Friesland Coberco Dairy Foods Holding N.V. Business Information, Profile, and History

Company Perspectives:

Strategy. Friesland Coberco is focusing on improving the quality of turnover and the profitability of operations. In this context, Friesland Coberco concentrates on those selected markets where it can establish a strong position for branded products. Full attention is being given to increasing market penetration and expanding these market shares, rather than developing new market positions. Innovative concepts are used to address the changing demands of consumers as well as direct customers. Company policy for Western Europe is to process only milk from members of the cooperative, using it as much as possible for product segments with a high added value.

Where this is not possible, standard dairy products such as milk powders and butter are produced. A feature of these products is their relatively low and volatile selling prices. The key to competing successfully on these markets is tight control of costs. The aim is to keep reducing dependence on standard dairy products by generating a greater share of the turnover through branded products.

History of Friesland Coberco Dairy Foods Holding N.V.

Friesland Coberco Dairy Foods Holding N.V. is one of the world's largest dairy and foods products groups. Wholly owned by Dutch farmers' cooperative Zuivelcooperatie De Seven Provincien UA--a grouping of 11,500 farmers that supplies most of the company's fresh milk needs--Friesland Coberco produces a full range of fresh and processed dairy products, including cheese, butter, yogurt, and desserts, as well as fruit juices and fruit-based beverages, food ingredients, and other prepared food items. The Netherlands remains Friesland Coberco's largest market, at 35 percent of its 2002 sales of EUR 4.7 billion ($4.5 billion), while the rest of Europe, including Eastern Europe, added 33 percent to sales. Asia and Australia contributed 19 percent to sales, while Africa and the Middle East added 10 percent to revenues. The company's presence remains limited in the Americas, which added just 3 percent to sales in 2002. Friesland Coberco, formed in 1997, operates through 95 branches in more than 70 countries. In the early 2000s, the company pared down its range of brand names, focusing on Friesche Vlag, Frico Cheese, Dutch Lady, Appelsientje, Chocomel, and others. The company also reorganized its operational structure, setting up nine primary divisions: Frico Cheese (25 percent of sales); Friesland Dairy & Drinks (16 percent); Friesland Consumer Products (15 percent); Friesche Vlag (8 percent); Friesland Coberco Butter Products (7 percent); Friesland Madibic Food Service (6 percent); Borculo Domo Ingredients (4 percent); Kievit (3 percent), and Friesland Asia Pacific (15 percent). The latter division was formed with the specific intent of expanding the company's activities in that region.

Merging a Dutch Dairy Giant in the 1990s

Friesland Coberco Dairy Foods was formed through the merger of four Dutch dairy groups: the larger Friesland Dairy Foods and Coberco, and the smaller Twee Provinciën and De Zuid Oost-Hoek in 1997, one of the largest mergers in the history of the Netherlands' dairy industry. The merger placed Freisland Coberco under the ownership of the enlarged farmer cooperative, Zuivelcooperatie De Seven Provincien UA, which represented at the time more than 16,000 farmers--nearly half the total number of dairy farmers in the Netherlands. These farmers were guaranteed an outlet for their milk production, at prices set each year by calculating the average milk price paid by the global dairy industry.

Although created in the late 1990s, Friesland Coberco has roots stretching back to the late 19th century, when a small village-based dairy cooperative was founded in 1894. Friesland Dairy Foods had long established itself as a leading dairy products group both in the Netherlands and abroad--including a subsidiary operation opened in Hong Kong in 1938 and especially through the establishment of subsidiaries in the former Dutch colonial markets and elsewhere in the Asian Pacific Region. Coberco, in the meantime, had grown into one of the Netherlands' leading dairy and beverages groups, with a full range of products, including fruit juices and other drinks. Both companies had established strong brand names through the 20th century, both in the Netherlands and abroad, including Friesche Vlag, Coberco, Dutch Lady, Riedel, and others. The smaller partners of the merger, Twee Provinciën and De Zuid Oost-Hoek, had in the meantime specialized primarily in the production of cheeses.

Both Friesland and Coberco participated in the consolidation of the Dutch dairy sector, developing scale through mergers and acquisitions, especially in the second half of the 20th century. By the mid-1990s, the two companies were confronted not only with intensifying competition at home--notably from fellow Dutch dairy groups Nutricia and Campina--but internationally as well. The European market, which had dropped trade barriers among member countries in the early 1990s, presented not only new opportunities for growth, but also new perspectives in competition.

Merging Friesland and Coberco, and the addition of Twee Provinciën and De Zuid Oost-Hoek, created Europe's number three dairy company, behind Switzerland's Nestlé and France's Danone. The new company started out with revenues of more than NLG 9 billion ($4.4 billion) and more than 11,000 employees working at 18 production plants. Cheese production became the enlarged company's flagship product, and grew to represent some 25 percent of sales under the Frico Cheese banner. The company also included a strong fruit juice and fruit-based beverage unit, through former Coberco subsidiary Riedel. Founded in 1897, Riedel had developed a number of leading Dutch brands, including Appelsientje, Dubbelsientje, and others.

Friesland Coberco immediately set its sites on expansion on both the domestic and international fronts. Among the company's first acquisitions was milk-based food ingredients producer De Kievit, located in Meppel, in the Netherlands. Other Dutch purchases that year included cheese and dairy products wholesale and distribution operations, such as Kaashandel Tamminga, Kaashandel Culemborg, Kaashandel Schep, and KH de Jong's Exporthandel, as well as Frisian Protein Workum. At the same time, Friesland Coberco strengthened its position in the South American market with the establishment of Friesland Peru. Yet that operation quickly slipped into losses and was sold before the end of the following year.

In 1998, the company also extended its Asian operations, adding its first production facility in mainland China, in Tianjin, controlled at 70 percent by Friesland Coberco. In 1999, the company boosted its Asian Pacific region operations with the acquisition of full control of Foremost Friesland, in Thailand. One of that country's leading dairy products groups, Foremost had long been held at some 75 percent by Friesland.

After completing its purchase of food ingredients group De Kievit (the acquisition had been held up by a mergers and monopolies commission review), Friesland Coberco prepared itself for a larger acquisition, that of the sales, marketing, and distribution operations of DSM Bakery Ingredients, which retained control of its production. The new addition, however, enabled Friesland Coberco to extend its distribution portfolio with DSM's line of confectionery items and ingredients.

In the meantime, Friesland Coberco had been integrating its operations. That process led to a streamlining of the company's brands portfolio. In 1999, the company merged the sales and marketing divisions of its Friesche Vlag and Coberco dairy products groups. Then, in 2000, the company dropped the Coberco brand in order to focus its efforts on promoting a single Friesche Vlag brand family. That year, also, the company revised its organizational structure into nine operating divisions--Frico Cheese; Friesland Dairy & Drinks; Friesland Consumer Products; Friesche Vlag; Friesland Coberco Butter Products; Friesland Madibic Food Service; Borculo Domo Ingredients; Kievit; and Friesland Asia Pacific. The last, newly created division emphasized Friesland Coberco's commitment to boosting its presence in the Asia Pacific--which, with the adoption of Western eating habits, represented one of the world's fastest-growing dairy markets at the turn of the century.

International Foods Group for the New Century

Another feature of Friesland Coberco's reorganization was a strategy of emphasizing higher value-added products, and especially processed foods and branded products. As part of this effort, the company acquired, in 2000, fresh juice producer Hoogsteeder Fresh Specialist, a small company set up in 1998, that boosted Friesland Coberco's Riedel juice unit. Yet Friesland Coberco's next large-scale acquisition came in 2001, when the company paid Royal Numico NLG 1.45 billion (EUR 700 million) to take over its Nutricia dairy foods division.

Founded in 1896, Nutricia had pioneered infant formula and other dietary dairy products in the Netherlands, starting with a license to produce formula using the Backhaus method. Exports had early on played a primary role in Nutricia's growth, starting as early as 1905. In the years following World War II, Nutricia's efforts went toward the development of so-called "scientific" products, ranging from infant formulas to dietary supplements for critically ill and other hospital patients. Yet Nutricia had also developed a number of strong dairy brands, including the highly popular Chocomel and Fristi brands.

Nutricia's international expansion stepped up in the 1980s, as the Netherlands began emphasizing breast-feeding over formula, and in 1981, the company acquired the United Kingdom's Cow and Gate. In the 1990s, Nutricia's international expansion led it to Eastern Europe, and especially to Hungary, which became a primary market for the company. In 1995, Nutricia acquired Germany's Milupa, gaining a place as one of Europe's

Chronology

• Key Dates:
• 1894: Predecessor to Friesland Dairy is founded.
• 1896: Nutricia is formed.
• 1897: Predecessor to Coberco is founded.
• 1997: Friesland Dairy and Coberco merge, together with Twee Provinciën and De Zuid Oost-Hoek, forming Friesland Coberco Dairy Foods Holding.
• 2000: Company announces reorganization and refocusing on limited range of value-added brands.
• 2001: Company acquires Nutricia from Royal Numico.
• 2002: Friesland purchases Romania-based Napolact and the Slovak Republic's Laktis-Zilinske-Mliekarne.
• 2003: Company sells bakery products division to CSM; sells NutriFit brand and Dairy to Weise. leading infant formula groups. Soon after, Nutricia reorganized, placing its dairy operation under new parent Royal Numico--which then went on to refocus itself through the acquisitions of such companies as General Nutrition Companies, Rexall Sundown, and Enrich International.
• Friesland Coberco's acquisition of Nutricia enabled it to claim the number two position among European dairy groups, and solidify its spot among the global top ten. It also gave the company a solid position in Eastern Europe. Meanwhile, the addition of Nutricia's strong brand lineup helped Friesland Coberco move closer to its goal of repositioning itself as a value-added producer. By the end of 2001, Friesland Coberco's sales had climbed to EUR 4.4 billion.
• The year 2002 was marked primarily by the integration of the Nutricia operations, boosting the company's sales past EUR 4.7 billion by the end of the year. Friesland Coberco continued to make targeted acquisitions, however, such as its purchase of Transylvania, Romania-based Napolact, and the Slovak Republic's Laktis-Zilinske-Mliekarne. These acquisitions were followed by the purchase of assets from the recently bankrupted Swenty, a Dutch maker of cream and ice cream mix. Then, in October 2002, Friesland Coberco added to its share of the Greek and Balkan region market through the purchase of a factory in Patras, Greece.
• By 2003, Friesland Coberco's transition to branded, high value-added products appeared well on its way, as its key drive brands grew to represent 42 percent of the group's total sales. The company continued in its reorganization that year, selling part of its bakery ingredients operations to CSM Bakery Supplies Europe in June 2003. At the same time, the company sold off the DrinkFit brand and dairy in Schlüchtern, Germany, acquired through the Nutricia purchase. Sold to Germany's Klaus Weise, the move fit in with Friesland Coberco's transformation into a brand-driven, value-added global foods giant for the new century.