When Saputo Inc., Canada’s largest dairy producer, won a hard-fought battle to acquire one of Australia’s biggest dairies in 2014, it may have looked to outside observers as if the company had jumped into the frenzied bidding at the last minute, spotting an opportunity to spin a fast deal. But those who paid close attention knew that nothing could be farther from the truth: CEO Lino Saputo Jr. had been quietly making inroads with Warrnambool Cheese and Butter Factory Co. for more than a decade.
He’d first made contact with the Australian dairy 12 years ago, and had made a point of checking in every year since, getting to know the company and its market, and patiently waiting for a moment when a deal might make sense. “We take a very long view,” says Saputo, who has turned his family business into an industry giant through a series of relentless, though always thoughtful, acquisitions. Since the company went public in 1997, it’s snapped up about two dozen smaller players, worth a combined total of more than $4.7 billion. And, in a recent interview with Canadian Business, the ambitious CEO made clear that he’s not done yet. Over the course of this fiscal year, Saputo Inc. could add up to three more companies to its ever-expanding portfolio, he suggested, highlighting North America, Latin America and Oceania as the key regions he’s eyeing. But don’t expect any rash moves: Saputo’s signature style is to be patient—and always think three moves ahead.
Saputo Inc. emerged as the winner of the Australian deal with a $450-million all-cash bid—one of the biggest deals in the history of the company, which was launched in the 1950s as a family venture that made deliveries of homemade fresh mozzarella by bicycle. In the 1970s and 1980s, the company bought up manufacturing plants across Canada, then entered the U.S. market in 1988 by acquiring two cheese plants. It continued undertaking a number of strategic acquisitions in the 1990s that helped diversify its product lines and grow its customer base in Canada and the U.S., then expanded its operations beyond North America in the 2000s through acquisitions of two Argentinian plants, a number of European manufacturing facilities and, more recently, its Australian dairy.
Now, with 12,000 employees around the world and $14.1 billion in market cap, Saputo is one of the top 10 dairy processors on the planet. But, to maintain its position, the company is going to have to look farther afield to fuel growth. Canada’s mature dairy market has become increasingly competitive in the last decade—a fact that became apparent in June, when Saputo Inc. released its latest quarterly results. Saputo described the most recent fiscal year as the most competitive. A price war started last year by Agropur and Parmalat, Saputo Inc.’s two largest rivals, has led to a 12% drop in the company’s third-quarter Canadian-sector profit from a year earlier, he said. (The domestic market has also presented another sort of challenge: Animal-welfare activists targeted Saputo Inc. for what they describe as inhumane practices on the part of one of its suppliers. The company has since introduced an animal welfare policy across its global operations—a move that Saputo says he hopes will enable them to assume a “leadership role” in more humane treatment of livestock.)
On the international front, meanwhile, Saputo Inc. has seen a 42% increase in revenues in the current fiscal year (compared to growth of 5% and 18% in Canada and the United States, respectively), and Saputo says they’re looking to grow even more through future acquisitions. The company has pored over more than 200 files since going public, he says. It typically examines three to five at any given time and the most promising now are those in emerging markets where dairy consumption is still in its infancy. “We’ll be happy with the 1% to 2% growth in the developed North American markets and maintain our presence there,” says Saputo, “but we’re tapping into emerging markets that are showing more growth potential than the developed markets.”
David Sparling, professor and chair of agri-food innovation and regulation at the Ivey Business School, says Saputo’s moves so far have made it clear it wants to be a significant international player. “They want to build both international and domestic markets,” Sparling says. “When you look at where they are—U.S., Argentina and Australia—those are attractive domestic markets, as well as really good international plays.”
One of the most tantalizing markets, Saputo says, is Brazil, which ranks fifth in dairy production in the world and was the largest milk producer in Latin America in 2008, with a market share of 46%, according to a report by the Wisconsin International Trade Team. Saputo sees big opportunity there because Brazil’s dairy industry is still very fragmented and, geographically, it’s close to Argentina, where the Canadian company already has a base. “The largest dairy might be $1 or $2 billion in sales. They might represent less than 10% of the entire industry and the rest of the players are all small to medium in size, ranging from $20 million in sales to $100 or $200 million.” Saputo says. “We see great potential to be a consolidator in Brazil.”
Saputo also sees potential to draw in consumers with high protein or flavoured milk, flavoured cheeses and shredded zipper-bag cheese. “Consumers in Brazil may not be used to progressive or innovative dairy products,” he says. “We’re very familiar with these dairy products and think we can add value to the system, in addition to being a consolidator within Brazil.”
Another region of interest is Oceania, a prolific milk producer. Saputo Inc. will continue to grow its business in Australia, he says, and is also considering possibilities in New Zealand, although establishing a base there could be trickier since the market is heavily concentrated.
China is also an extremely profitable emerging market for dairy companies, given its large market size. Chinese dairy production and consumption has soared in the past three decades, averaging a 12.8% annual growth rate since 2000 as a result of changing diet trends that are shifting more toward Western foods, according to a report by the Institute of Agriculture and Trade Policy. The 2008 melamine milk safety scandal provided huge business opportunities for foreign dairy producers, as the Chinese no longer trusted domestic brands and looked toward foreign suppliers for milk. For now, however, Saputo Inc. has no plans to set up operations in China, limiting its business there to exporting powdered and ultra-high temperature milk.
Saputo Inc.’s global success isn’t guaranteed: In its latest quarterly report, Saputo reported adjusted earnings of 32¢ per share, well below analysts’ estimate of 40¢ per share. This was due, at least in part, to an abrupt and significant decline in its international earnings—$28 million lower, compared to the corresponding quarter last fiscal year. Peter Sklar, analyst at the Bank of Montreal, wrote in a report that its earnings will be suppressed through fiscal 2016 primarily due to low dairy commodity prices.
Still, Saputo sees a rosy future for the company. “The international markets may remain a little challenging for the balance of this calendar year, and perhaps into 2016, but our foundations are solid and I feel very very good about our positioning today.”
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