It’s been a busy half-year for consolidations in the dairy industry. In March, Unilever, owner of ice cream brands Magnum and Ben & Jerry’s, announced the group’s plans to spin-off its entire ice cream division.
The strategic move, which would result in around 7,500 job losses, is hoped to be completed by 2025 in order to allow the consumer goods giant to focus on its four high-growth divisions of Beauty & Wellbeing, Personal Care, Home Care, and Nutrition. CEO Hein Schumacher said the spin-off – which is most likely to be a divestment – would allow the group to focus its resources ‘on global or scalable brands where we can apply our leading innovation…across complementary operating models’.
Meanwhile, Belgian dairy co-operative Milcobel announced it would sell its private-label ice cream division YSCO, citing the ‘fast-growing but highly-fragmented market’ as a key reason behind the decision. YSCO is a major player in the European private label ice cream market, producing and distributing nearly 200 million liters of ice cream per year and working closely with many major retailers on creating their own-brand ice cream products. Selling YSCO would fund additional capacity and process optimization across the co-op and likely have a positive effect on the milk price, according to Milcobel.
In May, New Zealand's Fonterra said it would focus on the co-op's ‘high-performing’ ingredients and foodservice channels and divest from its global consumer and integrated businesses – including the sale of brands such as Anchor, Fernleaf and Western Star.
“While these are great businesses with recent strengthening in performance and potential for more, ownership…is not required to fulfil Fonterra’s core function of collecting, processing and selling milk,” said CEO Miles Hurrell. “Due t our co-operative structure, we believe prioritising our Ingredients and Foodservice channels and releasing capital in our Consumer and associated businesses would generate more value.”
The news came after years of consolidation activity from the New Zealand co-op, which offloaded its Chilean dairy business to Gloria Foods, divested from its loss-making Chinese dairy farms, and exited Dairy Partners America Brazil, a JV with Nestlé, now under the control of Lactalis Brasil.
So what is prompting this activity – and why is ice cream in the midst of it?
'Investors prefer certainty to volatility'
We reached out to Mark Lynch, Partner at Oghma Partners, a corporate finance consultancy with a focus on the food, beverage, and wider consumer industry and advises on acquisitions, divestments, strategy, and raising capital.
We asked what are the risks of divesting from an ice cream or consumer goods division - particularly where a globally-recognized brand portfolio forms part of it. Lynch said: “The risks around splitting a division like ice cream from the rest of a company can lie around economies of scale and future NPD opportunities.
“Whilst in theory splitting a division off allows focus on that division which hopefully drives higher sales growth, the spun-off business has to carry some of the central overhead which previously existed in the Group Co.
“So, by its nature such splits drive duplication. If there was too much ‘fat’ in the divested business and/or the central cost charge was overly and unnecessarily high, then this could offset – more than offset – the negative impact of spinning off.
“With regards to economies of scale, the spun off company and the original business will both be smaller – so their buying scale diminishes as can their presence and clout with the retailers. This could have a negative impact with regards to their negotiating position versus presence on the shelf.
“Finally, it is possible that there will be a loss at new product development level – where the Group has historically helped generate NPD activity.”
He added that a stable category may move into growth through innovation, resulting in lost growth opportunities for the company that has divested from that business.
“Ice cream has its challenges, as do other subsectors of the food industry; in part due to its seasonality, as a poor summer can lead to a poor set of results and investors prefer certainty to volatility.
“Food stocks in general have lost some of their allure as other more exciting growth sectors have claimed the limelight – this is likely to be more cyclical in nature and as tech stocks get overheated interest may return to the sector.”
“Historically, the food sector has been of interest to private equity investors – as seen by the number of deals and we see ice cream as being part of where the interest lies,” he added.
Besides ice cream and consumer dairy, where in the food and beverage space is there scope for consolidation activity in the next 12 to 18 months? Lynch said: “We have already seen some consolidation in the meat-free space in the last year or two as the sector has struggled. However, I can see this continuing driven by cost related concerns.
“Elsewhere, there still seems scope for consolidation in the sports, healthy nutrition, and protein space, which remains in growth and where the market remains fragmented.”
How can food brands shield themselves from profit volatility?
Asked to highlight specific strategies that may help food and beverage companies to shield themselves from profit volatility, Lynch suggested there isn’t a magic bullet, but a set of tried and tested methods that companies can leverage.
“Historically, sector profitability has actually been fairly stable – the unusual Ukraine war-driven cost events are, fortunately an infrequent occurrence.
"However, consolidation can drive profitability, as can automation, for example."
“On top of that market segmentation, premiumization – product driven strategies and NPD – can help lift profits over time,” he concluded.