The dairy sector decides on alternative routes

The latest annual Rabobank survey highlights the global giants of the dairy industry, which have started to recover after two years of significant downturn. As prices start to move up again and milk volumes delivered by farmers become more limited, dairy companies have once more become more focused on value strategies rather than volume strategies driving their actions and attitude to growth.

Dairy price recovery in 2016 came too late to be reflected in the combined turnover of the top 20 companies, which, in 2016, was down 1.6% on the year—but down a dramatic 14.4% in US dollar terms since 2014 (-1.3% and +2.7%, respectively, in euro terms), due to the significant reduction in milk values which has occurred over the period and the weakened world market demand.

There are no new entrants into the list this year, with the €4 billion threshold difficult to achieve. However, while the players have remained the same, the order has moved compared to 12 months prior.

Nestlé remains at the top of the list, upheld by its ice cream JV with R&R (now named Froneri), which has offset slow growth elsewhere. Danone has moved into the second spot, having acquired WhiteWave Foods. This enables Danone to leapfrog Lactalis, who- despite making acquisitions in Romania, Belarus, China, Chile, and the US- moves to the third place on the list. With the pending acquisitions of Danone’s Stonyfield business in the US and Omira in Germany, Lactalis is likely to move up again in next year’s ranking. The acquisition of a 51% share in Pakistan’s Engro Foods has allowed FrieslandCampina to move into fifth place, slightly ahead of Fonterra who move to sixth.

Dean Foods has dropped out of the top 10 in a year that saw continued decline in the US fluid milk category, and saw the company investing in dairy alternatives and juice. This allowed Mengniu to become the second top 10 Chinese company, helped by consolidating its share of Burra Foods in Australia and acquiring a majority stake in China Modern Dairies who also produces liquid milk. However, the two Chinese players in the top 10 showed a combined sales growth of 0% YOY in 2016 in dollar terms, compared to 3% in 2015 and 14% in 2014, and they will perhaps need to look outside of China to continue their movement up the list in future years.

The largest M&A deal in the sector this year was the acquisition of Mead Johnson by Reckitt Benckiser, who previously had no footprint in dairy. While there were only a total of 73 deals in dairy in 2016, at the halfway point in 2017, the number is already up to 50, with half of these in Europe.

It is expected that the dairy sector will see organic growth return, with growing milk supply in the north-eastern US. There will also be growth from acquisitions with increased M&A. At the same time, mitigation of risk is likely to become a major driver for events, as companies will consider their position in the light of future risks caused by Brexit, potential and announced changes to trade agreements, and further changes to environmental and food safety regulations around the globe.

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