Blog: Katy AskewCould Dairy Crest become the next UK M&A target?

Katy Askew | 24 May 2012

Dairy Crest insisted this morning (24 May) that it will improve profitability at its dairies business after profits fell into the red on charges at the unit.

The group - along with others in the dairy sector - has struggled to maintain profitability in liquid milk. Dairy processors and farmers are being squeezed between rising costs on the one hand and pricing pressure from retailers on the other.

Earlier today, Dairy Crest CEO Mark Allen revealed how his company plans to weather these "challenging" times: the group will cut the cost of manufacturing and selling milk while also shedding customers who are unwilling to pay "a fair price for the high quality product that we deliver".

Allen said Dairy Crest expects its dairies unit to return to profitability levels seen "just a couple of years ago", with a return on sales of about 3% targeted in the "medium term".

Dairy Crest is not the only company active in the category that is looking to reduce its cost base.

Arla Foods and Milk Link announced plans to merge their businesses earlier this week and their combined operations would leapfrog Dairy Crest to the top spot in the UK dairy sector.

Speaking to just-food shortly after the merger was announced, Neil Kennedy - CEO of Milk Link - and Peter Lauritzen - CEO of Arla UK - said they believed the newly-formed group would be able to leverage economics of scale to boost profits.

"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," Kennedy told just-food.

The news comes against a backdrop of continued consolidation in the European dairy sector. European dairy companies are increasingly look to cut costs by leveraging scale against a backdrop of rising input costs and pressure on pricing in a depressed consumer environment.

The third major player in the UK liquid milk category, Robert Wiseman Dairies, was taken over by Germany's Muller earlier this year.

So, while Dairy Crest is currently the biggest fish in the UK dairy pond, its small continental presence and - compared to the global players - petite scale could potentially mean the group becomes another takeover target in the ongoing sector-wide, international, process of consolidation.

just-food will be taking a more detailed look at the UK liquid milk sector in our two-part Category Crunch next week. 


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