The decision by MD Foods of Denmark and Arla of Sweden to merge to create Europe's largest dairy company is symptomatic of the growing consolidation within the industry as it becomes increasingly global in nature.

MD Foods already controls over 90% of the Danish dairy market, and Arla is Sweden's leading dairy company with a 65% market share. The combined group - to be called Arla Foods - will process over 7 billion litres of milk annually (6% of EU milk production) and will have a turnover of DKr36b ($5.2b) in 1999.

Rationale

The merger has been prompted by the increasing consolidation within the retail trade internationally and the growing concentration within the global dairy industry. Combining MD Foods and Arla to form the biggest dairy group in Europe (see Table One) will not only provide economies of scale and synergistic opportunities but pooling resources will also enhance product development, marketing, added value and capital investment, as well as the new group's capability to meet changing customer requirements.

Table One: Europe's Largest Dairy Companies by Milk Volume, 1998

Arla Foods (Denmark/Sweden)
Groupe Lactalis (France)
Friesland Coberco (Netherlands)
Campina Melkunie (Netherlands)
MD Foods (Denmark)
Nordmilch (Germany)
Bongrain/CLE (France)
Glanbia (Ireland)
Nestle (Switzerland)
Sodiaal (France)
Danone (France)
Arla (Sweden)

The enlarged group will also be better placed to meet the challenges of Agenda 2000 and the eastern expansion of the EU along with the more open global market in dairy products anticipated by the WTO.

Worldwide Business

In addition to its interests in Denmark and Sweden, Arla Foods will also have production facilities in six other countries, including Brazil, Argentina, Saudi Arabia and Korea, and sales offices in 22 countries worldwide. Its dairy products range will be sold in over 120 countries worldwide. The new group is expected to have its headquarters in Aarhus, in Denmark, with divisional head offices in Stockholm, Copenhagen and Leeds.

The choice of Leeds is indicative of the large presence already developed by MD Foods within the UK dairy industry. Indeed, MD Foods processes 800 million litres of milk in the UK from its total annual volume of 4.9 billion litres.

Arla Foods will represent the first cross-border merger between two farmer-owned companies. The recommendation to merge from the respective boards of MD Foods and Arla has since been approved by the shareholders of the two companies. Assuming there is no objection from the competition authorities, Arla Foods will be established by April 17th. Europe's largest dairy company will be owned by Arla and MD Foods for a three year transition period, following which the two co-operatives will be dissolved.

MD Foods and Arla have been working closely together in the areas of production and sales since 1995, resulting in a good relationship between both companies at executive and board level.

The chairman of Arla Foods will by Lars Lamberg, the present chairman of Arla, while MD Foods' chairman Knud Erik Jensen will become deputy chairman. Jens Bigum, the current managing director of MD Foods, will assume a similar role at Arla Foods, and his deputy will be Ake Modig, Arla's managing director.

Globalisation

While the dairy industry has been steadily becoming more international and has been consolidating as companies merge to benefit from economies of scale and to achieve critical mass in key markets, the larger players are now being driven by global, rather than a purely regional, aspirations. The proposed merger between MD Foods and Arla is indicative of the increasing globalisation of the dairy industry, which will is characterised by an increasing number of cross-border acquisitions and international joint ventures as well as greater foreign investment. The opening years of the new millennium are likely to bring the emergence of large global dairy companies.

Although Dairy Farmers of America is the world's largest dairy company, it holds this position because of its pre-eminence within the huge US market. However, pre-occupied by the domestic market North American dairy companies have been slow to internationalise. This is in stark contrast to New Zealand, where a strong emphasis has been placed on developing overseas markets for a number of years. Moves are also afoot in New Zealand to create a 'MegaCo-op', incorporating the country's largest co-op owned processing companies along with the marketing operations of the New Zealand Dairy Board. Such an alliance would make give the enlarged New Zealand Dairy Group a milk pool of 10,000 million tonnes (see Table Two), making it the second largest in the world.

Table Two: The World's Top Ten Dairy Companies

Company Country   Volume (m tonnes)
1 Dairy Farmers of America USA 14,790
2 New Zealand Dairy Group New Zealand 10,000*
3 Arla Foods Denmark/Sweden 7,200*
4 Groupe Lactalis France 6,540
5 Friesland Coberco Netherlands 5,470
6 Land O'Lakes USA 5,375
7 Snow Brand Milk Products Japan 4,964
8 Californian Milk Producers USA 4,800
9 Campina Melkunie Netherlands 4,700
10 Nordmilch Germany 4,300
* Estimated combined milk pool from proposed merger.

Recent consolidation in France, Denmark, the Netherlands and Germany has left the leading dairy groups in these countries all ranked within the world's top ten players. With milk deliveries of about 7 million tonnes, Arla Foods would rank third in such a league table. However, the world's top ten dairy groups account for less than 20% of global milk supply, indicating the scope for further international expansion by these groups.

Key Role for the UK

The UK is regarded as a key development market for Arla Foods, just as it has been for MD Foods since the Danish dairy company started to build up a substantial manufacturing presence in 1990 following the purchase of Leeds-based Associated Fresh Foods, which marked the first of a series of major acquisitions. There will be no change in the present UK management team which is headed by David Salkeld.

"The people of MD Foods and Arla in the UK can look forward to an exciting and successful future as part of Europe's largest dairy company, from which the UK business can continue to grow organically, by acquisition, capital investment and continued marketing investment in the four dairy categories where we hold strong positions to further strengthen our relationship with both customers and consumers," says David Salkeld.

MD Foods, of course, has enjoys significant market shares in UK liquid milk, butter, cheese and fresh dairy products sectors. With a market share of about 11%, it is the third largest supplier of liquid milk (see Table Three) behind Express Dairies and Unigate Dairies. Through its Lurpak brand, MD Foods ranks second in the UK butter market with a share of 17% (see Table Four), behind Anchor Foods of New Zealand which accounts for 36% of sales. Indeed, Lurpak is one of the UK's leading individual brands of yellow fats, placed third behind Anchor butter and Flora spread from Van den Bergh Foods but ahead of Dairy Crest's Clover and Van den Bergh's I Can't Believe It's Not Butter. Lurpak Spreadable also features prominently amongst the UK's top branded yellow fats.

Table Three: Liquid Milk Market Shares in Great Britain, 1998

Company Liquid Milk
Production (m litres)
Share
1 Express Dairies 2,085 34%
2 Unigate Dairies 820 13%
3 MD Foods 750 12%
4 Robert wiseman Dairies 585 10%
5 Dairy Crest 550 9%
Others 1,310 22%
Source: Leatherhead Food RA

MD Foods has invested substantially in the UK but its expansion has not been without pain. It has suffered heavy financial losses in the past but has constantly reaffirmed its commitment to the UK market and its expectation of benefiting from the inevitable further consolidation of the country's dairy industry.

Table Four: UK Butter Market Shares, 1998

Brand Value Share
Anchor (Anchor Foods) 36%
Lurpak (MD Foods) 17%
Country Life (English Marketing) 11%
Kerrygold (Irish Dairy Board) 5%
Other Brands 6%
Own Label 25%
Total 100%
Source: Leatherhead Food RA