UK dairy companies consolidate

By Eric Donald

The rapid restructuring of the UK milk processing industry continues with the Dairy Farmers of Britain co-op acquiring Associated Co-operative Creameries from the Co-op group for stg£75 million.

This creates the largest co-operative owned dairy processing company in the UK with a milk pool of 2.4 billion litres and 3,250 farmer members. It's now the fourth largest processor after Arla Foods, Dairy Crest and Wiseman Dairies.

From a virtual standing start five years ago, farmer-owned and controlled co-ops have built up their milk processing capacity.

Arla plc (sales stg£1.4bn) and Dairy Crest plc (sales stg£1.3bn) have been active too over the last five years (see graph above) growing their businesses through mergers, acquisitions and new investments in plant. Arla has just announced plans to open its new Scottish dairy at Lockerbie early next year. This is a joint venture with Milk Link, a supply co-op with whom they formed a strategic alliance in 2002. But Milk Link also have processing assets of their own, having purchased the UHT, soft cheese, and yoghurt factories from Express Dairies in 2002. More recently in February of this year, Milk Link entered a cheese joint venture with Glanbia. Irish ownership of primary UK milk processing has dwindled as the rationalisation in the sector intensified.

Glanbia, once one of the largest cheese manufacturers in the UK following the acquisition of the cheese company by Waterford co-op, now retain just a 25% stake in Cheese Company Holdings. Milk Link bought the other 75% of this cheese business from Glanbia. Milk Link has just announced increased sales of stg£387 million and pre-tax profits of stg£7.26 million for their 2003/04 financial year.

While two of the UK's farmer-owned co-ops, Dairy Farmers of Britain and Milk Link, have been buying milk processing factories, Dairygold's former partner First Milk co-op have been slower to go down that road.

When Dairygold decided to exit the Aeron Valley cheese manufacturing joint venture last year, it was Scottish company A McLelland and not First Milk that stepped in to buy the Irish co-op's 50% stake. A McLelland hold 80% with First Milk co-op retaining a 20% stake in this Welsh cheese operation.

First Milk have come in for some criticism for their reluctance to increase their processing capacity, but they have a number of joint ventures formed with Dairy Crest and Nestle and also supply the third largest UK dairy company, Wisemans.

The two main catalysts for much of this rationalisation in the UK dairy industry were the disbandment of the Milk Marketing Board and the decision of the major supermarkets to limit the number of supply companies.

After the break-up of the MMB, farmer owned supply co-ops like Milk Link, First Milk and Zenith co-op were formed to market farmer's milk.

Dairy Farmers of Britain co-op have been transformed from its initial formation as a milk marketing co-op (Zenith) into the largest integrated dairy processing co-op in the UK. This latest deal to buy ACC was backed by HSBC bank and Barclays bank.

Last year these three farmer co-ops were also seeking the support of the banks to lease United Dairies' Westbury factory which went into administrative receivership.

The purchasing power of the large retail groups in the UK has exerted enormous pressure on both dairy companies and milk producers. One early example of this was Glanbia's decision to exit liquid milk when they lost preferred supplier status. More recently in May of this year Asda-Walmart announced they would be reducing the number of liquid milk suppliers down from three to one as of 1 September. Arla Foods will gain from this decision, but this contract was worth stg£70 million to Wiseman Dairies annually and Dairy Crest also lose out.

Increased farmer ownership in the sector may help in the face of this enormous retail power. In the past on both liquid milk and cheese the main supermarkets have agreed to increase their retail prices, provided the increase was passed back to milk suppliers.

From an Irish farmer's perspective, it's important that the IDB, Glanbia and Dairygold, who all have cheese sales and distribution companies in the UK, find a way to address this issue of retailer dominance.