More Dairy Consolidation To Come In Africa

BMI View: Dairy companies will continue to pursue acquisitions in Africa, where we see strong dairy consumption growth potential, mainly because of base effects. On the back of this, Danone has ramped up investment on the continent, with the acquisition of 40% of Kenyan dairy company Brookside and of a 49% stake in Ghanaian Fan Milk International. This will also help Danone diversify from its largest markets, France and Russia, where the consumer environment has deteriorated recently.

We believe dairy companies will continue to pursue acquisitions in Africa, where we see strong dairy consumption growth potential, mainly because of base effects. In fact, dairy consumption per capita in Africa is the lowest in the world, far below Asia and Latin America, where we already see strong growth opportunities. Consumption growth has for a long time been hampered by poor infrastructure and refrigeration systems preventing distribution and demand in the region. The growth in food retail has also made it easier for Western dairy brands to distribute their products. We estimate that mass grocery retail in the region has grown by an average of 9.3% annually between 2008 and 2013, and we forecast growth of 19.6% annually over our forecast period to 2018. We believe this will boost dairy consumption in the region and help consumption per capita higher by 2018.

On the back of this, Danone has ramped up investment on the continent, announcing in July the acquisition of 40% of Kenyan dairy company Brookside, after having bought a 49% stake in Ghanaian Fan Milk International in 2013. The Brookside deal was sealed with the controlling Kenyatta family, relatives of the current President Uhuru Kenyatta, for an undisclosed amount. Brookside had sales of EUR130.0mn in 2013 and has a 40.0% share of the domestic dairy market, which will give Danone's access to the largest milk collection network in East Africa, with 140,000 farmers and a distribution network in 200,000 outlets. Danone's decision to invest in Fan Milk International with Abraaj Group, a leading private equity firm having invested in several deals in Africa, was based on the growth potential the company had in Nigeria and Ghana (its main markets) but also in Cote d'Ivoire, Liberia, Burkina Faso, Benin and Togo. Fan Milk reported sales of around EUR120.0mn in 2012 and aims to become one of the largest food companies in West Africa. We believe these two acquisitions will help Danone expand beyond its existing African markets (South Africa and the Maghreb). Arla Foods, another leading European dairy company, also established a partnership with the Ivorian distribution company Mata Holdings to get more of its products on the market.

Lowest Dairy Consumption In The World
Selected Regions - Dairy Consumption Per Capita (kg/year)

More Dairy Consolidation To Come In Africa

BMI View: Dairy companies will continue to pursue acquisitions in Africa, where we see strong dairy consumption growth potential, mainly because of base effects. On the back of this, Danone has ramped up investment on the continent, with the acquisition of 40% of Kenyan dairy company Brookside and of a 49% stake in Ghanaian Fan Milk International. This will also help Danone diversify from its largest markets, France and Russia, where the consumer environment has deteriorated recently.

We believe dairy companies will continue to pursue acquisitions in Africa, where we see strong dairy consumption growth potential, mainly because of base effects. In fact, dairy consumption per capita in Africa is the lowest in the world, far below Asia and Latin America, where we already see strong growth opportunities. Consumption growth has for a long time been hampered by poor infrastructure and refrigeration systems preventing distribution and demand in the region. The growth in food retail has also made it easier for Western dairy brands to distribute their products. We estimate that mass grocery retail in the region has grown by an average of 9.3% annually between 2008 and 2013, and we forecast growth of 19.6% annually over our forecast period to 2018. We believe this will boost dairy consumption in the region and help consumption per capita higher by 2018.

Lowest Dairy Consumption In The World
Selected Regions - Dairy Consumption Per Capita (kg/year)

On the back of this, Danone has ramped up investment on the continent, announcing in July the acquisition of 40% of Kenyan dairy company Brookside, after having bought a 49% stake in Ghanaian Fan Milk International in 2013. The Brookside deal was sealed with the controlling Kenyatta family, relatives of the current President Uhuru Kenyatta, for an undisclosed amount. Brookside had sales of EUR130.0mn in 2013 and has a 40.0% share of the domestic dairy market, which will give Danone's access to the largest milk collection network in East Africa, with 140,000 farmers and a distribution network in 200,000 outlets. Danone's decision to invest in Fan Milk International with Abraaj Group, a leading private equity firm having invested in several deals in Africa, was based on the growth potential the company had in Nigeria and Ghana (its main markets) but also in Cote d'Ivoire, Liberia, Burkina Faso, Benin and Togo. Fan Milk reported sales of around EUR120.0mn in 2012 and aims to become one of the largest food companies in West Africa. We believe these two acquisitions will help Danone expand beyond its existing African markets (South Africa and the Maghreb). Arla Foods, another leading European dairy company, also established a partnership with the Ivorian distribution company Mata Holdings to get more of its products on the market.

We maintain that Nigeria, Ghana and Kenya will be top markets for food and drink manufacturers, and the three countries rank very high on our risk/rewards ratings. Nigeria has continued to close the gap on South Africa in the latest iteration of our Food & Drink Risk/Reward Ratings for Sub-Saharan Africa. In fact, the country has gradually improved its risk/rewards outlook thanks to booming consumption growth in the food & drink sector, rising per capita income and premiumisation as well as a strong outlook for growth. As a result, the country appears in the high reward/low risk side of our ratings, alongside Ghana (which ranks fourth in our ratings), while South Africa has now moved on to the low reward/low risk quadrant. Kenya, which ranks sixth in our ratings, also has a strong reward score on the back of the potential for growth in its population, income and food consumption, while its risk score is relatively low compared with Nigeria, South Africa and Ghana.

Africa Accounts For Minimal Sales
Danone - Sales By Region (LHC) & Top 10 Countries (RHC)

We believe an increased focus on Africa over the coming years will help decrease Danone's dependence on its two largest markets, France and Russia. We have grown increasingly pessimistic about the short-term outlook for consumption in France. In our latest Economic Analysis piece (see 'Consumers No Longer Offsetting Weak Corporate Activity', 03 July 2014) , we cautioned that leading indicators suggest a rather mixed outlook for households, which have historically been the primary driver of growth. Despite exceptionally low inflation, real wage growth has decelerated to just 1.5% y-o-y, and rising unemployment indicates the probability of private sector wage pressures building over the next 24 months remains low. Public sector wage increases will remain constrained by the government's ongoing need to rein in spending.

In Russia, the impact of the Ukraine crisis has added to a structural slowdown in household lending in recent quarters, as banks started to ramp up loan-loss provisioning and the authorities took steps to rein in unsecured household lending.  Aside from tighter credit conditions in 2014-2015, another factor impacting consumption negatively will be elevated consumer price growth. The rouble hit a record low versus the dollar on March 3, and while it is likely that the unit will recoup some of its losses over the next few months, we remain sceptical that it will reach its pre-March 3 levels any time soon. Rouble weakness will push up import prices, further eroding consumer purchasing power. As such, we have lowered our growth forecast for household consumption to 3.2% in 2014 from 4.0% previously, and to 3.3% in 2015 from 3.5% previously. Given that Danone depends on Russia and France for 11.0% and 10.0% of its sales, we expect a refocus of sales towards higher growth markets to help results over the near term.

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