Coles’ acquisition of Saputo milk plants in NSW, Victoria could lessen competition

The retailer’s plans to buy two major milk factories in NSW and Victoria – a first for the sector – could threaten competition, warns the ACCC.

The potential for the nation’s second-largest supermarket chain Coles of owning and operating its own milk processing plants – a first for the supermarket sector – could substantially lessen competition.

The competition regulator says it has preliminary competition concerns about Coles’ proposed acquisition of two Saputo milk processing plants located in NSW and Victoria that could scupper the supermarket giant’s dairy play.

The Australian Competition & Consumer Commission issued a statement of issues document on Thursday that has outlined its concerns about the bid by Coles that would trigger a major structural shift in the dairy sector and for the first time see a supermarket own and operate its own milk processing facilities.

In April, Coles announced that it would pay Saputo $105m for two milk factories, in Laverton North, Victoria, and Erskine Park, NSW, as owner Saputo struggles with sliding earnings and a move to shrink its exposure in Australia.

Coles’ access to private label milk could have been threatened by Saputo dumping the milk processing assets, and it took the unusual decision to make a bid for the two sites to help secure its milk access into the future.

The retailer currently acquires raw milk from farmers in both Victoria and NSW, and processes it at these plants under an arrangement with Saputo.

The ACCC said on Thursday, a significant number of industry participants have raised strong concerns about the proposed acquisition, particularly given it will result in a major structural change for the first time a supermarket owns and operates its own milk processing facilities.

“The ACCC is closely considering these concerns and whether the acquisition would give Coles the ability to influence the market in a way that is currently not possible via its current position as a retailer of dairy products and purchaser of raw milk,” the regulator said.

“The ACCC’s preliminary view is that the proposed acquisition may substantially lessen competition by giving Coles the incentive and ability to foreclosure or frustrate competitors at various levels of the dairy supply chain.”

The ACCC has raised competition concerns over Coles’ proposed acquisition of two Saputo milk processing plants located in NSW and Victoria. Picture: Tertius Pickard/NCA NewsWire

In response, Coles said it would work constructively with the regulator on these issues, but that it didn’t believe the acquisition would impact competition.

“From Coles’ perspective, we see no lessening of competition in any relevant market, noting that Coles already acquires approximately 80 per cent of the volumes at the facilities

and will provide milk processing services to Saputo Dairy Australia under a tolling arrangement,” said Coles chief executive Leah Weckert

“We remain confident that any outstanding concerns can be addressed so that the proposed transaction can proceed to completion.”

For NSW dairy farmers, concerns have been raised that this acquisition may change Saputo’s incentives to continue acquiring raw milk in NSW.

“If Saputo does exit NSW as a result of the acquisition, this would leave limited competition in regions of NSW, which could result in farmers receiving lower prices for their raw milk” said ACCC deputy chair Mick Keogh.

The ACCC is carefully considering whether Saputo would be likely to exit NSW after the acquisition.

“We have heard strong concerns across the industry about how the acquisition will strengthen Coles’ position in the dairy supply chain,” Mr Keogh said.

“Many industry participants have expressed concerns that the acquisition will result in Coles consolidating its private label milk production, which would increase its bargaining power in negotiations with dairy processors and dairy wholesalers.”

The ACCC is concerned that Coles’ increased bargaining power could lead to reduced competition at the wholesale level, impacting on processors’ long term viability and with the potential for flow on impacts to farmers in Queensland and regions of NSW.

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.

Originally published as Coles’ acquisition of Saputo milk plants in NSW, Victoria could lessen competition