There's further consolidation in the Brazilian dairy sector
In the latest development, Lactalis buys out DPA from Nestle and Fonterra
After its purchase of Itambe from CCPR, a cooperative and Vigor Alimentos, a deal first announced in 2017, in the wake of its taking over of BRF dairy business in 2015, and in addition to purchased assets from failed LBR (previously a much celebrated champion financed by BNDES during the profligate Lula da Silva administration), Lactalis further strengthens its position in the Brazilian market by taking over DPA. It is now facing up to Nestle, Danone and Grupo Lala, a Mexican group now a heavyweight after its recent USD 1.8 billion takeover of Vigor from JBS, J&F and Arla. The new owner of Dairy Partners of America (known as DPA, a joint venture formed by Fonterra and Nestle and changing hands for USD 131 million), is expected to see the transaction through by mid 2023. Those new developments show that further consolidation continues in this highly competitive market where winners are not just volume players, but savvy value addition, multi brands specialist dairy groups.
The fact that JBS, its holding and years earlier, BRF could be selling their dairy interests suggests that size alone doesn't predict healthy profits in this highly competitive industry. Brazilian dairies traditionally buy various types of milk grades at spot or contract prices from dairy farmers, incidentally incurring tax liabilities in a country where - incredibly - raw materials are taxed when crossing internal state borders (the infamous ICMS tax comes to mind). In Brazil supply chain management (especially of the cold chain sort) can be taxing during the tropical summer months and get quite challenging during the height of major crop harvests, given the already high road transport price schedules and a sub-par transport infrastructure. If vertical and in particular, horizontal integration across pig, chicken, turkey, cattle and dairy farms were so easy JBS and BRF wouldn't have offloaded their dairy businesses, although gearing could have played a part in the respective decisions to sell.
Interestingly JBS and its holding (in addition to Arla Foods, which sold its 8% share ownership in Vigor) appear to be making a pretty good deal with Grupo Lala, in comparison to the surprisingly low sale values achieved by other players.
What will the structure and dynamics of the dairy industry look like in 2H 2023?
Nestle may now have its hands free to focus on growing its well known dairy brands, while Danone will keep developing its share of the market in fresh dairy products. Overall competition would now be expected to heat up between Lactalis, Lala/Vigor, Danone and Nestle, while challengers and longer tier players such as Italac or Betania keep growing their markets. Some market observers might agree that volumes of collected milk would be even poorer predictors of future success; rather they'd expect innovation and value addition to sort the winners from the losers. Let's see what happens to the yogurts, cheese, UHT milk and other dairy products and brands in 2023.
Keywords: Itambe, Vigor Alimentos, BRF, BNDES, Lactalis, Nestle, Danone, Grupo Lala, JBS, Arla. Dairy Partners of America, DPA, Fonterra, Italac, Betania, yogurts, UHT milk, cheese, fresh dairy, dairy brands, innovation, value addition