The creeping consolidation in Europe’s dairy sector has continued this year, with confirmed or mooted mergers in Austria, France and Germany marking the industry’s more notable moves.
In Austria, the farmer-members behind dairy co-operatives Berglandmilch and Tirol Milch have approved plans for the two companies to merge to create a business with annual sales of EUR700m (US$921.9m).
Further north in Germany, dairy co-ops Nordmilch and Humana Milchindustrie have been drawing up plans to merge and, pending approval from their farmer-members and regulators, expect the deal to go through early next year.
In France, Sodiaal is set to finalise its acquisition of rival co-op Entremont Alliance, a deal that will create Europe’s fourth-largest dairy processor.
Two more French co-ops, Glac and Eurial, have also agreed to team up and, should that deal go through as expected in the next year, the combined company will be France’s second-largest co-op, behind Sodiaal.
And today (17 December), Arla Foods, the dairy giant behind brands like Lurpak butter and Castello cheese, announced it is in talks to merge with Germany’s Hansa-Milch.
The deals (confirmed or proposed) marked the return of consolidation in Europe’s dairy sector in 2010 after a year when the financial crisis, the economic downturn and volatile commodity costs caused processors to look inwards and focus on short-term issues, rather than the longer-term future of their companies.
However, 2010 has seen more stability in dairy prices, while the gradual economic recovery in Europe has enabled dairy companies to divert more attention to the long-term development of their businesses.
The proposed end to dairy quotas in the EU in 2015 is also a key driver in this consolidation. With the EU planning to scrap quotas in five years time, milk production in some parts of the region will rise, putting pressure on prices. Dairy co-ops and processors see consolidation as a means of building scale and protecting their businesses in the face of a possible drop in milk prices, particularly when faced with ever-powerful retail customers.
The end of the quotas also provide an opportunity for some dairy processors to manufacture more dairy products to export to the world’s emerging markets. Consolidation could provide the increased scale for dairy groups to better serve markets in the East – and this has certainly been a factor in the mergers between Sodiaal and Entremont Alliance, as well as the 2008 deal between Friesland Foods and Campina, which created the world’s fourth-largest dairy processor in FrieslandCampina.
Announcing its talks with Hansa-Milch, Arla focused on what it saw as the domestic logic behind the proposed merger. Arla said its move to combine with Hansa-Milch would enable it to create a stronger business in Germany, one of Europe’s key dairy markets, both in terms of milk production and the consumption of dairy products, but also a market in need of consolidation in the face of powerful retailers.
Arla currently exports butter and cheese to Germany, generating annual sales of DKK2bn, but has no manufacturing presence there. A merger with Hansa-Milch, an Arla spokesman said today, would create a business with a broader product portfolio, including a presence in “value-added” fresh dairy categories.
Arla also insists it is determined to pay as high a price as possible to farmers for their milk and says the company must grow its business in Europe, particularly in the “important” German market, which it has earmarked as a core market for some time, alongside Poland, Sweden, Denmark and the UK.
As such, a deal with Hansa-Milch would give Arla the ability, it says, to keep prices high as it would give the business more clout when dealing with retailers both in terms of price and in its wider product portfolio.
What’s more, with Nordmilch and Humana Milchindustrie looking to merge next year, Arla is likely to have felt the need to also be at the forefront of the consolidation in Germany’s dairy sector.
The proposed merger between Arla and Hansa-Milch may, then, be driven by factors within Germany but the move is another example of the dairy consolidation across Europe. The deals in France and Austria also share this domestic logic even if some are also driven by international ambitions.
However, the end to EU dairy quotas in 2015 is a factor in each deal. In five years time, the milk market will be less regulated, production is likely to rise and any surpluses will put pressure on prices. The stronger the company, the greater its scale, the more likely it is to withstand what Rabobank dairy analyst Marc Voorbergen describes as market “turbulence”.
“No-one knows exactly what is going to happen,” Voorbergen told just-food today. “In the most favourable production areas, we will see more milk. It will probably cause a lot of turbulence. We will see surpluses building up in some areas.”
Consolidation will be one way for dairy processors across Europe to navigate the choppy waters ahead. As 2015 nears, the dairy sector is likely to see more of the kind of deal proposed by Arla and Hansa-Milch today.