Arla Foods Amba Business Information, Profile, and History

Company Perspectives:

Arla Foods' objective is to be the consumers' and customers' preferred dairy. In Northern Europe--with a wide range of dairy products. In Southern Europe--with selected ranges of cheese and butter. Outside Europe--with a product range adapted to the individual markets. Moreover, Arla Foods intends to maintain and develop its position as an innovative global supplier of added value, milk-based ingredients for leading food producers throughout the world. With Northern Europe as its natural domestic market, Arla Foods is dedicated to providing consumers with a broad range of high-class dairy products. From a solid base in Denmark and Sweden, where the Group has its roots, Arla Foods aims at maintaining close links with customers in all key export markets through a network of sales companies. In addition, through Arla Foods Ingredients, the Group is one of the world's leading global suppliers of added-value, milk-based ingredients to selected sectors of the food industry. Arla Foods's nearly 15,000 dairy farmer owners have helped make it one of the world's leading dairy products manufacturers and the leading dairy group in Europe.

History of Arla Foods Amba

Arla Foods amba is a cooperative formed by the 2000 merger between Sweden's Arla and Denmark's MD Foods. The company controls 95 percent and 65 percent of the dairy production markets in Denmark and Sweden, respectively. Yet these countries represent only half of Arla Foods's Dkr 38 billion ($4.66 billion) in annual sales. The United Kingdom is the company's third-largest market, accounting for 16.8 percent of sales; Germany and the rest of Europe add 18 percent of sales; while the company is also active in the Middle East and Asia, which together provide more than 11.5 percent of sales. Fresh milk products are the company's largest product segment, with more than 40 percent of sales. Cheese, including the international brand success Rosenborg, provides 28 percent of sales. Arla Foods is also one of the world's leading suppliers of powdered milk products, which add 15 percent of sales, and a strong player in the butter market, particularly under its 100-year-old Lurpak brand. Butter and spreadables generate 11 percent of sales. The merger between Arla and MD Foods represented a major step forward in what many observers consider the necessary consolidation of the European dairy industry as it braced itself for competition on a global scale. At the beginning of 2002, Arla Foods revealed that it had been holding merger talks with one of the United Kingdom's largest dairies, Express Dairies. Concern that such a merger would not pass the review of monopolies and merger commissions forced the two sides to abandon talks, however.

Cooperative Origins in the 19th Century

The merger of Swedish dairy cooperative Arla with its Danish counterpart, MD Foods, created Europe's leading dairy products company in 2000. Both companies had their roots in the cooperative movements of the late 19th century. The world's first cooperative appeared in Rochdale, England, in 1844, establishing a set of principles that were to be adopted throughout the world. The cooperative movement reached Sweden by the 1860s; at the end of that decade, a new cooperative was formed among dairy producers that was to form the basis of the later Arla ek. for. group. As with other countries, dairy cooperatives operated at first on a largely local level. As production methods improved, and as transporting raw milk and dairy products became easier, local cooperatives began to group together into a smaller number of larger cooperatives.

Over the following decades, the number of dairy cooperatives in Sweden continued to shrink. By the early 1970s, the consolidation of the Swedish dairy industry gathered still greater force, leading to the creation of the Arla economic cooperative in 1975. By then, Arla had already proved itself as one of Sweden's most innovative cooperatives as well. In 1974, Arla developed a means of binding water and fat into a smooth emulsion--producing what was to become known as "spreadable" butter. Meanwhile, Arla's symbol, the Arla cow, was to become one of Sweden's most-recognized trademarks. By the 1990s, Arla had grown to become Sweden's largest dairy producer, with some 65 percent of its domestic market. Yet exports still represented only a tiny fraction of the company's sales.

Over in Denmark, Arla's counterpart was also building a successful business, including a thriving export trade based on its butter products. Although founded in 1970, Mejeriselskabet Danmark was to grow to become that country's dominant dairy products group, capturing some 95 percent of the domestic market by the end of the 1990s. Yet Denmark itself represented only approximately 10 percent of the cooperative's sales.

Mejeriselskabet ("Dairy Company") Danmark started out as a cooperative among four small Danish dairies, which grouped together in 1970 in order to confront an increasingly competitive market for dairy products. Over the following two decades, MD Foods, as the cooperative came to be known in 1988, grew by absorbing other dairy members and merging with other Danish dairy cooperatives. From the start, exports, especially to the nearby United Kingdom, represented a significant share of the group's sales.

Much of MD Foods' international success came from its butter exports. In the early 19th century, however, Danish butter was considered to be inferior in quality to that of its European neighbors, who often referred to it as "mast butter", that is, its best use was for greasing the masts on sailing ships. Yet by the mid-19th century, Danish dairies had made steady improvements in the butter recipes, and by the 1860s, a number of British shopkeepers had begun to promote Danish butter. Among these was one John Sainsbury, whose name was later to become synonymous with supermarkets in the United Kingdom.

A turning point for Danish butter in the United Kingdom came in 1879 when it was awarded first prize for its category (lactic butter) at the Royal Agricultural Society's International Exhibition. Having found a market, Danish dairies began shipping larger quantities of butter overseas--reaching shipping 12,000 tons to England by 1882, a figure that multiplied by more than six times by the end of the century. The opening of this market, and the appearance of new machinery, notably the invention of the continuous cream separator, encouraged the appearance of cooperative dairies based on the Rochdale model. The first cooperative, established in 1882, was quickly followed by others: by 1890, more than 200 cooperatives were operating in Denmark, a number that was to top 1,400 between the two world wars.

By the turn of the century, Danish butter had become so popular that it had inspired a crowd of imitators. In order to protect the reputation of Danish butter, granting a level of quality assurance, the Danish Ministry of Agriculture defined new quality standards and established an official seal, the Lur Mark, to guarantee its butter. Only qualifying dairies were allowed to use the market--and Lur-branded butter quickly became the trademark for Danish butter exports.

Lur butter was to achieve a strong degree of consistency both in flavor and quality throughout the Danish dairy industry. Its success encouraged the appearance of a large number of export groups--both local and regional cooperatives and associations and private export companies. The resulting competition served to keep the price of Danish butter on the international market low, which, in turn, kept sales high--by the early 1930s, the United Kingdom alone was importing more than 130,000 tons of Danish butter per year.

Denmark's dairy industry was hit hard first by the Great Depression, then by the Nazi occupation of Denmark during World War II. Recovering from the war years, the country's dairies once again returned to exporting Lur butter to overseas markets, particularly to the United Kingdom, which remained the Danish dairy industry's single-largest foreign market. Indeed, the relationship between the two countries was such that, in 1949, the British and Danish governments put into place a butter agreement placing quotas on Danish butter imports and restricting the prices that could be charged.

The end of the butter agreement in 1955 opened the way for renewed competition among the various dairy cooperatives and export companies. Instead, however, the Danish dairy industry decided to band together. In 1955, nine of the country's largest export dairy cooperatives joined to create a new sales and marketing group for the United Kingdom, known as Butterdane (or Andelssmor in Danish). The new group helped forestall a price war, guaranteeing strong prices for Danish butter exports.

The advent of new machinery, particularly the development of the continuous butter making machine and the invention of a butter packaging machine, was also transforming the Danish butter industry. An immediate result of the butter packaging machine was a new marketing opportunity. Until the late 1950s, Danish butter imports had arrived in the United Kingdom in large, 112-pound wooden barrels. The butter packaging machine, capable of packing butter into small, foil-wrapped portions--which, in addition to providing greater hygiene, was also more suited to the rising number of self-service supermarkets--encouraged the Danish Dairy Board to adopt a new brand name, Lurpak, not only for its butter exports, but for butter sold on the domestic market as well. Backed by a strong advertising campaign, Lurpak proved an instant success in the United Kingdom, with sales quadrupling by the 1960s.

Merging for the 21st Century Global Market

The creation of the European Common Market created a new competitive climate for the European dairy industry during the 1960s, leading the Danish dairy industry into a consolidation phase that resulted in the formation of a small number of dominant dairy groups, MD Foods and Klover Melk, which together accounted for more than 90 percent of the Danish dairy market.

With little room left to maneuver at home, MD Foods began concentrating on its international position. In 1989, the group created a new subsidiary, MD International, charged with the group's global expansion, particularly through the acquisition of existing dairy products manufacturing operations in targeted countries. In that same year, MD Foods set up a U.S. import branch, MD Foods USA, which started up manufacturing operations in that country some ten years later, with a Havarti cheese-making plant opened in Wisconsin.

MD Foods' primary expansion target remained the United Kingdom, however. In 1990, MD Foods acquired its first production facilities in that country, buying up Associated Fresh Foods, based in Leeds, then the fifth-largest dairy in the United Kingdom. Two years later, MD Foods added Oakthorpe Dairy, in north London, and two other dairies which formerly comprised the dairy operations of Consolidated Retail Services. That same year, MD Foods bought another dairy, Sunderland & District Creamery, moving its operations to Newcastle. In 1993, the group acquired Bamber Bridge dairy, located in England's northwest region. Further U.K. expansion came in 1996 with the acquisition of a dairy at Hatfield Peverel. These acquisitions enabled MD Foods to diversify its product offerings in the United Kingdom, adding a significant fresh milk component of nearly one million kilos of milk per year. Meanwhile, the company continued to make inroads in other areas of the U.K. dairy market, particularly with the highly successful 1997 launch of its Lurpak spreadable product line.

By then, Sweden's entry into the European Union had encouraged Arla to step up its efforts to expand internationally. In 1993, Arla had created a new export department, then began a review of potential markets before setting its targets on the United Kingdom, Germany, and the other northern European and Scandinavian countries. Arla's export effort featured a different product mix than its Danish competitor, with an emphasis on fresh cheeses and spreads--which remained something of an Arla speciality--as well as powdered milk products. Arla's strength in innovative products gave it an edge in this latter category, as the company's range boasted some 60 different powered milk products, many of which were geared toward the baby foods segment. In 1995, Arla set up a new subsidiary, Arla UK.

By the end of the decade, Arla had succeeded in boosting its international sales to 12 percent of its total annual sales. Yet the company recognized that this percentage, combined with its restricted growth opportunities within Sweden itself, was not enough to enable it to compete in the increasingly competitive European market, which by then was heading toward the introduction of a single currency.

MD Foods found itself in a similar position following its absorption in 1999 of its largest domestic rival, Klover Melk, which gave it more than 90 percent of the Danish dairy products market. Following that acqusition, MD Foods and Arla began talks, signing a merger agreement in 1999.

The merger itself was carried out in April 2001, creating Arla Foods, the largest dairy products group in Europe and one of the largest in the world, with a total milk volume of more than 6.2 billion liters per year. Arla Foods immediately revealed its commitment to maintaining its leadership in Europe while pursuing its expansion into other markets. Soon after the merger, the group entered a partnership with SanCor, the largest dairy company in Argentina, to build and operate a whey processing facility. At the same time, Arla Foods formed a new subsidiary in the United Arab Emirates to promote its products throughout the Persian Gulf region. Later that year, Arla Foods traveled to New Zealand, forming a joint-venture marketing partnership with that country's Fonterra dairy group.

Despite its interest elsewhere in the world, the United Kingdom remained Arla Foods primary export market, which, accounting for nearly 17 percent of the group's sales, trailed only its operations in Denmark and Sweden. In February 2002, Arla revealed that it had entered talks to acquire one of the United Kingdom's largest dairies, Express Dairies. When it became certain, however, that such a link-up would run up against monopoly concerns, the two sides abandoned the talks. Nonetheless, as the European dairy market moved toward consolidation--particularly in the face of growing competition from non-European companies--Arla Foods appeared certain to seek other acquisition targets in the near future.

Principal Subsidiaries: Arla Foods Holding A/S; Medani A/S; Kingdom Food Products ApS; Arla Foods Leasing A/S; Rynkeby Foods A/S (50%); Kinmaco ApS, GB Finans A/S; Arla Insurance Co. Ltd; Arla Foods Fastighetsförvaltning AB (Sweden); De Danske Mejeriers Fællesindkøb Amba; Dairy Fruit A/S; A/S Crispy Food International; IFEG International ApS; Ejendomsselskabet Østre Gjesingvej 19 A/S; Danapak A.m.b.a.; Danapak A/S; Danapak Flexibel A/S; Danapak Kartonnage A/S; Danapak Plast A/S; Tölkki OY (Finland); Norsk Danapak A/S (Norway); Danapak Faltschachtelsysteme GmbH (Germany); Danapak Cartons Ltd. (England); Danapak R&D Center A/S; Danapak leasing ApS; Dana-Green 2000 A/S (51%); Medipharm USA; Arla Foods Ingredients S.A. (Argentina); Arla Foods Hellas S.A. (Greece); JO-Bolaget Fruktprodukter HB (Sweden); Synbiotics AB (Sweden); Biolac GmbH (Germany); Dan Vigor Ltd. (Brazil); Semper Holding AB (Sweden); Delimo A/S.

Principal Competitors: Nestlé S.A.; Dairy Farmers of America Inc; Groupe Danone (DA); Snow Brand Milk Products Co Ltd; Prairie Farms Dairy Inc; Land O'Lakes Inc.; Meiji Milk Products Co Ltd; Lactalis; Morinaga Milk Industry Co Ltd; Royal Numico NV; Friesland Coberco Dairy Foods Holding NV; Uniq Plc.

Chronology

• Key Dates:
• 1869: The oldest predecessor cooperative, Arla ek. for., is founded in Sweden.
• 1970: Mejeriselskabet Danmark is formed by four Danish dairies.
• 1975: Arla is formed to consolidate Swedish dairy cooperatives.
• 1988: Mejeriselskabet Danmark changes its name to MD Foods and prepares for international expansion.
• 1989: MD Foods forms MD Foods International A/S to promote its international growth.
• 1990: MD Foods launches its U.K. expansion with the acquisition of Associated Fresh Foods.
• 1995: Arla opens a subsidiary in the United Kingdom.
• 1999: MD Foods acquires Klover Melk, the second-largest dairy cooperative in Denmark, gaining control of 90 percent of the Danish dairy market.
• 2001: MD Foods and Arla merge to form Arla Foods amba, the largest dairy products group in Europe.