Booming Acquisitions to Lead to Further Consolidation in Dairy Market

The dairy industry saw yet another acquisition last month with Lactalis-owned Parmalat buying 11 dairy plants from BRF, Brazil’s third biggest dairy manufacturer.  Mergers and acquisitions (M&A) have reportedly reached over 120 transactions in 2013 according to Rabobank, so why this large number?

One could suggest it’s a choice to either join forces or get left behind. With the world’s top 10 dairy players capturing just under a quarter of global dairy sales, no one realistically would want to compete against these players alone. Building scale is inevitable but here is the catch; as M&A booms and joint ventures are ever more present, what billion dollar deal is left? Do dairy companies need to tie up with even more companies to sustain growth, or is organic growth still on the cards? Euromonitor International looks at what’s driving M&A activity in dairy and which growth markets will see more investment.

Forecast Growth: Dairy by Region

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Source: Euromonitor International

Top 10 dairy players already capture a quarter of the market

Looking at expected future sales, dairy will be the number one growth driver across packaged food, generating US$71 billion of new sales between 2014-2019, in real terms. That is 30% more than new sales between 2009-2014. Therefore, it is not necessarily a question as to whether dairy will continue to grow but more where and how companies can get the most out of the booming category.

As the world’s top 10 dairy giants capture 24% of the market in 2014, up from 17% in 2009, the lack of billion dollar acquisition opportunities is set to lead to a slowdown in the consolidation process over the years to come. However, the number of smaller purchases is likely to increase. Two strategies stand out; strengthen existing presence in mature markets and build a presence in fast-growing emerging markets.

Market Share of Top 10 Dairy Players vs Rest of Global Dairy, 2009/2014

Sharetop10_new

Source: Euromonitor International

Note: Top 10: Danone Groupe, Nestlé, Lactalis Groupe, China Mengniu Dairy Co Ltd, Inner Mongolia Yili Industrial Group Co Ltd, Kraft Foods Group Inc, Royal FrieslandCampina NV, Arla Foods Amba, Yakult Honsha Co Ltd, General Mills Inc

Strengthen existing presence in mature markets through innovation

In existing and mature markets such as the US, France and Italy, multinationals are “buying in” innovation through acquiring smaller, more innovative firms in niche markets. More M&A activity is expected to occur with multinationals buying more niche organic or lactose-free brands in order to widen their portfolio and tap into smaller but faster growing markets. General Mills’ recent purchase of organic brand Annie’s for a premium of US$800 million, is one such example.

Another health food category which is being eyed up by multinationals is non-dairy milk alternatives. This is emerging as a significant long-term growth category and is outpacing growth in volume sales of conventional milk. In fact, non-dairy milk alternatives, which includes the likes of soy, hazelnut, almond and oat milk, was one of the fastest growing categories within health and wellness packaged food, with 5% value growth globally between 2013-2014. What makes it an attractive investment is that soy milk commands a much higher unit price (US$1.65 per litre) than conventional milk (US$1.15 per litre) which is a heavily commoditised product marked by a high private label share. In fact, private label share in cow’s milk is 21%, whilst for soy milk this is a mere 7% globally.

Non-dairy milk alternatives are characterised by emerging new varieties, not only to facilitate adventurous consumer palates, but also to cater to the spiralling number of consumers afflicted by food allergies and intolerances. WhiteWave’s acquisition of SO Delicious Dairy free is testimony to companies tapping into faster growing categories in mature markets.

Build a presence in fast-growing emerging markets

With dairy consumption in mature markets dropping to 72kg per person in 2014, from 74kg in 2009, companies are seeking for growth in emerging markets that have a far lower level of consumption but, conversely, are growing. In emerging and developing countries, the average per capita consumption reached 18kg in 2014, up from 16kg in 2009. However, competition to serve countries like China, India and Brazil is fierce and companies will need to build scale in order to compete. Parmalat’s purchase of 11 dairy plants in Brazil last month is a clear example of this scale. With BRF being the third largest player, with a market share of 10.4% in Brazilian dairy, Parmalat will gain access to brands known to millions of Brazilian consumers. This is a strong defensive move in building scale that will aid in competing with the top 10.

Global dairy will continue to see acquisitions of this scale in the years to come. However, as there are increasingly fewer companies to procure, the size of the deals will be smaller. Instead of the larger Lactalis-Parmalat deals that we have seen in the past, small to medium local enterprises (SME) are likely to be the primary target going forward. Nevertheless, the pool of SMEs is big and acquiring these SMEs give companies immediate access to the consumer, as opposed to the lengthy procedures seen with large acquisitions, and for a smaller price tag.