The pace of acquisitions made by Lactalis, particularly in emerging markets, shows no sign of abating as the French dairy behemoth kicks off 2019 with deals in India and Egypt. Simon Harvey takes a look.
Lactalis’ M&A activity, in terms of numbers and geographical diversity, is unrivalled among any of its closest peers in dairy.
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Despite a period of calm during the second half of 2017 as Lactalis found itself embroiled in a scandal over tainted baby milk, activity picked up again last year, with at least four acquisitions, excluding an increased stake in Parmalat to 95.8%, the Italian dairy group in which the French giant bought a majority stake in 2011.
Amid a moribund dairy market in western Europe, Lactalis has looked further afield, particularly into emerging countries, picking up assets stretching from eastern Europe to South America, from south-east Asia to the former USSR, and the Middle East.
And now, at the start of 2019, more deals in India and Egypt. Last week, Lactalis announced it had snapped up the bulk of India’s publicly-listed Prabhat Dairy, along with Egyptian dairy business Greenland Group for Food Industries, both for undisclosed sums. Lactalis already had a presence in India, having entered the country in 2014 with the purchase of local processor Tirumala Milk Products, followed two years later with a deal for the dairy business of local conglomerate Anik Industries. Lactalis also has a joint venture in Egypt with Hawala, set up in 1997, and through which the Greenland transaction was conducted.
In making those acquisitions, Lactalis set out its stall, saying it’s pursuing a “growth strategy across all dairy categories on the five continents”. The purchase of the Prabhat assets gives the company two additional facilities in India, taking it to 13 factories in the country and becoming “the first private milk collector with 2.3 million liters of milk collected per day”.
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By GlobalDataFounded in 1995, Greenland competes with domestic and international companies including the leading producer Dina Farms, Juhayna Food Industries (which has a joint venture with Denmark’s Arla Foods), Arabian Food Industries and Nestlé. Greenland produces cheese, ghee, milk, juices and other fresh dairy products and exports to around 50 countries.
Describing its strategy for Egypt, Lactalis said its aim is to be a major producer of dairy products and the acquisition of Greenland will “effectively strengthen our position in the cheese category”. In its partnership with Halawa, the company manufactures processed cheese, yogurt and UHT milk.
Why expand further in India and Egypt?
Both India – considered the world’s largest dairy producer and consumer – and Egypt are major milk producers, giving companies operating in those countries access to a large pool of ingredients for manufacturing. And, according to analysts, while markets in both destinations are developed, both have “huge” informal dairy sectors waiting to be tapped.
Preben Mikkelsen, a Denmark-based dairy consultant and chief executive of PM Food & Dairy Consulting, says India produces 150-160 million tonnes of fresh milk annually but only about 20-25% of that is processed by dairy companies.
Mikkelsen puts the formal production of dairy in India at 65,000 metric tonnes in 2017, although he could not provide figures for the informal sector. The informal market in Egypt is around 400,000 tonnes, compared to 376,000 for formal production, Mikkelsen says.
According to Mikkelsen, Lactalis sees India and Egypt as an opportunity to reach out into the respective geographical regions, with Egypt perhaps offering a gateway into other north African markets, such as Algeria, Tunisia and Morocco, “where the dairy markets are growing quite well and the demand is increasing”.
“Lactalis seems to be eager to be a global dairy company now”
“Lactalis is expanding very rapidly,” Mikkelsen tells just-food. “They seem to be eager to be a global dairy company now. They have been focusing first on Europe, then they took eastern Europe and then went to the US but now they are going global.”
For Mark Voorbergen, a Netherlands-based dairy consultant and managing partner of Dairyntel & Partners, Lactalis has moved into India and Egypt to take advantage of population growth, and along with it, the potential demand for dairy products amid increasing disposable incomes. At the same time, stagnant markets in western Europe are driving dairy companies to overseas assets, he says.
Voorbergen calculates volume growth in dairy is more or less absent in Europe – 0.5-0.6% in 2018 – and “barely” running above population growth. “It’s creeping closer and closer to aligning with population growth, implying that capital consumption isn’t growing any more,” Voorbergen tells just-food, adding India’s population is increasing at a pace of around 1.1% to 1.2% every year.
“The European market has been saturated already; cheese is probably the final remaining growth category. You have to look for value growth opportunities and that’s a highly competitive area. So, you are looking for markets where rising population growth and increasing wealth are driving dairy consumption. You end up with these kinds of markets – India and Egypt.”
Voorbergen argues the reasoning behind the company’s strategy for India is probably more about synergies in different product categories, as well as a high level of dairy consumption, whereas in Egypt it’s perhaps more about bolstering Lactalis’ existing base.
“If you look at what is the trigger for M&A in general, and with Lactalis in particular, it’s strengthening the presence that they already have … it could be about synergies on their manufacturing side or access to a new product portfolio that they can offer their clients in the region.”
Mikkelsen, meanwhile, believes Lactalis “still wanted to get a greater foothold in Egypt, so it’s not surprising that they are getting back when the possibility is there, and Greenland is one of the major dairy companies”.
He says it is easier to have a production base in Egypt than to import, and therefore be better placed to take advantage of the growth in the industry. “They want to import, but it’s easier to make the product in Egypt. There’s a formal sector for cheese in Egypt but there’s a huge informal sector. The transformation into a formal sector has grown very fast in Egypt, particularly for white cheese.”
Whither China?
On paper, the world’s most populous country, with growing demand for dairy and infant formula, presents an opportunity for multinational companies in the sector.
Voorbergen says during his time at Rabobank, where he served as a dairy analyst, he remembers how, in around 2010-11, “everybody was going for China trying to secure a position in the baby food chain”.
However, a number of international businesses have encountered difficulties in China – Netherlands-based FrieslandCampina’s venture with China’s Huishan Dairy and the struggles New Zealand’s dairy cooperative Fonterra has had with Beingmate Baby & Child Food Co. being two recent examples.
And Voorbergen says that, while India’s population demographics are growing every year, China actually went “backwards” in 2018. Plus the cheese consumed in China is not really Lactalis’ forte, he adds.
Lactalis has been selling in China since the late 1990s. Last year, Lactalis struck a deal to buy the infant-formula business of Aspen Pharmacare in South Africa, giving it ownership of brands including Alula, Infacare and S-26. Alula received registration to be sold in China in 2018 but the majority of the sales from the Aspen assets come from Latin America, sub-Saharan Africa and Australasia.
Voorbergen adds: “The most interesting part of the pie has already been shared among the players in China; in baby food, you have three or four companies that dominate the market and, in their trail, you have a lot of ingredients suppliers. I don’t see [Lactalis] being able to do more and more business in China.”
Mikkelsen says India can be a “tricky” country in which to get established and is not an easy market in which to “actually make money”. However, he points to strict regulation in China as an obstacle, along with a milk supply that has almost stagnated in the past three years.
He says: “Maybe they [Lactalis] have assessed China would be too costly now. A lot of companies have made joint ventures in China and paid a lot of money for it. It’s been difficult; Huishan Dairy lost a lot of money, Fonterra’s Beingmate was really terrible, you’ve seen Danone Wahaha also a disaster, so I think they [Lactalis] have been cool, calm and collected and said: ‘OK, China is crowded, it’s expensive and it’s too difficult.’
“The whole consumption pattern and product portfolio in India are way different to Egypt”
India and Egypt both present challenges. Egypt has a well-established cheese market, especially for white cheese such as feta, while consumption in India is tilted toward paneer. When you look at other cheese types in India, many are only consumed by expatriates, according to Mikkelsen.
He notes the increasing influence of western habits on dairy consumption in India but argues international dairy companies will need to adapt to local consumers by adding spice flavours consistent with people’s palates or by adapting processed cheese.
Nevertheless, Mikkelsen adds: “The retail chains are finally getting to expanding in India. Formerly, you only had the mom-and-pop shops but now you have more modern retail facilities. This means the market will develop in a western way, with value-added products and branded products, and more affluent consumers can afford higher prices.”
Voorbergen echoes Mikkelsen’s thinking, agreeing it’s more about adaptability in India and catering to local tastes in Egypt. One of the key challenges to India is “trying to tap into the specifics on how people consume dairy”, he says.
“The whole consumption pattern and the product portfolio in India are way different to Egypt,” Voorbergen says. “I doubt Lactalis’ ambitions in India would be to try and sell the products they already make and sell that into a new audience. Indians are well travelled and have been exposed to western diets and dairy products, but the long-term potential is about really understanding the way dairy is consumed there. Egypt has its own local cultural traits as well, but I think that comes closer to how ‘we’ consume dairy.”
What could Lactalis look to do next?
“I don’t think this is the end of it,” Voorbergen says when asked whether Lactalis could look to make further purchases in India. “They are not the sort of company that will settle for the market share in India they currently already have. I’m sure there’s going to be more to come”.
Mikkelsen says Lactalis has the firepower, the “capital and market know-how” and also has brands. “I don’t think a lot of cooperatives have the power to get into India,” he says. “You really have to get a lot of capital and be in for the long term, but it’s a long-term risk when you go into India. And Lactalis always seems able to take that risk. They’ve done it in Europe, in Turkey and other places where they have been expanding very rapidly, and before anybody else.
“I think they are very excellent in acquiring companies and increasing the performance of those companies. They are second to none in that game. You’ll see a lift in productivity and quality. This makes them one of the best expanders in the dairy sector.”
Mikkelsen suggests Lactalis could be interested in the dairy assets of Australia-based Lion, put up for sale by owner Japan’s Kirin Holdings in October. Australia, he says, “could also be a good place for supplying good quality milk to the south-east Asian market”.
Away from dairy, could the rising popularity of plant-based food and drinks be on Lactalis’ radar screen?
“I don’t think we are talking about big volumes but [plant-based foods] are gradually eating away at some of the dairy demand and I think it’s going to last,” Voorbergen says. “On the other hand, we see dairy benefiting to some extent, especially cheese, from the bad press that meat is getting. So we are gaining something on one side and losing a bit on the other.
“I think their [Lactalis’] key strength is the capabilities to integrate the manufacturing assets to improve … and they have a great skill in identifying assets that can generate a return.”
