The Australian dairy industry is undergoing huge changes as tired cooperatives develop new consumer-oriented strategies and foreign companies such as Fonterra and San Miguel sweep up whatever takeover targets become available. Australia’s Dairy Farmers looks like a prime target, as David Robertson reports.

Last year New Zealand-based Fonterra and Philippines conglomerate San Miguel ignited takeover fever with a four-month battle for National Foods, Australia’s largest dairy producer. Eventually, San Miguel won with a A$1.9bn (US$1.39bn) bid, much to Fonterra’s annoyance.

Fonterra, the world’s largest dairy exporter, has made no secret of its desire to expand across the Tasman Sea and it has already bought a company called Bonlac, giving it about 18% of the Australian market.

However, food industry analysts believe that this is only the start of Fonterra’s ambitions. The most obvious target for an acquisitive Fonterra would be Dairy Farmers, Australia’s second largest dairy producer.

Dairy Farmers is undergoing a radical overhaul to prepare itself for a proposed stock market listing in 18 to 36 months time, although the restructure will also make it a more attractive takeover target.

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The cooperative, which is currently owned by its 3,000 farmer suppliers, revealed earlier this week that sales in the six months to the end of December fell 3% to A$577.4m. Net profits (after tax) rose 23% to A$4.7m.

But these figures do not fully reflect the substantial changes taking place at Dairy Farmers, which owns brands like Oak flavoured milk, Cracker Barrel and Coon cheese.

As part of the overhaul the cooperative aims to save A$42m a year and it has already cut a third of its workforce and closed four of its 15 factories.

Chief executive Rob Gordon is also focusing the company’s investment on its leading brands in order to drive growth in higher margin areas like cream, custards, cheese and flavoured milks. Sales in this area grew about 20% in the last half of 2005.

Gordon said earlier this week: “Dairy Farmers boasts some of the strongest consumer brands in the country. Our focus during the past 12 months has been to begin to unlock the underlying strength of our eight champion brands, to deliver real, sustainable, value for our shareholders. We’re just over a year into the two to four year journey which has involved making some big bold moves so that we can reap the benefits as we head towards a listed environment.”

Until 2000 the Australian dairy industry was heavily regulated with prices set by state governments and Gordon is currently stripping out the inefficiencies this heavily regulated system bred in companies like Dairy Farmers (for example, Gordon wants to cut the number of trucking companies DF uses from 90 to single digits).

But whether Dairy Farmers has an opportunity to display its leaner frame on the stock market is doubtful as Fonterra continues to stalk the New South Wales-based cooperative. Gordon refused to comment on whether the two companies had been in talks, saying: “We won’t be distracted by any of the speculation.”

However, gossip in Sydney suggests that the New Zealanders are talking about making a bid for Dairy Farmers by the end of this year. Further changes in the Australian dairy sector seem inevitable.