DFB acquisition sees further UK dairy consolidation

- Last updated on GMT

Related tags: Dairy farmers, Dairy

Dairy Farmers of Britain's £75 million acquisition of Associated
Co-operative Creameries means further consolidation within the UK's
tough dairy sector, writes Anthony Fletcher.

Dairy Farmers of Britain (DFB) has acquired Associated Co-operative Creameries (ACC) from the Co-operative Group for £75 million, creating the UK's largest integrated milk cooperative.

DFB believes that the acquisition will help establish the group as the UK's leading farmer-owned, broad based dairy company. At 1.3 billion litres, DFB will be the UK's third largest milk processor.

The group claims that the enlargement represents a better deal for customers and retailers, promising to deliver security of supply and a more competitive, flexible and cost efficient service. According to DFB, vertical integration is critical to enabling its farmer members to achieve a sustainable milk price and a profitable platform from which to gain access to new markets for their milk and dairy products.

Dairy Farmers of Britain was established in July 2002 as a new generation cooperative business based on the successful European model. The group was formed as a reaction to farmer dissatisfaction with lack of control over, and returns from, the milk distribution system.

Created through the merger of the Milk Group and Zenith Milk, the business is structured to provide efficient member communication and involvement, a means of raising substantial capital, and a clear strategy of growth and development through investment in the supply chain to create a sustainable future for its members.

In addition to its core milk supply business, Dairy Farmers of Britain has dairy processing facilities in Chard, Peterborough and Westbury. Through the ACC acquisition, DFB will now acquire a number of established brands such as Dairygate, Cadog, Alive and Yorkshire Milk.

"This is an historic day for everyone at Dairy Farmers of Britain and ACC - customers, employees and farmers, as well as the industry in general,"​ said DFB chief executive Malcolm Smith.

"With this acquisition Dairy Farmers of Britain takes a massive step towards fulfilling our long-term strategic aim. We are now a major player in the milk processing market, becoming the third largest company in the UK."

Smith claims that the deal will allow the group considerably more flexibility in terms of pursuing its growth plans.

"Both organically and through acquisition we are now able to expand our horizons to a much wider range of options, providing better returns to our members,"​ he said. "We welcome ACC to Dairy Farmers of Britain and look forward to an exciting future as we continue to pursue our growth and expansion plans."

The UK milk sector is an incredibly tough environment in which to operate for small-scale suppliers, with the industry dominated by a few big players. Arla Foods UK's recent merger with Express Dairies, for example, created the country's largest dairy company, processing around 2.4 billion litres of milk a year.

And Arla Foods UK is confident of consolidating its new position. Asda recently selected Arla Foods UK as its sole milk supplier, a move that saw shares drop in its other two suppliers, Robert Wiseman Dairies and Dairy Crest.

In addition to the 250 million litres Arla already supplies to ASDA, the UK's second largest multiple, the deal will result in Arla selling a further 200 million litres. This is substantially more than Danish-Swedish group Arla's total supplies of liquid milk to the Danish market.

Arla's milk pool is reported to be one of the largest in Britain, with farmers stretching from south west of England to the north east of Scotland, and ASDA has emphasised the importance of Arla providing a more direct line from cow to consumers.

Certainly, the dairy industry has gone through significant change in recent years and such consolidation has resulted in fewer and bigger players. This is a pattern that can be seen throughout Europe, where supermarkets are increasingly dictating prices.

Arla Foods managing director åke Modig argues that it is this price pressure that is driving new structures in European dairy production.

"The trend in Europe's dairy industry points towards two blocks - one driven by the French dairies and one led by the German, Dutch or Scandinavian dairy industries where we'll play an active role,"​ Modig said.

For example, there is growing pressure on German milk producers after the three dairy groups, Campina, Müller and Hocheifel, discount their milk prices for Aldi. The retail chain has defended the new contract by declaring that the dairy companies are at liberty to demand whatever price they want from the retail trade.

But speaking to Arla's board of representatives in Halmstad, Sweden last month, Modig said that his company was well-placed to deal with the new market conditions because of its successful strategy to consolidate its position as Europe's largest co-operative dairy company and as market leader in several markets.

"Mergers are not objectives in themselves,"​ he said. "In order for mergers to work, the right economic conditions must be in place. Any future merger partner must also be able to pay a more or less equal milk price."

This is the strategy that DFB is now following within the UK dairy market.

Related topics: Markets, Consolidation

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