Coles will buy two milk processing facilities from Saputo for $105m underlining Australia’s dairy crisis

The retail giant takes the unusual step of buying two factories that make its own-brand groceries to protect its milk supply as Australia’s milk supply evaporates.

Coles has taken the unusual step of buying two factories from Canadian dairy giant Saputo in a move that will protect the supermarket’s access to its private label milk as Australia’s dairy industry battles an existential crisis.

Saputo for decades has invested hundreds of millions of dollars expanding into the Australian dairy market, buying up local processors and facilities, but now is reducing its size and scope and was seen as a desperate seller of the facilities in Laverton North, Victoria, and Erskine Park, New South Wales.

Coles will pay Saputo $105m for two milk factories – an agreement, which underlines the dire state of Australia’s dairy industry.

Already, Coles has become one of the biggest milk buyers in dairy rich Victoria, committing to pay farmers $12.05 a kilogram milk solids by 2025. This compares with Fonterra paying $9.55 a kilogram for the rest of a season, with Rabobank forecasting a potential cut across the broader industry next year.

It is unusual for Coles, or any supermarket, to also own the supplier and supplier facilities. But Coles has shown some precedence, buying the ready-made meals business and factory Jewel Fine Foods in Mascot in 2020. In 2015 Coles also paid for the construction of a highly automated retail-ready meat and poultry manufacturing facility in Erskine Park to secure supply and improve shelf-life of meat products.

But this deal with Saputo is more seen through the lens of it becoming increasingly difficult for the Canadian dairy giant to turn a profit in Australia as profit margins are strained and Saputo looks to shrink its exposure here.

Saputo’s latest accounts show its Australian business crashed to a $54.4m annual loss from a $30.6 net profit the previous financial year. At the same time, Saputo’s Australian milk collections have slumped from a forecast 3.1 billion litres to about 2 billion.

Saputo has already closed two milk dryers at its Maffra factory in Victoria’s Gippsland region and shut down its individual wrapped cheese slice factory in Cobram on the Murray River.

Its factory fire sale follows Fonterra aborting a $1.2bn float of its Australian business last year. It is understood the New Zealand dairy giant was told it would struggle to get even a $1bn for its local operations. Meanwhile, Bega Cheese executive chairman Barry Irvin last year pleaded with shoppers to buy branded milk over private label amid supermarket price rises.

For Coles, the consolidation comes 12 years after it ignited the supermarket milk wars when it slashed the price of its home brand milk to $1 a litre – widely seen as a psychological tipping point for Australian farmers who have since battled the perfect storm of water price hikes, drought and higher fuel and fertiliser costs from the war in Ukraine.

Many farmers have left the industry, selling their farms or converting to less labour-intensive and more lucrative practices, such as beef farming.

As a result the national milk pool has lost about 1 billion litres of supply since late 2018, and more than a third of that has evaporated from northern Victoria, while the dairy-rich western part of the state and South Australia has shrunk by almost a quarter, according to food industry analyst Fresh Agenda.

The crisis has paved the way for cheap New Zealand dairy imports to flood Australian supermarket shelves, with Woolworths selling Kiwi branded butter – owned by Chinese dairy giant Yili, and cheese more cheaply than its home brand products made from Australian milk.

As a motivated seller of the two milk processing facilities, Saputo could have placed in danger Coles’ access to its supply of private label milk, with the dairy company’s sites each having the capacity to process around 225m litres a year and predominantly used to process Coles Own Brand 2L and 3L milk products.

The acquisition will be funded from Coles’ existing debt facilities and is subject to ACCC approval and other customary closing conditions.

Coles chief executive Steven Cain said these facilities were state-of-the-art, delivering exceptional production efficiency and quality through highly automated processes.

Indeed, the Murray Goulburn spent $80m building the milk bottling factory at Laverton – which Saputo later acquired when the group collapsed – after securing a 10-year supply contract with Coles in 2014. It was at this factory where the $1 a litre milk rolled off production lines.

Mr Cain said: “While improving security of our milk supply and our supply chain resilience in the dairy sector, these facilities also have sufficient capacity to facilitate further growth opportunities through new product innovation.”

“The acquisition will build on the strong relationships we have developed with our dairy farmers since launching our direct sourcing model in 2019. Around 90 dairy farmers supply milk direct to Coles, allowing these farmers to invest for the future and ensuring the long-term sustainability of their farms,” Mr Cain said.

“These processing facilities will complement our existing investments in our Own and Exclusive brand portfolio and manufacturing capabilities in areas such as convenience meals and meat.”

The acquisition will be funded from Coles’ existing debt facilities and is subject to ACCC approval and other customary closing conditions.

SDA union site-based employees at both facilities will be offered employment contracts with Coles. The facilities employ around 48 people.

Saputo is framing the sale as part of a consolidation or optimisation of its operating model in Australia.

“We’re continually working to ensure we have the right manufacturing footprint and product offering to enhance our position as a high-quality, low-cost processor,” said Lino A. Saputo, Saputo chair, president and CEO said.

“This marks an important step in executing our long-term vision for success in Australia as we maintain a sharp focus on efficiency to ensure we maximise the return on every litre of milk.”