Not even four months after FrieslandCampina and Milcobel set out plans to merge, another pair of European dairy groups have announced they are to join forces – and they are unlikely to be the last.
On Tuesday, Denmark-based Arla Foods and Germany’s DMK outlined a deal they said would create the “largest dairy cooperative in Europe”.
Go deeper with GlobalData
The new co-op is to have more than 12,000 farmers across seven countries and a pro-forma revenue of €19bn ($20.75bn).
The two cooperatives, who have worked together in the past in areas like whey processing, believe the merger will provide resilience amid an anticipated decline in the overall European milk pool.
And, Peder Tuborgh, the Arla CEO who is set to be the chief executive of the larger business (which will carry the Arla name) sought to outline other positives.
“By uniting resources, we enhance our product portfolio and expand globally, reaching over 160 markets to ensure stable food production. This synergy strengthens our investment and innovation capabilities, driving new technologies and sustainable practices,” Tuborgh said.
The maturing of Europe’s dairy market into a low-growth industry makes deals like this understandable – even if it coming so soon after FrieslandCampina and Milcobel announced their plans might have raised some eyebrows.
“I think the current situation in the EU calls for combining strength, let’s put it that way,” Mark Voorbergen, a Netherlands-based dairy industry consultant and partner at Claassen, Moolenbeek & Partners, says.
“Unless we have these kinds of consolidation initiatives, I think there’s a decent chance that we will see capacity reductions. If everyone’s doing that all by themselves, I think it’s a less efficient process than when it’s carried out by two companies combined.”
Europe’s dairy processors are operating in an industry facing stagnant consumption and falling production.
Sluggish consumption in the EU has been a factor in the consolidation seen in the region’s dairy sector for the last couple of decades – including in deals that have already involved both Arla and DMK.
In the last decade and more, Arla has been involved in transactions in European markets including the UK, Belgium and Germany. DMK itself was born in 2011 when two of Germany’s largest dairy processors, Nordmilch and Humana Milchindustrie, combined. Five years later, DMK struck a notable merger with Netherlands-based DOC Kaas.
According to research by The European Commission that sets EU forecasts for various agricultural sectors out to 2035, the consumption of dairy products in the bloc is projected to remain flat (it forecasts a 0.1% annual decline out to 2035), with, for example, falling consumption of drinking milk but opportunities in areas like cheese, whey and functional dairy ingredients.
Meanwhile, Brussels says expectations for stricter EU and national environmental policies will likely lead to the bloc’s dairy herd to shrinking by 13% by 2035 compared with the 2021-2023 average.
Milk production could decline by 0.2% per year on average between up to 2035, the Commission says, although output is forecast to grow in areas like cheese, whey and skimmed milk powder albeit more slowly than in the past. “Cheese and whey could absorb 36% of the EU milk pool by 2035,” it notes.
Voorbergen sees cheese and whey as two opportunities for the new, larger Arla. The two cooperatives have worked together in the past, including on the ArNoCo joint venture to process whey from DMK’s cheese production into whey protein concentrate and lactose for Arla’s global ingredients business.
“Assuming there won’t be any remedies, which is not a given, I would say, particularly not in the German market, but, assuming they can keep both companies intact, then I think there’s quite a strong cheese and whey combination to be made,” Voorbergen tells Just Food.
“Cheese, of course, still being the main driver of consumption growth in the European market – and probably outside the European market as well. And whey, I think, has only become more attractive over the last decade with all the positivity surrounding [consuming] the right proteins.”
The Commission’s 2035 outlook report suggests the EU’s dairy sector is likely to face increased competition to supply markets outside the bloc. The EU’s dairy industry has benefited from growing demand for dairy in the world’s emerging markets but Brussels sees some regions stepping up efforts to become more self-sufficient.
“South East Asian and north African countries are expected to increase their milk production by around 3 % per year by 2035,” the Commission notes.
Nevertheless, the report says there will still be a need for imports to meet the expected continued increase in domestic demand, with the EU and NZ set to remain the world’s top two exporters of dairy products “with each accounting for around 24%”.
“The product portfolio of EU dairy exports will also need to adapt to changing demand in trading partners, favouring dairy products of greater added value,” the Commission’s report reads.
Both Arla and DMK do business outside the EU, of course. The majority of Arla’s sales remain generated in Europe but it does sell packaged products and dairy ingredients outside the region. It is also looking at further expansion via M&A in the Middle East and north Africa, with an ongoing interest in the dairy assets of Egypt’s Arabian Food Industries. DMK, Voorbergen notes, has an “interesting business” selling cheese in the former Soviet states of central Asia.
“I think that’s maybe something where DMK can add to Arla Foods,” he adds. However, with a smile, Voorbergen suggests the current volatility in global trade means it might be a little early to suggest when the enlarged Arla could best prosper internationally. “I must say, if you talk about emerging markets against the backdrop of what’s happening recently, anything is in the open,” he says. “It doesn’t really make sense to say where the opportunities are because they can be different in two months’ time.”
One topic on which Voorbergen is more certain is the prospect of further consolidation in Europe’s dairy industry. Two major proposed deals may have been announced in four months but he sees more transactions on the horizon.
“I think, looking at it from a helicopter view, I would actually welcome it. In a market where milk production continues to grow and you can grow no matter what, either through exports or locally, I think you can still have a lot of companies carving out their own little product market combination,” he says. “I think in a market where both consumption is kind of stagnant, but now also production, I think that creates the kind of environment where you bound to see more consolidation.”
