British Dairy: Getting Hitched
Good things come in threes, the saying goes. If this holds true for the dairy industry, then surely the next major merger, takeover or acquisition can only be a matter of time. After Muller’s purchase of Robert Wiseman Dairies in January and the proposed merger of Milk Link and Arla Foods, announced in June, industry speculation is already rife about what the next big deal will be.
Industry gossips have been busy mooting combinations of everyone with everyone, but what deals would make most sense strategically? And how have this year’s consolidation moves changed the dynamics of the British dairy industry?
Muller’s advance on Wiseman at the beginning of the year certainly took the sector by surprise. After all, most industry insiders had been betting on two liquid processors coming together, not a yoghurt maker and a liquid specialist. Many observers found their disappointment difficult to hide. The deal failed to deliver the one thing the dairy industry needed most, further consolidation in liquid milk leaving the same three processors competing for retailers business as before, they argued.
The reaction to the Milk Link and Arla amba merger which will create the UK’s biggest dairy company with an annual milk volume of three billion litres has been markedly more positive, not least from farmers. The deal will create not just the UK’s biggest but also arguably the best invested and most balanced dairy outfit, which will include the country’s biggest cheese business. It will add financial and promotional muscle to Milk Link’s fledgeling brands as well as possibly creating a new Cheddar brand to give the likes of Cathedral City a run for their money. In addition, Milk Link producers will, after three years, receive the same price as Arla amba’s Swedish, Danish and German farmers, putting pressure on UK-based dairy companies to up their prices an attractive prospect for farmers in the current climate.
All of those positives don’t mean the merged business will have an easy ride, though. Size will bring new challenges, not least having to get to grips with the thorny issue of dedicated retailer supply contracts. At the moment, these are paying by far the highest price in the market, but Arla’s stated objective is, over time, to secure Arla amba membership for all Arla Foods Milk Partnership (AFMP) members and that won’t square easily with dedicated schemes.
The co-operative ethos is that all farmers get the same milk price, says John Allen of Kite Consulting. If the supermarkets want to continue with their dedicated supply pools and the variability in the premiums is similar to the levels that we are currently seeing today, then this will be incompatible with AFMP and Arla amba membership. It is not yet clear how retailers and AFMP will decide to tackle this, but Allen says much will depend on how milk prices in Europe develop against UK prices, what the costs of production are, and the level of premiums the retailers are happy to pay in the future.
What Next For First Milk?
With Milk Link having made its play, speculation is inevitably mounting about the future of the remaining UK dairy co-op, First Milk. The company has been resolute in saying it has a defined strategy focusing on giving its farmers access to a broader range of value-added markets, as evidenced by its tie-up with Fonterra, its acquisition of Kingdom Cheese & Dairies and its purchase of sports nutrition company CNP Professions and it’s not minded to change.
It has also been playing the Britishness card hard to attract farmers who like the idea of supplying a company owned by UK farmers. Farmers want to be part of a business rooted in Britain. They want to shape their future and be in charge of their own destiny, First Milk boss Kate Allum said at a recent dairy industry conference. We’re on a different path.
This pro-British stance could play in First Milk’s favour as far as retaining and recruiting patriotic farmers is concerned, but it could also limit its strategic options other European co-ops interested in the UK market could well infer First Milk is not interested in a full-blown, Arla/Milk Link-style merger, potentially depriving its members of attractive cross border opportunities.
That’s not to say First Milk wouldn’t have UK options. If it decided greater scale were essential, the obvious strategy would be to look west to Northern Ireland and to Wales, where United Dairy Farmers and South Caernarfon Creameries would make noble partners. Both operate to a limited degree in First Milk’s patch, have some complementary milk fields and businesses and in the case of United talk the same language on the need to increase exports.
FMCG Consultant Hamish Renton, Managing Director of HRA Global, says there will be several opportunities for First Milk to consolidate as a UK business by buying smaller businesses or merging them within it, but he also thinks the co-op could be an attractive partner to a Continental co-operative looking for a cheese portfolio. The pace of change has accelerated again. What will matter in the long term is scale, volume and efficiency, as these drive the supply chain, he says. Is there a future in a standalone UK business? I would like to see it, but it would still have to be economic in the long term against international ones.
If speculation about First Milk’s options has been lively, rumours about Dairy Crest’s future have been off the scale. As a plc, the company is always in play anyway, but the well-documented troubles at its liquid milk business have led to a frenzy of gossip. This has been fuelled indirectly by Dairy Crest’s own actions, as recent moves to sharpen up its business such as divesting its French St Hubert spreads business and closing two old creameries have made it an increasingly attractive takeover target.
In the absence of another international wildcard that’s yet to show its face, any chase for Dairy Crest would currently appear to come down to a two-horse race between French giant Lactalis and Both already have a presence in the UK and crucially would have deep enough pockets. Following its merger with Milk Link, Arla wouldn’t need the cheese and probably wouldn’t want all of Dairy Crest’s fresh milk volume, especially in the middle ground (Arla exited a few years ago), or wouldn’t be allowed it by competition regulators (see Lawyer boxout, overleaf).
An acquisition by would be likely to have to carve up Dairy Crest’s liquid assets and could be forced to share it with a third party, possibly Arla.
The case for Lactalis is less clear. Although it is believed the French company has actively looked at Dairy Crest before and its track record of global acquisitions means it cannot be discounted it’s not clear to what extent the company still has its hands full digesting last year’s Parmalat acquisition. Furthermore, Lactalis already has a very good, well-invested creamery at Stranraer and a leading Cheddar brand in Seriously Strong, giving it a less urgent need to add Dairy Crest’s cheese assets than, say, Muller. It’s also questionable if Lactalis would have much of an appetite for getting involved in the current scrum-down that is UK liquid milk retailing other, better investments wouldn’t be hard to find. Of course, there’s no guarantee a bid will be made.
Dairy Crest is certainly not hanging the for sale sign out and will be working on potential acquisitions of its own. Over the coming months we will consider a range of opportunities, including synergistic acquisitions in the UK, the company recently said.
And what of those companies that might consider themselves as Milk Link did, pre-merger too big to be small and too small to be big? What does the future hold for players such as Freshways, Medina, Cotteswold Dairies, Payne’s Dairies, Tomlinsons, Yeo Valley, Joseph Heler, Wyke Farms, Belton Cheese, Barbers, to name but a few?
Richard Clothier, MD of Wyke Farms, isn’t ruling anything out, but believes the industry would be a worse place without such small to medium sized companies. We are a medium-size, family-owned branded business, but there will be a limit to what we can achieve with our brand aspirations without a partner, he admits. Our brand is growing rapidly and as demand gets bigger, the family may have to look at options to maintain that growth.
By contrast, Tim Mead of Yeo Valley is taking a decidedly anti-takeover stance, saying we just want to continue doing things as we are (Supplier profile, p46).
The options for consolidation are many and varied, but the one sure fact is there will be more of it, says John Allen. The current market situation of desperately low or non-existent margins through the chain, the prospects of record low milk volumes this year, the Milk Link/Arla amba deal setting the bar high by locking in the UK milk price to the EU milk price, and the end of quotas in 2015 will all be drivers, he believes. But I don’t think anyone should fear this consolidation ever since the end of the Milk Marketing Board, change has been endemic in the dairy industry and given the state of the industry now, further consolidation can only do good.
John Giles, Divisional Director at Promar International agrees. We are still struggling from historically being a fragmented industry, he says. Countries with successful dairy industries often have a highly consolidated processing sector. People here have talked about the need for consolidation for years, but very little has happened and we now seem to be in a stage of catch up with lots of activity taking place. It should be embraced, not resisted.