Its plans to create a local powerhouse in Chile’s dairy industry may have been dashed a year ago but, 12 months on, Nestle has underlined the importance it places on the sector and on the country.

Last year, Nestle’s plans to merge its liquid and dairy products business in Chile with Fonterra ‘s local subsidiary were abandoned amid local opposition.

In November 2010, Nestle and Fonterra, which work together in a number of Latin American countries under their Dairy Partners of America alliance, announced plans for a venture in Chile that would manufacture products including yoghurt, cheese and butter.

According to data published last month by analysts at Market Line, Fonterra, through its local unit Soprole , is the largest dairy processor in Chile, with a market share of 28.1% in 2010. Nestle, the figures show, is the third-largest player in the sector, accounting for 14.4% of sales.

It is clear a venture between the two in Chile would have created a business dominating the market (its nearest rival would have been local co-op Colun, which had a market share of 17.2% in 2010) and, according to analysts at Bmi , a combined Nestle and Soprole would have accounted for 90% of some dairy categories, including yoghurt. However, the two sides pulled the plug on the plans amid opposition from producers and from politicians. “The conditions were not suitable to get ahead with the proposal. There were several actors involved and if they didn’t support this agreement, Nestle decided not to insist upon it,” the company told just-food last week.

Almost exactly a year on, earlier this month, Nestle has unveiled a new dairy facility in Chile at a cost of CHF127m (US$138.9m). The plant, in Osorno in southern Chile, which will be fully operational in July, will make powdered milk with “added nutritional value” like lines including Nido +1 and Nido +5 and skimmed milk that will contain “vitamins, fibre, probiotics and minerals”.

The Swiss food giant insists the Osorno plant, which will be able to make 30,000 tonnes of milk powder, had been planned for a number of years. “Nestle has a long-term vision and the Osorno plant was the result of an specific requirement to increase our production capacity, identified several years ago when the project started to be developed,” it said.

Chile has a number of characteristics that would appeal to multinational investors. The country is second on BMI’s food and drink “risk/reward” rankings for Latin America, behind only Brazil. Domestic consumption of processed food is “rising steadily” thanks to Chile’s “strong economic growth”, BMI says, while the country’s food and drink sector, the research firm adds, is “relatively fragmented”, meaning opportunities are still available for new entrants. Furthermore, the modern organised retail sector is more widespread than in other South American countries and, broadly speaking, its economy is an attractive place to invest.

“On the risk side, Chile is placed top in the region,” BMI says. “The country is seen as a good place to do business, being deemed open to foreign trade and free of bureaucratic red tape. For companies looking for a low-risk investment that offers growth rates ahead of developed markets, Chile’s attributes are certainly attractive.”

However, other markets in the region are seen as more “dynamic”, BMI argues. Chile’s place in BMI’s league table is more thanks to the relatively low risk of investing in the country (other Latin American countries are seen has having more room for growth) and its position as an export hub, not just to neighbouring states but across the Pacific to Asia.

“Chile’s position near the top of our rankings is to a large extent thanks to a very strong risk score; the rewards on offer are judged to be less impressive than elsewhere in the region. The country’s consumer sector is more developed, leaving less room for growth, while the population of only 17m also places downwards pressure on our reward rating. Chile’s advanced economy and high per capita consumption levels also mean that the market is less dynamic, with certain sectors showing signs of maturity and slowing growth rates. For example, the organised retail sector already accounts for around 62% of all grocery sales (compared to 27% in neighbouring Peru),” BMI says.

However, domestic demand has boosted Chile’s dairy sector, attracting multinational investment and increasing milk production. According to Market Line, Chile’s dairy market grew at a CAGR of 2.6% during 2006 and 2010, when it generated sales of US$1.4bn. The firm predicts that growth will accelerate to 2.9% between 2010 and 2015, when sales will hit around $1.63bn. Market Line notes that, as a point of comparison, the dairy sectors in the US and Mexico are forecast to grow at a CAGR of 3.6% to 4.4%.

However, the rising production, coupled with Chile’s geographic position and recent free trade deals, has meant the country has become a net exporter of dairy products. The likes of Fonterra and Nestle can continue to benefit from Chile’s position as a regional trade hub, with easy access to markets, for instance, to Asia, where demand for dairy products and dairy ingredients are growing.

“What Chile lacks from a consumer perspective it partly makes up from an export perspective,” BMI says. 

Nestle’s new dairy facility will serve Chile and export markets. The company has identified the US, Central America, the Middle East and Asia as markets to which it can ship products from the Osorno plant, which is only 60km from the Pacific Ocean.

“This factory will produce dairy products with added nutritional value that meet the different needs of our consumers, both in Chile, Latin America and in other countries around the world,” Nestle CEO Paul Bulcke said when the facility opened earlier this month.

Investing in Chile has benefits both within the domestic market and further afield. Nestle, which saw one plan to boost its presence in the country fall through last year, will nonetheless be hoping to milk those benefits with its new dairy facility.