In a move to secure steady supply for its own-brand milk label, supermarket giant Coles Group (ASX: COL) has announced today it is acquiring two milk processing facilities from the nation’s largest dairy processor, Saputo Dairy Australia (SDA), in a deal worth $105 million.
Located in Laverton North, Victoria and Erskine Park, New South Wales, each facility has the capacity to process around 225 million litres a year with both predominantly being used to process Coles own brand 2L and 3L milk.
The deal comes three years after Coles acquired Jewel Fine Foods' (now Chef Fresh) ready-made meals facility in Mascot, NSW to expand its convenience meals range, and almost a decade since it snapped up a highly automated meat and poultry facility in Erksine Park.
Under the agreement, SDA site-based employees at both facilities will be offered employment contracts with Coles.
Coles said the buyout will improve the security of its milk supply, consolidate milk production, and facilitate growth through further product innovation.
“Whilst 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,” Coles CEO Steven Cain said.
“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.”
“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.”
In 2019, Coles launched its direct sourcing model in Victoria and Southern and Central New South Wales, contracting directly with local farmers to supply milk for Coles Brand fresh white milk and offering a competitive farmgate milk price.
Under the direct sourcing model, Coles offers a farmgate price directly to farmers, and pays dairy processors to process the milk under a toll processing agreement. It replaces a previous model which saw Coles brand white milk sold via processors like Lion Dairy and Drinks and Lactalis Australia, which would set the price farmers would receive.
The model was rolled out in South Australia and Western Australia in 2020, with all Coles Brand fresh white milk in both markets now coming from directly-contracted farmers within their respective states. In May 2021, the retailer expanded the sourcing model to Tasmanian dairy farmers, offering contracts of up to three years.
Coles said it will continue its direct sourcing model and relationships with existing dairy farmers, with no expected impact on its current arrangements.
The acquisition of SDA’s sites is subject to Australian Competition and Consumer Commission (ACCC) approval and other customary closing conditions and is expected to be completed in 1H FY24.
Macquarie Capital (ASX: MQG) is acting as financial adviser and Norton Rose Fulbright as legal adviser to Coles.
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