Dairygold job losses herald revamp of industry

Despite being flagged since last August, the announcement of 500 job losses at Dairygold still came as a shock, writes John McManus

The need for drastic rationalisation in the €2.5 billion dairy industry is acknowledged by all the main players, but until last Wednesday evening nobody seemed to have done anything about it.

It is now seven months since the Department of Agriculture published a Strategic Development Plan for the Irish Dairy Processing Sector, known as the Prospectus Report. The report called for the number of plants processing milk into butter, milk powder and casein to be cut from 11 to four. It also said a consolidated player needs to emerge in the medium term with the ability to process around 70 per cent of manufacturing milk (which excludes milk for domestic consumption). ...

"This level of consolidation may take two or three steps to be achieved. It needs to begin with consolidation between some of the five largest processors and also consolidation or joint ventures among some of the smaller processors," concluded Prospectus.

"Without the development of a strong major entity to act as a catalyst to drive the changes required, there is a real danger the industry will drift, only making incremental changes and gradually decline in terms of total output and value," warned the consultants.

It may be of no comfort to the 500 people who will lose their jobs in the weeks before Christmas, but the overhaul under way at Dairygold is seen a precursor for a consolidation necessary to ensure the long-term future of the dairy industry.

"What is called for by the Prospectus Report may or may not happen, but each company first has to take care of its own business," according to Mr Liam Igoe, food industry analyst with Goodbody Stockbrokers in Dublin.

All of the major players are facing their own individual challenges as a consequence of the major changes in the international marketplace being brought about by the mid-term review of the European Union's Common Agricultural Policy and the current round of World Trade Organisation talks.

These changes have yet to play themselves out fully, but the only certainty is the increasing liberalisation of world markets which in turn will make it harder for Irish dairy processors to compete.

Many of the players also face company-specific problems. In the case of Dairygold, it is the failure to achieve the sort of efficiencies predicted when it was created more than 10 years ago through the merger of Mitchelstown Co-op and Ballyclough Co-op.

Falling profits and the appointment of a new chief executive, Mr Jerry Henchy, were the catalyst at Dairygold. The 500 redundancies announced this week are part of a plan to cut the co-op's workforce by half to 1,500. The process will see the number of milk processing plants also halved to just two, while the co-op's four meat processing plants are also in the firing line. Such drastic measures are driven by a collapse in operating profit from €25.2 million to €4.8 million last year.

Dairygold's problems are not unique and with internal issues of such magnitude to be faced up to first, its not surprising that progress towards industry consolidation is slow. Glanbia, the biggest co-op, has undergone a huge reorganisation over the last year, involving the sale and closure of underperforming businesses.

Even if the disparate players were not concentrating on fighting their own individual battles, there is no guarantee that they would all see the business case for consolidation, believes Mr Igoe. "Any business, or enterprise, is ultimately run on the basis of maximising returns on investment and this is not automatically achieved by bringing 10 companies with different philosophies together," he argues.

Just because such an approach has worked elsewhere - such as New Zealand - does not mean that it will work here. For example, in New Zealand there was not the same historical baggage attached to the merging companies as there is to the Irish players.

Mr Igoe also makes the point that some of the Irish players - Kerry Group and IAWS in particular - have developed very significant international business outside of the dairy processing sector. The returns on capital, time and other resources invested in these parts of their business will potentially exceed the potential gains from making the same investment in what would almost certainly be the fraught and difficult process of merging with their domestic counterparts.

The solution, according to Mr Igoe, is a federation approach where new companies would be set up for basic product areas such as butter, skimmed milk and cheese.

Such an approach would get around some of the major obstacles to mergers, including the fiercely independent ethos of some of the smaller players. It would also offer a solution to companies who might not see the merits of fully-fledged mergers.

What Mr Igoe proposes is closer to the views of the industry, certainly the views as expressed last September by the chief executive of Glanbia, Mr John Moloney. "We would put the emphasis on co-operation and shared assets and joint ventures in internationally competitive base processing facilities rather than on mergers and amalgamation," he said

Similar sentiments were expressed at the time by smaller processors, with the chief executive of Lakeland dairies, Mr Ed Prendergast, on record as saying regional co-operation must precede national consolidation

Any hope of a "big bang" creation of an Irish super milk processor would appear slim, but further rationalisation at the level of individual players is a certainty.