Arla Foods: How Sustainable Can A Dairy Company Be?

In January 2023, Professors Willy Shih and Mike Toffel led more than 40 HBS MBA students on site visits to witness the energy transition and innovative sustainable production activities throughout Denmark and the Netherlands, in their new Immersive Field Course (IFC). This is one of 13 student essays posted on the HBS Business and Environment Initiative’s Blog that highlights their reflections. Learn more about this IFC course on Decarbonization and Sustainable Production by watching this five minute video summary.

Visit Date: January 5, 2023

Arla Foods is a farmer-owned cooperative of nearly 8,500 dairy farmers, and the 4th largest dairy company in the world. When we entered the Arla Headquarters near Aarhus, the rare Danish winter sun lit up the central atrium, highlighting the most adorable office centerpiece: the cows! From the first moments of our visit, it was clear that the cows and all that they represent—sustainability, health, and farmer empowerment—were at the center of Arla Foods, literally and figuratively.

The authors at the Arla Headquarters in Viby, Denmark. Image source: Morgan Brewton-Johnson.

Highlights: Arla’s Sustainability Strategy and Implementation

Corporate Sustainability. Arla shared their commitments to a stronger planet and stronger people, grounded in a selection of eight priority UN Sustainability Goals. In pursuit of these commitments, Arla has set ambitious goals, including 100% recyclable plastic and 100% green electricity in the EU and UK by 2025 and carbon net zero by 2050. These goals have been set and communicated by Arla’s central corporate sustainability team in collaboration with sustainability experts embedded throughout other corporate functions. At every step of goal setting and strategy, Arla’s corporate leadership aims to create value for their farmer-owners, both economic and environmental.

Supply Chain Sustainability. Behind their ambitious goals, Arla shared the strategic pathways that they plan to execute on their path to be carbon net zero by 2050. As is the case across the dairy industry, most of Arla’s emissions occur at the farm level. The remaining emissions come from operations, logistics, packaging and retail and consumer use. On Scope 1 and 2 emissions, Arla explained how they plan to secure 100% green electricity, maximize operational and transportation energy efficiency, and transition to alternative fuels and trucks. These emissions are still relatively small compared to those at the farm level, so we were excited to learn about their farmer sustainability initiatives.

Farmer Sustainability Incentives. Because Arla is a farmer-owned cooperative, farmers ultimately control the largest category of emissions on a farm-by-farm basis. Arla has developed a sustainability incentive model to incorporate the carbon footprint of each farmer’s milk production as a factor in their compensation. By allocating points across a variety of sustainability categories weighted for their environmental impact, the incentive model will reward the farmers leading the cooperative on sustainable dairy production. In parallel, Arla HQ is offering technical assistance and support for farmers, sharing resources and best practices so that farmers can make informed, empowered choices about which categories to invest in for their own operations. This innovative model was thoughtfully constructed and sparked many questions from our group.

Key Takeaways: The Challenges of Decarbonizing Dairy

One of our most powerful takeaways from this visit was the importance of stakeholder engagement, particularly in this cooperative ownership model, but also in any organization-wide sustainability transformation. The Arla team was very intentional about balancing near-term economic value to farmers with long-term environmental value to all of their stakeholder groups, and made efforts to engage their farmers throughout the incentive model development process. Although they do not anticipate change management to be 100% frictionless, they seem to be well set up to support their farmer-owners throughout the incentive model transition.

Another key takeaway was the interconnectedness of emissions from Arla Food’s owned and contracted operations (Scope 1 and 2) and emissions from up- and downstream activities (Scope 3). Although we frequently hear Scope 1 and 2 emissions considered separately from Scope 3, it became clear that Arla corporate’s efforts on energy sourcing, efficiency and alternative fuels gave them the credibility and the know-how to encourage similar shifts among their suppliers. At the end of their value chain, Arla also considered how their operational sustainability initiatives earned them the credibility and trust with consumers to make changes like recyclable packaging.

A final key takeaway is the difficulty of embedding sustainability when there is an inherent tension in the business model—in this case growing their cow-based business while reducing inherent environmental impacts like methane emissions, land use, and soil and water acidification. It was clear that everyone at Arla had an appreciation for the natural resources that allowed their business to thrive, but we had several questions about how they anticipated resolving that tension long-term in a world where dairy production and animal agriculture more broadly is seen as a key contributor to climate change, and alternatives are gaining prominence.

Our Remaining Questions: The Future of the Dairy Industry

Future Growth

While growth in Arla’s existing markets has been flat, the company is expanding into emerging markets such as Nigeria, Bangladesh, and China. The company is making a bet that these markets will follow the historical trend of consuming more dairy products as the population becomes wealthier. However, these countries do not traditionally include dairy products in their cuisines, and it’s unclear that emerging markets will follow suit as they continue to develop.

Alternative Dairy Products

We asked the Arla team about their views on plant-based alternatives to dairy products. They answered that they were “keeping an eye on it” and have introduced oat milk under its new plant-based JORD brand, but they did not seem too concerned about the future of the Arla business. One Arla presenter highlighted the nutritional benefits of cow-based dairy products and said she was unsure that alternative dairy products would be able to match the nutrition and taste profile. Arla is also farmer-owned, meaning that the core stakeholders of the business are incentivized to promote animal dairy over alternatives.

Our team sees things differently. Lab grown dairy products have shown high potential for matching animal dairy in terms of nutritional value and taste. As these technologies improve and the production of lab grown dairy becomes more affordable, we believe that more people could switch to alternative dairy products, whether for health, price or sustainability reasons. This transition will likely occur slowly and alternative dairy products probably won’t ever fully replace animal dairy products, but we feel that the rise of alternative dairy products is inevitable and that Arla should have a robust strategy to diversify into or defend against this market.

Overall, visiting Arla Foods and learning how they are working to produce more sustainable dairy was very informative. It further proves that creating and implementing sustainable practices within a company cannot be relegated to a single person or department. It requires the entire organization understanding and getting behind the mission.

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