The Nordic food retail sector has recently seen a swift wave of consolidation, and the Nordic food industry looks set to follow in its footsteps. Swedish Meats and Danish Crown meat producers meanwhile have a long history of business co-operation. These facts, says just-food.com, suggest that a full-blown merger deal is in the air.
A Danish-Swedish merger between the Danish Crown and Swedish Meats cooperative meat groups seems likely to be the next move as the Nordic food industry consolidates in response to similar rapid developments in the Nordic food retail sector.
Surprisingly frank statements regarding further and deepened cooperation between the two respective market leaders from both managements have sparked speculation here that the probability of a merger is no longer a question of “if” but “when”.
Paired with these statements from Swedish Meats’ new MD Peter Rasztar and his Danish Crown counterpart Kjeld Johannesen, the most compelling evidence to date to suggest that the two companies are heading for a full merger is their track record of long-term and strategic co-operation in breeding, R&D and producer counselling activities. An extension of this cooperations into production and marketing is a logical next step and seems a formality.
Adding to these speculations is the economic rationale of a merger and, given recent developments in the sector and the markets, both seem to have much to gain from it.
Denmark is expanding its pig production dramatically; the need for new export markets will grow further and will have to be addressed swiftly. The Danes are expected to boost pig production next year by a further 1.5 million heads, from the currently already high level of 24 million heads per year. Danish Crowns, as one of the world’s largest pork meat producers, exports nearly 85% of its 1.1bn tonnes annual pork meat production. It will most likely need access to new and lucrative markets nearby, and possibly also increase its processing capacity, in order to balance its heavy orientation towards bulk production.
Much of that is to be found in neighbouring Sweden. The Swedish market has already been given the highest priority by Danish exporters and the value of meat exports has nearly doubled to SKr1.5bn (US$0.14bn) between 2000 and 1995. Furthermore, domestic Swedish meat consumption has been rising steadily in the 1990’s but its per person annual consumption is still only 63% of that recorded in Spain, and 20 kilos less than Denmark. Swedish retail food prices are also attractive relative to the rest of Europe and pork prices have soared ahead 13.6% to October this year.
A tie-up with Swedish Meats would swiftly give Danish Crown access to this market, and furthermore, it would offer the company processing capacity, something Swedish Meats currently is being forced to dismantle at great costs.
Turnaround for dwindling sales?
Swedish Meats’ case for a merger meanwhile contrasts strongly with that of Danish Crown. The Swedish meat group is struggling to halt dwindling sales and slaughtering volumes, while at the same time fighting negative earnings. Last year it made a SKr260m loss on sales down 8% to SKr8.2bn, and the company is still in the red. The group needs to rapidly increase production efficiency to lift itself out of the negative spiralling as it loses out to other domestic players and imports. Domestic pork meat production slumped 14% last year and Swedish Meats took a lion’s share of that decline.
The two Nordic players also have a common problem which could be solved by a merger. Swedish meat imports are gaining market share by the day and there are many who want a piece of the action while safeguarding their revenue streams. Between 1995 and 2000, for instance, the Germans increased their meat exports to Sweden by 263%and total imports soared 77% in the same time. This year to June, meat imports are up a further 15%. As fear and concern over BSE and mouth and foot disease, from which Sweden has been spared, is fading, exports are again expected to pick up.
With imports accounting for nearly 25% of beef consumption, and domestic pork production for the first time in nearly a decade equating to less than levels of national consumption, Sweden has had few export potential, and exports have shrunk by 3% between 1995 and 2000.
Swedish Meats’ export volumes have slowed significantly, and what is being shipped goes mainly to England and Germany. Its export potential, especially of processed meat products, is favourable however, not least from a currency point-of-view, and its export efforts would get a head-start could it lean on the know-how within Danish Crown, which alone represents 60% of its home country’s total food and agricultural exports.
Although rather rare in the agricultural sector, cross-border mergers can prosper as Arla Foods, the result of the merger of Sweden’s Arla and MD Foods of Denmark, proves. However, history also shows all economic rationale can go down the drain when cooperatives are about to merge, and the key issue is whether the Swedish farmers and owners of the Swedish Meats cooperative are ready to let go of what they consider to be their unique animal husbandry practices.
Hopes were that Swedish animal welfare laws, currently far more extensive than EU laws, would pay off within the meat market, but so far this has not materialised because the laws have proved difficult to forge into a marketing tool. Nevertheless, Sweden has been spared from salmonella-contaminated food, BSE, swine fever and foot and mouth disease that in the 1990’s plagued the rest of Europe.
All these factors suggest that the proposed merger between the much-smaller Danish group Steff-Houlberg and Danish Crown, admittedly unlikely considering the resulting company will control 95% of the Danish slaughtering market, is only a prelude to something much greater for the Nordic meat industry.