Rachels has been sold to French firm Lactalis

Rachel's has been sold to French firm Lactalis

As a business proud of its Welsh roots, it is unlikely the Stars and Stripes were ever hoisted above the Rachel's dairy farm in Aberystwyth.

And, with the organic business now in French hands, visitors are unlikely to see the Tricolore flying in that rural part of west Wales.

However, yesterday's (28 July) announcement that US dairy giant Dean Foods had sold Rachel's to France's Lactalis, one of Europe's largest dairy processors, could mark a critical phase in the Welsh company's history.

The origins of Rachel's date back to the 1940s and a farm owned by founder Rachel Rowlands. Her mother was one of the first to sign up to The Soil Association and the farm became one of the UK's first certified organic dairies.

Rowlands took the helm in 1966 and supplied milk to the Milk Marketing Board; by the 1980s, she and her husband were selling a range of dairy products, including yoghurt, which has became the core line under the Rachel's brand.

US-based Horizon Organic Dairy bought Rachel's in 1999 and, upon the acquisition of Horizon by Dean Foods in 2004, the Welsh business continued in US hands.

Rachel's has developed into the UK's second-largest organic dairy brand and, announcing the sale of the business, Dean Foods hailed the brand's "rich history and strong brand equity".

However, like the rest of the UK organic sector, Rachel's has faced competitive pressures during the recession.

Demand for organic food among UK consumers slowed in 2009; according to The Soil Association, organic sales fell almost 13% last year.

Organic dairy, which accounts for a third of the market in the UK, was more resilient but still saw sales slide 5.5%.

Sales of organic yoghurt, a category dominated by Rachel's and market leader Yeo Valley, fell 7%.

Rachel's seemed to attempt to distance itself from a category hit hard by recession by dropping the word 'Organic' from its brand last year, although the word still remained on-pack.

However, organic remains a sector in which, despite the downturn, some industry watchers believe remains ripe for growth, making investment in the market potentially attractive for larger food processors.

Analysts at Datamonitor have forecast that the UK organic sector will see a compound annual growth rate of 11% between 2009 and 2014 to reach sales of US$6.6bn.

Rachel's may hold just 1.2% of UK yoghurt sales, according to data covering the last 52 weeks from mysupermarket-insights.co.uk, but its position as the UK's number two organic yoghurt brand makes the business an attractive asset for Lactalis, a company already with a strong domestic presence in organic food.

The dairy giant, owner of such international brands like President and Galbani, is the second-largest producer of organic products in France, according to 2009 data from Euromonitor.

However, Lactalis has only just started dabbling in France's organic yoghurt market. In March, it launched a range of organic yoghurts under its Lactel brand. Lactalis already accounts for over 50% of organic milk sales through the Lactel brand.

Ildiko Szalai, senior analyst for packaged food at Euromonitor, believes Lactalis's move for Rachel's is a sign of the company's interest in building a presence in organic yoghurt on both sides of the Channel.

"The acquisition of Rachel's has established Lactalis with a growth platform in the UK organic yoghurt market, which is almost three times as big as the French organic yoghurt market, although [the UK organic yoghurt category] is expected to grow at a low rate of 0.6% CAGR over 2009-2014," Szalai says.

"France, meanwhile, is forecast to expand more dynamically from a smaller base at a near 12% CAGR over the same period."

Szalai adds: "Lactalis seem to have pursued a double-pronged strategy in expanding in organic yoghurt. As well as launching organic brand extensions to its own brands, such as Lactel, it is also building a presence via the acquisition of established brands with an existing consumer base."

From Dean Foods' perspective, Rachel's was no longer a priority for a business facing challenges at home.

Dean Foods president and CEO Gregg Engles warned back in February that the company's key fluid milk business was facing pressure from private label. Worryingly for investors, by May, when Dean Foods issued its first-quarter results, that trend was showing no sign of abating.

That day, Dean Foods decided to pull its full-year profit guidance and announce plans to cut 400 jobs - on top of the 100 posts already axed earlier this year.

Consumer confidence in the US remains fragile, meaning that private-label milk is a popular way to save money. Indeed, US retailers have used own-label milk as a way to drive traffic, putting pressure on Dean Foods' regional brands.

Erin Swanson, an analyst at Morningstar, says the sale of Rachel's is a sign that Dean Foods is focusing on the challenges in its "core" business.

"Competitive pressures within the dairy category have obviously intensified, and as a result, Dean is working to offset some of the strain by improving its cost structure by eliminating redundancies, closing facilities, and streamlining distribution and production," Swanson says.

"While we do not believe that the recently announced sale of Rachel's will move the needle on Dean's financial results, this transaction indicates to us that the dairy processor is focused on improving core categories and brands within its existing portfolio."

Dean Foods, as a company listed on the New York stock exchange facing pressure from investors, its focus may necessarily be on short-term issues.

For a family-owned company like Lactalis, it may be easier to take a longer-term view and owning an organic business like Rachel's may be a better fit for the Besnier family in France.