Arla Foods and Milk Link have revealed plans to merge their operations in the UK. If approved, the combined entity would become the largest dairy processor in the market. In this month’s just-food interview, Peter Lauritzen, CEO of Arla UK, and Neil Kennedy, chief executive of Milk Link, speak to Katy Askew about the benefits the proposal would bring the companies and their farmer-owners.

The ongoing process of consolidation in the dairy sector took a leap forward yesterday (22 May) when Arla Foods and Milk Link unveiled plans to fully merge their operations in the UK.

The proposed deal is the latest in a series of M&A moves in European dairy, the most recent being the takeover of the UK’s Robert Wiseman Dairies by Germany’s Muller earlier this year.

Consolidation in the market has gathered pace as European dairy companies increasingly look to cut costs by leveraging scale against a backdrop of rising input costs and pressure on pricing in a depressed consumer environment.

If it is approved, the Arla-Milk Link merger will bring together two significant players in the UK dairy sector that, between them, control around 25% of the country’s milk pool.

Indeed, for Milk Link chief executive Neil Kennedy and Peter Lauritzen, who heads up Arla’s UK business, the greater scale the merger offers represents a significant benefit.

“Two strong businesses together make an even stronger business,” Kennedy insists.

“We will have a stronger scale, combined turnover of GBP2bn (US$3.16bn), extremely well invested assets within the cheese and fresh milk packing facilities and a total milk pool in the UK of about 3.2bn litres,” Lauritzen adds.

To Kennedy, increased scale is a necessity if Milk Link’s farmer-shareholders are to contend with global competitors.

“The competitors we have as farmer owners – large scale businesses like Danone and Muller and Nestle – are global either private or plc businesses we are having to compete with and we need to be able to have the scale and the investment to match,” Kennedy says.

Talking to just-food shortly after the merger was announced, Kennedy and Lauritzen appear confident Arla and Milk Link will be able to grow their businesses more effectively together. Kennedy suggests Milk Link will benefit from Arla’s financial muscle and investment in manufacturing facilities and innovation.

“We have been very impressed with the investment in innovation and facilities. A very large innovation team in Arla and their record in terms of product development and innovation is something we think we can leverage. We’ve been quite active, but I think the two together, we can do a lot more.”

Lauritzen confirms Arla expects the Milk Link business to benefit from the Denmark-based company’s ongoing investment in its UK facilities, technologies and product development.

“We have already invested heavily in the business and we will continue to do this. In plants, new product development. There will be a lot of exciting things going on in the future in all categories in fact. We have done it in the butter-spreads area. You will see it more in fresh milk. We also hope we will extend that to cheese going forward,” he says.

While Arla is already a strong UK player in fresh milk – both branded and private-label – butter and spreads and continental cheese, Milk Link brings to the table its expertise in traditional English cheeses such as Cheddar.

Through the merger Arla would therefore be able to offer a full range of dairy products to its UK customers, as well as managing profitability by balancing production levels between different dairy categories in response to shifting prices.

“We have been a strong player in fresh milk, our Aylesbury dairy is coming on stream in 2013. We have a strong presence within butter and spreads. Also in speciality cheese, I would add, through our Castello brand,” Lauritzen says. “But it is correct that we have been missing the traditional English cheeses like cheddar. This will certainly be a benefit for us. That is why the merger is a perfect match.”

“We’ve got a good asset base primarily focused on cheese. Arla’s manufacturing footprint here is primarily fresh milk and butter, so they are actually very complementary. There is very little in the way of overlap,” Kennedy adds.

Increased investment, coupled with Arla’s brand building know-how, could see Milk Link’s cheese offering develop from what Kennedy terms its “core” private-label business to include a growing branded cheese portfolio.

Kennedy says this evolution is “one of the potential options for the new business” while Lauritzen confirms Arla sees “some opportunities” to develop cheese brands going forward.

Kennedy also suggests the deal would allow Milk Link cheeses to reach an international market by utilizing Arla’s existing infrastructure to capitalise on export opportunities.

“We produce some fantastic cheeses that have a relatively small export market. We don’t have the infrastructure in major markets around the world like Arla do, so we think it is a great opportunity to feed some of our great cheeses into that network,” he reveals.

For its part, Arla would be able to expand its customer base through Milk Link’s “broader” foodservice presence, Kennedy adds. “We think that is a good opportunity for some of their products to open up to a wider catering market.”

Lauritzen and Kennedy are upbeat on the prospect that this strategy of targeted investment in facilities, innovation and brand building will result in market share gains.

“We are investing. A large investment in really excellent production facilities, investment in brand marketing, investment in innovation. If you do all three of those things well then customers and consumers tend to want more of what you are doing,” Kennedy observes.

“Keeping production costs down is a prerequisite. Nobody wants to pay more than they have to for products of the same quality, so you’ve got to be efficient. But I think you also have to innovate and differentiate,” he continues.

And all of these benefits will feed back to Arla and Milk Link’s farmer-owners, the dairy chiefs suggest.

The Milk Link co-operative comprises of 1,500 dairy farmers across the UK, while Arla has just over 800 members in Denmark, Sweden and Germany. However, following this merger and a planned combination with MHU in Germany, Lauritzen says Arla’s membership base will expand to 12,400 owners.

The merger would see Milk Link members become full members of Arla, the first time UK farmers have been represented in the cooperative. They will have “equal rights and obligations” to their European counterparts, Lauritzen says. This means after a “transitional period” Arla’s UK farmers would receive the same milk price as their European colleagues and all would benefit from the strides that the company expects to make driving sales and profits in the UK.

“Our aim is obviously to be an effective supplier but at the same time to deliver competitive returns. I think you do that by being efficient, you do that by building brands, you do that by creating differentiation value. And I think the combined business is better placed to do all of those things,” Kennedy concludes.