The deal sees Saputo’s rival Lactalis snapping up a number of respected households names, including Davidstow, Wensleydale, Clover, Country Life, and Cathedral City. The latter is the UK’s biggest cheese brand, consistently generating sales of more than £300 million annually.
It’s a perplexing deal considering the UK’s love for dairy, but perhaps the Canadian juggernaut’s decision to downsize is simply a sign of the times.
One exit after another
The UK economy is in a state of constant volatility, with Saputo not alone on its swift shift away from the country. Earlier this year, we also saw Mondelez boss, Dirk Van de Put, point to shaky UK regulations as a potential reason to not invest in the future.
Prof Consulting group director Mark Field says the move is reflective of a highly competitive market, with Saputo likely not getting the returns it needs “to justify the investment and pull on resource”.
But it’s not just the UK, the world we live in can be best described as VUCA - volatile, unpredictable, complex and ambiguous, prompting many businesses to scale back and consolidate their offerings.
In its Q1 results, shortly before it announced its UK dairy divestiture, Saputo saw sales of CA$4.4 billion but net income of only CA$3 million, compared with CA$165 million a year earlier - highlighting the stark reality the company was facing before its decision to trim down its portfolio.
For Saputo this has translated into its recent divestment of its Argentina dairy division to Gloria Foods and streamlined operations in Australia, which have further reduced business complexity.
This means that the firm has now exited or significantly reduced its presence in three formerly key markets over the space of just 18 months.
In doing so, the dairy giant has focused on its North American business. According to Julian Wild, director at Wilkin Chapman Rollits, success here will hinge on a “strategic refocusing” of a pared-down asset list and the company’s ability “to improve the state of their balance sheet” with what it no doubt hopes will be significant savings.
Wild also queries the firm’s decision to enter into the UK market in 2019 - only to pull out seven years later.
“It does beg the question why Saputo bought the former Dairy Crest business in the first place, but the UK business has halved in profitability since they bought it and that will have concentrated minds away from Europe.”
Shifting priorities
As we have seen over the course of this year, international powerhouses such as Unilever and General Mills are actively divesting all, or large parts of, their food portfolios as they seek to compete in an economic landscape scarred by the Covid-19 pandemic, two major regional conflicts, and a 2026 summer of climate-related disruption.
In this context, it is not really much of a surprise that Saputo is seeking to streamline what was a bloated portfolio.
Field believes the decision makes good business sense, saying the decision likely forms part of a wider “re-adjustment” for Saputo, which will now aim to reinforce its position as a market leader domestically and across North America.
He adds: “Whilst it’s a surprise move for a brand that has been aggressive over recent years through acquisitions, we continue to see similar approaches across the wider food industry reflecting its competitive nature.”
Taking a more positive view and focusing on the future of the UK dairy industry, Julian Wild, director at Wilkin Chapman Rollits, forecasts that the portfolio transfer to Lactalis will lead to a much more engaged and proactive owner.
Under Lactalis, the former Saputo brands will likely have “a more interested owner”, with the clout to reverse the decline in profitability.
He continues: “Cathedral City is the biggest brand and worth about half of the total Saputo UK turnover. Lactalis should give it more care and attention. The deal makes a lot of sense for both parties and the exit price (on a similar multiple to when Saputo went in) seems fair, albeit not Saputo’s greatest acquisition.”
A familiar face
So what does all this mean for the UK dairy sector at large? Is Saputo’s exit a harbinger of doom, or will Lactalis’ takeover inject some positivity and momentum into the wider market?
Saputo’s decision to re-focus its portfolio can hardly be faulted, especially in times like these. And perhaps the transfer of some of the nation’s most popular dairy brands to a more present and directly engaged neighbour in France can only be good news?
Lactalis already has a significant presence in the UK dairy market, but this high-profile acquisition will serve to strengthen its position in today’s difficult environment.
How the French powerhouse will choose to manage the brands it now owns is anyone’s guess. But if anyone has the required expertise to manage them, Lactalis would be right at the top of many people’s lists.
“This deal is part of a continuing consolidation in many categories where ‘might is right’ and suppliers must have a substantial position,” Wild comments.
“Saputo failed to exploit that, but Lactalis are the largest dairy player globally and should be able to improve profitability. However, the UK remains a very challenging market with a lack of consumer confidence and margins very tight.”
Predicting potential closures and restructuring as Lactalis assesses the viability of the portfolio, Wild adds: “There will inevitably be a review of all the Lactalis and Saputo sites in the UK and closures may follow. Lactalis will seek to rationalise production where sensible to do so.
“Farmers may also be concerned that Lactalis will use their strength to tighten ex-farm raw milk prices.”
Taking a more positive view, however, Field predicts Cathedral City and Clover will continue to dominate the domestic market. Although he does expect the French firm to focus closely on cost savings as it fully integrates the acquisition.
He says: “Change can always unsettle, but the acquired brands have a high level of trust and market share so it’s logical to expect them to continue to grow and dominate the sector.”
While there is optimism around Lactalis’ stewardship of these brands, the real test will be whether the company can deliver stronger returns without undermining the scale and market strength that made them so attractive in the first place.
“The risk, or unknown, will come down to driving the improvements in profitability, the speed of focus and where the savings are targeted.”
Ultimately, Saputo’s exit from the British dairy industry appears to say more about the challenges of managing a sprawling global dairy empire than it does about the health of the UK market itself.
The fact that Lactalis, the world’s largest dairy group, moved swiftly to acquire Saputo’s UK portfolio suggests that, despite economic uncertainty, squeezed consumer spending and ongoing pressures on producers, the British dairy sector remains an attractive, if tricky, market with significant long-term value.
