Dean Foods could be the next acquisition target in a consolidating dairy industry

Throughout the recent recessionary quarters most dairy companies have been impacted by growing consumer preference for lower-priced private label dairy products, and company strategies to fend off the decline in profit margins have included expanding their scale of operations.

In 2010, there have been a number of good sized acquisitions in various national markets, for example Lactalis’ purchase of Ebro Puleva’s dairy division in Spain, but one deal which would have a significant impact on the global dairy competitive landscape would be the sale of Dean Foods.

Speculation about a probable takeover has repeatedly boosted the company’s trading value on the New York Stock Exchange, with the most likely buyer being Danone Group, the world’s leading dairy player.

Pros and cons of Dean Foods for a potential buyer

Dean Foods is the world’s eighth largest dairy player, but its global market value share has been steadily decreasing. Additionally, the company’s retail value sales of branded dairy products have also declined slightly since 2007.

The company, in terms of both geographical and category spread, is positioned in less dynamically growing areas. Up until the acquisition of Alpro’s operations in Western Europe in 2009, almost all the company’s sales were generated in North America, and in 2009 the share of sales from its domestic market dropped, driven down by Alpro’s European revenues.

However, the purchase of Alpro gave Dean Foods the leading position and a strong platform in soy beverages from which to fully benefit from the category’s growth. The Alpro label is Europe’s leading soy food brand and covers such products as milk alternatives, yoghurts and desserts. It has strong brand equity for further expansion in related categories and an existing wide consumer base.

Dean Foods would fit Danone geographically but not category-wise

The potential purchase of Dean Foods by Danone would further consolidate the group’s leading position in the global dairy market. Additionally, the deal would make Danone the number one player in the affluent North American market.

However, the purchase of Dean Foods would not significantly increase Danone’s presence in the yoghurt categories. However, it would grant instant access to a large scale local production and distribution infrastructure, which is the ultimate necessity for entry into dairy categories given the limited potential of exporting such products long distance.

However, the high price Dean Foods would likely command could be better invested in expanding Danone’s operations in more dynamically growing emerging dairy markets, such as Asia-Pacific or Latin America, as well as in categories which would not dilute its currently high margin, functional product operations, with strong shares in close-to-staple drinking milk products.