Arla Foods today (29 August) reported a doubling of earnings in its first-half, boosted by M&A. The company has taken a lead in the process of consolidation underway in the European dairy sector, with deals in the UK and Germany. Arla expects to continue to play an active part in European consolidation in the dairy sector as well as looking to M&A to drive growth in emerging markets, Michelle Russell discovered when she caught up with Arla CFO Frederik Lotz.

Lurpack spreads producer Arla has inked two significant merger deals in the past 12 months. Last autumn, Arla UK merged with Milk Link to create the country’s largest dairy company with a combined turnover in excess of GBP2bn. Arla also merged with Germany’s eighth largest dairy co-operative, Milch-Union Hocheifel (MUH), to create the country’s third largest dairy company in 2012.

These deals should be viewed in the context of a consolidating European dairy landscape. Other deals in the sector have included the takeover of the UK’s Robert Wiseman by German dairy major Muller for GBP280m (US$435m).

Speaking to just-food following the release of the firm’s results this morning, Arla CFO Frederik Lotz said he has seen “a lot of consolidation action” over the years.

“We certainly expect more in the future, and we will continue to participate in industry consolidation in the markets we play in, in Northern Europe, if relevant to our owners.”

Lotz said Arla had made “significant investment” in M&A over the last few years and that the “payback and synergies” were now beginning to “unfold in a very clear manner”.

“What we can see is that our turnover is growing at a significantly higher rate than our cost structure at a rate of around 2:1 and that is a mirror image of the value of the synergies we can drive out by scaling our business. In terms of when, we would expect the integration of these companies that we acquired last fall to be completed in full, in one to two years time.”

These synergies allowed Arla to book a jump in first-half earnings this morning (29 August).

The group gave an update on its Strategy 2017, which it published at the beginning of the year. The plan calls for it to double the proportion of dairy sales derived from emerging markets by 2017.

To date, Lotz said the group has achieved organic growth of 25% in Russia and more than 15% in the Middle East and Africa. In China, Lotz said the development of “a promising business” continues with sales of products under the Arla brand. It has also doubled sales of value-added child nutrition products and milk powder to the global dairy industry, in particular to China, the CFO said.

“When we look at the emerging markets we see very strong growth, about 20% organically, which is on par with what we’ve seen in the last few years. So very strong growth, strong demand out of the Middle East, Africa, Russia, and China. We see no indication that that is going away and we continue to up our investments and our presence in these markets in line with our strategy.”

In China in particular, Lotz said the “key to success” is to have “strong local partners”. Indeed, last year Arla became a shareholder in Chinese dairy giant Mengniu, through which the companies agreed to work together to sell a full range of dairy products in the country.

“It’s very clear to us that was the right decision,” Lotz says. “Having access to a distribution network and local presence makes the difference. We know there is a strong demand from Chinese consumers to buy foreign dairy brands and foods safety is at the top of the agenda and we feel that a 100-year history rooted in production and manufacturing of milk and milk products means we can offer safe products to consumers across the world, including China.”

With its eye on expansion in emerging markets, Lotz said Arla would certainly look to further M&A deals in order to expand in these regions.

“You should expect Arla to up its game in M&A outside Europe. We will be looking to obtain a larger presence in these markets, compared to the total size of Arla. I cannot disclose on existing targets but we have a very healthy pipeline and we have the firepower to take on more M&A in the coming years.”

Turning to Europe, Lotz offered a confident outlook for a region that has experienced a somewhat challenging downturn, but suggested it is the emerging markets where growth is key.

“We certainly hope [there will be an improvement]. There are indications of improvements in consumer confidence. We can see that clearly across our core markets and we have nice growth in certain areas, so we feel cautiously optimistic about our core markets, but the growth clearly sits outside Europe so that’s where the future is as we consolidate our position in Northern Europe.”

It is in Europe where the bulk of Arla’s private label sales are, where Lotz says the company has a “significant” presence, particularly in the UK and Germany. However, it is branded where Arla appears to see the real growth opportunities. 

Operating in a sector that is very much promotional and price driven, brand loyalty has become relatively difficult to develop, particularly in cheese. But for Arla, Lotz suggests the key is investing in the brand.

“Growing our brands is big part of our strategy. It is core. In the UK we continue to see growth in spreadables like Lurpak and we also see Cravendale experiencing a very strong development so there is a clear willing with some consumers to pay extra to get better quality and more variety. That will continue to be the ovveriding ambition of Arla to develop our branded sales through innovation.”