Globalisation Makes Dairy Merger Essential

STATEMENT FROM: Boston Consulting Group

For Immediate Release

GLOBALISATION MAKES DAIRY MERGER ESSENTIAL

THE SECOND HALF OF THE 20TH CENTURY SAW DAIRY INDUSTRIES MOVE FROM BEING STRICTLY LOCAL OPERATIONS TO BECOME NATIONWIDE BUSINESSES. THEN, IN THE EARLY 1990S, THE FIRST SIGNS OF REGIONALISATION EMERGED. NOW, LIKE OTHER INDUSTRIES, THE DAIRY INDUSTRY IS GLOBALISING. IN THIS ARTICLE, BOSTON CONSULTING GROUP SENIOR VICE PRESIDENT DR ALAN JACKSON EXPLAINS WHY THE PROPOSED MERGER BETWEEN KIWI DAIRIES AND THE NEW ZEALAND DAIRY GROUP SIGNIFICANTLY IMPROVES NEW ZEALAND’S CHANCES OF BUILDING A GLOBAL CONSUMER DAIRY COMPANY.

In India, 87 percent of milk goes directly from the cow to the consumer without packaging. In the past, other countries’ dairy industries have been nearly as localised. Cows need to be milked every day and the milk processed or consumed almost immediately. Without efficient collection, processing and distribution networks, the industry is forced to be local.

When those networks were developed, there began to be wider opportunities. From the 1970s to the 1990s, dairy industries consolidated along national lines, reaping cost savings in manufacturing and distribution.

New Zealand and Australia are good examples of dairying moving from a local to a national industry. Australia has moved from twenty to just four major milk companies in the last ten years, and New Zealand now has just two.

The last two years have seen national dairy companies start to rapidly expand to become regionalised. Again, cost savings in manufacturing and distribution have been a key driver. But an even greater driver is the need to achieve efficiencies in the more costly areas of R&D and brand development, and the need to spread these costs across a much wider consumer base.

There are many examples. In North America, Dean Foods has spent more than NZ$2.5 billion on over 13 acquisitions and Suiza Foods has bought over 18 companies. Denmark’s MD Foods and Klover have merged with Sweden’s ARLA to form Europe’s largest dairy company. Holland’s Friesland and Coberco have merged to create a formidable competitor to New Zealand through their South East Asian subsidiaries.

Beyond efficiency, there have been other key drivers to these mergers. Consumer tastes are converging, making it possible to introduce products into many markets at once, rather than having to make specific products to cater to different local tastes. That, together with trade and capital deregulation, has contributed to the consolidation and globalisation of the grocery trade by companies such as Wal-Mart, Ahold, Tesco and Carrefour. The Economist predicts that as few as ten global companies will ultimately dominate food retailing.

Global retailers such as these want to deal with global suppliers, while suppliers also need scale to improve their relative bargaining positions.

These factors are spurring the next stage of dairy consolidation – regional companies becoming global. Italy’s Parmalat has made more than 25 acquisitions outside Europe in the last five years, including the Queensland-based Pauls, and is rumoured to be turning its sights to New Zealand. From Europe, Danone has moved aggressively into both Asia and South America with acquisitions in countries such as China, India and Argentina.

In some product categories, globalisation has already taken place. Nestle and Unilever dominate ice cream, and Danone, Yoplait and Nestle dominate yoghurt. We can expect to see similar dominance achieved by major companies for other dairy products.

At first glance, New Zealand looks well positioned to be successful as the industry globalises. It has been very successful in developing strongly branded consumer positions in key Asian and South American countries such as Sri Lanka, Chile, Venezuela and the Philippines. These have primarily been in milk powders, particularly enhanced nutrition products, with brands such as Anchor, Anlene and Fernleaf.

Despite these successes, New Zealand continues to be a relatively small player in key regions, with less than 4 percent of the Asian and 2 percent of the South American market for branded dairy products.

This position can be likened to having captured important ‘beachheads’. New Zealand now needs to act quickly to turn these into substantial, defensible positions. Part of this strategy will entail the acquisition of select local dairy companies when they come up for sale.

The window of opportunity is still open to the New Zealand dairy industry in Asia and South America, but its competitors have their eyes on the opportunities too. To be successful, the New Zealand dairy industry therefore needs to have a unified vision to build for the future, the ability to fund growth, the right management talent and capabilities, and the willingness and ability to take bold action.

The industry’s Merger Package will significantly improve its capacity to respond to these imperatives and orchestrate a focussed, cohesive strategy.

Of all New Zealand industries, dairying is by far the best placed to become a truly global market leader in both consumer and industrial products. A failure to build on its regional beachheads and become a leading global player would be an inexplicable waste of an unparalleled opportunity – an opportunity not just for the dairy farmers but for New Zealand as a whole.

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