Australian food and beverage group Lion has reported a 4.% drop in third-quarter sales from its dairy and soft drink business as it rationalises its portfolio and battles competition.

Lion, which yesterday (29 October) announced it had acquired nearly 10% of sought-after Australian dairy processor Warrnambool Cheese and Butter Factory, said sales from dairy and soft drinks were down 4.4% at A$1.83bn (US$1.74bn).

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Reporting on its dairy and juice division, Lion said it had “continued to experience volume declines in price-driven categories such as juice and everyday cheese, as product rationalisation and heavy discounting continued”.

The company, owned by Japan’s Kirin Holdings, also warned it had seen a “significant” increase in farm-gate milk costs since the end of the quarter. It said the 2013/14 milk price, set in July, was up to 27% higher year-on-year based on the average price in some states.

“In the context of a highly competitive and deflationary retail environment, [the increase in milk prices] will place significant pressure on profitability,” Lion said.

However, Lion enjoyed growing sales of flavoured milk, speciality cheese and Yoplait, for which it holds the local licence.

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Lion, which owns brands including Dairy Farmers milk and Cracker Barrel cheese, is Australia’s second-largest dairy company.

Yesterday, it said it had snapped up 9.99% of Warrnambool Cheese and Butter Factory, which is the subject of takeover bids from three firms.

WCB manufactures some of Lion’s cheese brands, including Cracker Barrel. The acquisition of a stake in WCB is seen as a strategic move by Lion, with its manufacturing partner having attracted three full takeover bids.

Last week, Canadian dairy group Saputo made its second offer for WCB. Saputo’s A$8-a-share bid for WCB is the highest on the table, worth more than offers from Australian dairy groups Murray Goulburn and Bega Cheese.