This article first appeared in The Edge Malaysia Weekly on May 22, 2023 - May 28, 2023

WHEN Farm Fresh Bhd started with 60 Holstein Jersey cows from Australia at its farm in Johor, nobody would have expected the home-grown dairy product specialist to come this far.

Spearheaded by its co-founder and managing director Loi Tuan Ee, a farmer turned entrepreneur who grew up in a small town in Perak, Farm Fresh defied the odds and made an impressive breakthrough in the local dairy industry in 2010.

Despite the long-standing dominance of multinational brands in the industry, Farm Fresh — then known as Holstein Milk Co Sdn Bhd — managed to carve a niche for itself and emerge as the dominant player in the ready-to-drink (RTD) milk segment.

Now, Loi envisions a bold new chapter for the company.

Having established itself as one of the largest and fastest-growing dairy producers in Malaysia, the 60-year-old “milkman” believes it is time for Farm Fresh to take on the big boys again. This time, in the ice cream and children’s milk markets.

Notably, Farm Fresh announced in February its plan to acquire a 65% stake in ice cream chain store operator The Inside Scoop Sdn Bhd for RM83.9 million in a cash-plus-shares deal. The acquisition is expected to be completed by the middle of this year.

In October last year, Farm Fresh launched its ready-to-drink growing up milk for children — dubbed Farm Fresh Grow UHT Formulated Milk — based on a fortified fresh milk formula.

So, how does Loi plan to grow Farm Fresh? Why has he set his sights on the ice cream and children’s milk markets?

“Our idea is to build a local, home-grown brand in the consumer-packaged goods (CPG) ice cream market, taking on the multinational giants, just like what we did in the chilled RTD milk market,” he tells The Edge in an exclusive interview.

Loi urges all Malaysians to continue supporting local brands such as Farm Fresh and Inside Scoop. If given the same opportunity, he says, he will build another local champion after Farm Fresh.

“Ten years ago, who would have thought that we could take on these MNCs [multinational corporations]? But look at where we are today. Farm Fresh is the top chilled RTD milk player with 49% market share in 2022, and we have 9% market share in the ambient RTD milk segment,” he adds.

In its financial year ended March 31, 2022 (FY2022), chilled RTD milk made up 49% of Farm Fresh’s revenue, while ultra-high-temperature processed (UHT) or ambient milk contributed 29% to the group’s turnover. The rest came from yogurt products (10%), fruit jams and sauces (5%), raw milk (4%), plant-based products (2%) and other products such as palm date and coconut milk (1%).

Loi foresees that the ice cream segment will become a new growth driver for the group and possibly another large revenue contributor.

Being a dairy company that is already in the chilled and UHT milk segments, it is only natural for Farm Fresh, via Inside Scoop, to expand into the frozen CPG ice cream market, which is worth over RM1 billion, says Loi.

“If you go to supermarkets and convenience stores today, there are only two major brands — Wall’s, which is owned by Unilever, and Nestlé [under Nestlé (M) Bhd]. These two MNCs have dominated the market for the past 50 to 60 years. While there are some local players, none of them is able to compete against the big boys, which have stronger branding and product portfolios,” he points out.

Inside Scoop is in the artisanal ice cream, kiosk-based food and beverage (F&B) business, says Loi. In terms of pricing and taste, it is in the same league as Baskin-Robbins and Häagen-Dazs, which are not significant players in the CPG market.

Inside Scoop currently has 36 outlets nationwide. Its target is to open a new store every month. By year end, it should have about 50 stores. In the next two to three years, it may have 70 to 80 stores.

But the store expansion is something Loi will leave to Edmund Tan Jun Hua and Lim Shiew Li — the husband-and-wife co-founders of Inside Scoop — to drive forward.

From Farm Fresh’s perspective, what Loi has in mind for Inside Scoop is not its physical store business. Instead, what he wants is to tap into the CPG ice cream market.

“We want to produce stick ice cream, cone ice cream and mochi ice cream. Our mind is very clear. We knew that if we started the ice cream business on our own from ground zero, the learning curve would be very steep. But by having Edmund and Shiew Li on board, our learning curve will be cut short,” he elaborates.

Loi recalls that he came to know Edmund and Shiew Li when the couple set up their ice cream business. In fact, Farm Fresh is one of Inside Scoop’s suppliers of fresh milk.

“So, when Edmund realised that Farm Fresh was looking to venture into the CPG ice cream business, we started exploring the possibility of working together. We are hopeful to achieve 5% to 10% market share in the next two years,” he says.

Post-acquisition, Farm Fresh will provide most of Inside Scoop’s fresh milk requirements as well as other dairy products such as fresh yogurt and cream.

At end-2022, Farm Fresh acquired an eight-acre freehold industrial land in Techpark@Enstek, Negeri Sembilan, for RM18.2 million. The group is building a new manufacturing hub there that will not only increase its existing production capacity for dairy and plant-based products but also serve as a base for the development of new product offerings in Malaysia, including ice cream.

The plant is slated for completion by end-2024. Its initial construction is estimated to cost about RM40 million.

“But for Inside Scoop to produce CPG ice cream, we will invest about RM15 million to purchase some specific equipment,” says Loi.

In the interim, Inside Scoop’s factory in Damansara will be reconfigured so it can start introducing one or two CPG ice cream products by the first quarter of next year.

“Once our Enstek plant is ready, our plan is to launch an affordable range of ice cream using the Farm Fresh brand and a premium range of ice cream using the Inside Scoop brand,” he reveals.

Farm Fresh chief financial officer Mohd Khairul Mat Hassan recalls that Inside Scoop opened 36 outlets across the country in its first nine years of operation. “Now, we want them to expand three times faster,” he tells The Edge.

Inside Scoop generated a profit before tax of RM10.6 million on revenue of RM41.9 million in 2022, giving it a PBT margin of more than 25%.

“Based on its store expansion, Inside Scoop is aiming for revenue growth of 15% every year. But that does not take into account our potential growth in the CPG ice cream segment,” says Khairul.

Last August, Farm Fresh quietly ventured into the F&B space with the opening of the first Jom Cha outlet — its own boba milk tea chain that was officially launched in February this year.

Meanwhile, the group introduced fresh milk sold in reusable glass bottles with its milk-on-tap initiative in collaboration with Jaya Grocer in September last year.

Coupled with the acquisition of Inside Scoop, one can’t help but wonder whether Farm Fresh is moving up further the value chain by venturing into the F&B retail space.

But Loi is quick to downplay the idea. “We are not going into retail F&B in a big way. Jom Cha is just an extension of our product range. It’s more like a supplementary business and it’s not our main focus.

“Unlike Inside Scoop, Jom Cha is a very different play. We have to learn through the curve, even though it is not as steep as the ice cream business.”

The group currently has about 30 Jom Cha outlets, all of which use Farm Fresh products.

“We want to offer consumers a healthier choice of boba drink, which has been perceived by many as an unhealthy sugary drink. We will grow Jom Cha, but in a more measured manner and meaningful way,” says Loi.

“So, you have to look at Jom Cha from a different angle. I wouldn’t be so gung-ho about it. Definitely, we won’t burn money to expand our outlets for the sake of expansion. We want to make sure that our outlets are profitable.”

When asked about a possible spin-off listing of Inside Scoop and whether it could be packaged together with Jom Cha, Khairul says Farm Fresh is keeping its options open, but it is too early to say. “Well, it is an option. We will never say never. But obviously, it is still too early to talk about it.”

Following the encouraging response for its Farm Fresh Grow UHT Formulated Milk, the group plans to launch Farm Fresh Grow in powder format, which will be more affordable than the liquid version, by the end of the third quarter this year.

“This is a very honest milk powder. We are using whole milk powder, which is fortified with all the vitamins and minerals. There is no added sucrose, vegetable oil and maltodextrin [a form of sugar]. Our growing up milk, whether it is liquid or powder, is suitable for any child above one year old,” says Loi.

Unlike Jom Cha, the growing up milk is not a supplementary business for Farm Fresh.

“This is like a war for us. We are taking this business very seriously. I think Malaysian children deserve to grow up healthily. Obviously, the incumbents in this business are super giants. We are taking on all of them at one go,” he remarks.

“It is not going to be easy. It will take a lot of hard work and conviction. But we are confident that at some point, our products will start to gain momentum and traction. By then, all the mothers will realise that our products are better, and it may even turn out to be a movement.”

Loi says that for now, Farm Fresh does not believe in baby formula and therefore, it is “not in the infant formula market yet”.

“We know this is a huge industry, where all the big boys are trying their best to get the babies and children hooked on their products. But to us, we believe breast milk is the best food for babies. Nothing compares to breast milk,” he points out.

Loi started working life as a supervisor at Ayer Hitam Oil Mill Sdn Bhd in 1982, before joining Kartika Machinery Sdn Bhd briefly as a sales representative in 1984. In the same year, he left the industrial products company to set up his own household care products and packaging materials businesses.

In 1991, he joined Century Bond Bhd — a packaging solutions company that was eventually delisted in 2017 — as a director, before being promoted to deputy managing director in 2002. In 2005, he left Century Bond to raise dairy cows on a farm.

It was then that Loi realised that the local dairy market was dominated by reconstituted or powdered milk produced by MNCs. He then saw an opportunity for Farm Fresh to differentiate itself in the fresh milk category by not adding preservatives and colouring to its products.

In 2010, he co-founded The Holstein Milk Co. And the rest, as they say, is history.

In the first nine months of FY2023 ended Dec 31, 2022, Farm Fresh saw its revenue grow 25% to RM468.3 million from RM373.9 million in the previous corresponding period. However, net profit declined 27% to RM45.19 million, down from RM62.2 million a year earlier. The weaker earnings performance was attributed to higher input costs, from raw materials and animal feed to herd health and freight cost.

Khairul recalls that when Farm Fresh was going for listing in March last year, many investors were expecting the group to achieve a compound annual growth rate (CAGR) of 40% to 50% as its earnings before interest, taxes, depreciation and amortisation (Ebitda) and profit margin remained high.

“Everybody thought the good times would remain. We can’t blame them for forming high expectations of us because they were predicting our future based on the status quo back then. But what happened later was margin compression,” he says.

“Milk powder prices had gone up a lot. Then we saw high input costs. To mitigate these impacts, we had to seek alternative sources of ingredients in Singapore and Malaysia to save some costs. But there was only so much we could do.”

Khairul acknowledges that some research analysts who tracked Farm Fresh’s results on a quarter-to-quarter basis were disappointed. But for those who take a longer-term view on the company, they still like its growth story, not to mention other interesting developments such as the acquisition of Inside Scoop.

“Going forward, our aim is to achieve a CAGR of 20% to 25% in turnover over the next four to five years. Our profit margin, which probably went down by about 2% to 3% in FY2023, is expected to recover in FY2024,” he says.

“The price of raw materials from Australia is expected to go down in July. Definitely, we are seeing light at the end of the tunnel.”

While inflationary pressures have affected Farm Fresh’s earnings performance, which came in below expectations of fund managers and research analysts, Loi remains optimistic as the group’s turnover increased by 25% in 9MFY2023.

“In short, our business is still growing strongly. But the problem is margin compression. So, what can we do? We increased our prices twice [by 5% each] over the past two years, whereas our competitors raised their prices four times, including the most recent one in February this year,” he says.

“In other words, in terms of price hikes, we are still trailing our competitors by two rounds. Like it or not, commodity prices fluctuate. Some companies made a move to increase their prices, but we decided to take the opportunity to grow our channels and gain market share, at the expense of our profit margin.”

Loi says Farm Fresh is taking a long-term view as it is willing to sacrifice its profit margin to gain market share. “To us, it is a short-term pain for long-term gain. When commodity prices normalise, we will be able to regain our margin with a much higher revenue.”

However, certain fixed costs, such as higher utility costs and the new minimum wage, are irreversible.

“These costs are unlikely to come down and the impact on our margin will be permanent. So, we are considering a price adjustment of another 5% in July, just to recover some of our permanent costs,” he says.

“Our price adjustments have been rather prihatin. That’s why we have yet to see a promising improvement in our profit margin,” he adds, implying that Farm Fresh’s price increases have been moderate.

Going forward, regional expansion will be the company’s main focus. Farm Fresh is building processing facilities in Central Luzon, the Philippines — one hour from Manila — and it is establishing a distribution network to replicate its success in Malaysia.

“We are renovating our factory now. Most of our equipment will be moved in next month. Hopefully, we can commence operations by September,” says Loi.

“The Philippines is an attractive market. The country has a large market but low availability of fresh dairy products. We see potentially high demand for chilled RTD fresh milk there.”

After the Philippines, the group will attempt to expand into Indonesia.

“It’s still too early to say whether we will start a farm or build a processing facility there. Obviously, it is relatively easier to put up a new factory compared with acquiring land in a foreign country to start a farm. But for now, we are keeping our options open,” he says. 

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