Danone Announces the Purchase of WhiteWave Foods

How this will impact Organic Dairy Farmers in the Northeast

By Ed Maltby, NODPA Executive Director

On July 7, 2016, Danone announced that it will buy WhiteWave Foods in a deal worth $12.5 billion in cash and a $34 million golden parachute to the WhiteWave CEO, Greg Engles. Danone merging with WhiteWave will make Danone one of the top 15 food and beverage producers in the US. Danone has more than one-third (33.7 percent) of U.S. yogurt sales in 2015, considerably higher than its nearest rival, General Mills, which has 25.3 percent of the market. Though a smaller portion of the market, WhiteWave’s Horizon and Wallaby organic yogurt brands compete with Danone’s Stonyfield organic yogurts. Stonyfield makes the number-one selling brand of organic yogurt and the number-three, overall, yogurt brand in the United States, according to Fortune magazine.

The companies are projecting $300 million in synergies by 2020. Cecile Canais, chief financial officer of Danone, said the company is projecting $300 million in synergies on an annual basis. “From these synergies, 75% are cost synergies,” she said, “And of this 75%, 85% will be in the U.S. The cost synergies will basically be the results of efficiencies created through the combination, by scaling sourcing and supply chain and fixed cost optimization.” As the purchase will be financed by increased debt, Danone is projecting that the combined merged operations will increase its earnings within the first year of the deal’s closing. After the merger, Danone will control the Horizon, Stonyfield and Wallaby organic yogurt labels and this will impact CROPP (Organic Valley) which will be Danone’s primary rival in the marketplace.

On August 1, 2016, both Danone and WhiteWave filed merger notifications under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976, known as HSR Act notifications and the Department of Justice (DOJ) commenced its investigation of the merger. On August 31st, Danone voluntarily withdrew its HSR Act notification to provide the DOJ with additional time for review. On September 2nd, Danone refiled its paperwork with the expectation that the DOJ would finish its investigation within the month.

On October 1, 2016, the DOJ requested more information by issuing a “Second Request.” If either the Federal Trade Commission (FTC) or the Antitrust Division has reason to believe the merger will impede competition in a relevant market, they may request more information by way of “Request for Additional Information and Documentary Materials”, more commonly referred to as a “Second Request”. A typical second request asks to gather information about the sales, facilities, assets, and structure of the businesses which are party to the transaction.

The concern of NODPA is that Danone will need to be aggressive in exploiting the benefits of its merger to justify their purchase to shareholders. The main fear is fourfold:

1. Danone will presumably consolidate purchasing through WhiteWave, rather than continue its supply arrangement with CROPP, a WhiteWave competitor that benefits from its current contract. The supply agreement for Danone’s Stonyfield yogurt is terminable by either party and includes a four-year wind-down period subject to reduced purchase and sale requirements.
2. In November 2009, Stonyfield agreed to provide CROPP an exclusive license to market fluid milk products under the Stonyfield Farm brand. In 2013, Stonyfield fluid milk sales generated $64 million for CROPP, with sales centered primarily in the Northeastern US. This relationship is unlikely to continue post-merger. At the moment, Danone (Stonyfield) does not market a fluid milk product. Through the merger, however, Danone would acquire WhiteWave’s market-leading Horizon Organic fluid milk—an acquisition that will presumably diminish its incentive to continue to license its Stonyfield brand to a close, fluid milk competitor.
3. Danone is already the leader in the organic yogurt retail market and with the merger they will be the leading branded product in the organic retail fluid milk market. With the merger, Danone will continue to source the milk for their retail brand directly from the farmgate. With the ending of the supply agreement with CROPP, they will be able to source the milk for their yogurt directly from the farmgate. This will make them the largest buyer of organic milk with end sales as branded product. This will give them the dominant power and leverage in purchasing raw organic milk from the farm.
4. CROPP must also be aware that its relationship with General Mills will be seen by Danone as counterproductive to a long term relationship on the supply side. General Mills is second only to Danone in the yogurt market and appears to be aggressive in sourcing its organic milk at competitive prices.

If the above assumptions were to play out, CROPP would both lose the Stonyfield retail fluid milk franchise and its raw organic milk supply contract with Stonyfield yogurt. It is estimated that the fluid retail Stonyfield brand uses approximately 8% of the total volume of CROPP milk supply and the supply contract with Stonyfield represents approximately 20% of the total CROPP volume. We do not have reliable information about what percentage of CROPP’s Northeast organic milk supply is currently used to supply Stonyfield yogurt and retail brand, but we anticipate that it is a significant portion.

What will be the effect on demand for raw organic milk
in New England and the Northeast?

The farmgate pay-price for New England and Northeast organic milk is determined by the number of buyers and supply. Although the base price may be stable, producers’ payment for components, quality, volume and a Market Adjustment Premium (MAP) will vary. Most recently, the pay price has been determined by supply as the price was increased in early 2015 as supply was tight and inputs increased in price. In August 2016, the buyers determined that the market was in oversupply and reduced their MAP payments by up to $2 per hundred pounds.

Farmgate pay-price is also determined by competition. When HP Hood came into the market as a buyer in 2005, the pay-price increased by up to $4 per hundred pounds. When HP Hood left the market, there was stagnation in pay-price for over 3 years despite increases in input costs. Most recently, in 2015, Upstate Niagara Cooperative needed to expand their supply and therefore increased their pay prices. They rapidly increased their supply from within their geographic area by mostly signing up organic producers who sold their milk to CROPP and WhiteWave.

CROPP and WhiteWave, the two main choices for producers as buyers, rightly pay more for Northeast and New England milk than they do for the Midwest and Western milk because of higher input costs. Without a large regional buyer for raw organic milk, CROPP may well decide that they need to shrink or limit their supply in New England and perhaps in the Northeast. The cost of processing organic raw milk in the Northeast versus the Midwest is higher and the availability of processing plants is less in the Northeast. CROPP has a limited market opportunity for its higher cost organic milk. With the increased competitiveness of the Danone organic brands it is unlikely that CROPP will increase its share of the retail market with its own branded product, the most profitable use of organic milk. WhiteWave has always dominated that market; therefore, it is unlikely that CROPP will process milk in the Northeast into branded product and then transport that pasteurized milk to other parts of the country. It is more likely that any surplus from the loss of the Stonyfield contracts in New England and the Northeast will be diverted into private label and store brand contracts in the Northeast, where the profit margins are tighter.

Without supplying organic milk for Danone’s Stonyfield brands, it will be unlikely that CROPP will expand in the Northeast and New England. Instead, CROPP will concentrate on areas for expansion that are more competitive in producing organic milk at a lower price. The recent agreement between CROPP and General Mills to expand supply for General Mills organic products appears to show that CROPP’s investment in expansion is concentrated in the Midwest where it has a higher number of producers, a better infrastructure and state financial support for expansion.

As CROPP shrinks or stops any expansion in its supply in New England and the Northeast, Danone would increase its demand for organic supply for its Stonyfield yogurt, retail brands and other manufactured product through its WhiteWave infrastructure which might temporarily cause an increase in pay price for New England organic producers. Currently, with the steady and significant volume of raw organic fluid milk that Stonyfield purchases in the Northeast and the steady income it provides to CROPP and its co-op members, the Danone-CROPP relationship provides a counterweight to WhiteWave. Once Danone’s initial drive for new suppliers of organic milk has been satisfied, Danone will be in a unique position as the only significant buyer within the region. This shift in purchases would lessen producers leverage in any contract negotiations on pay price and contractual obligations with Danone, effectively creating a monopsony, (a market controlled by one buyer).

Possible Solutions to Creating a Monopsony

The Department of Justice can apply conditions to their acceptance of any merger which will alleviate the very real monopsony concerns that represent the main antitrust hurdle to close the deal.

NODPA has developed a number of solutions to the problems of monopsony, which are listed below:

1. Danone sells off the Stonyfield brand of yogurts and retail milk which would re-establish demand for raw organic milk in New England and the Northeast. There would then be at least two, if not three, competitive buyers for organic milk. As an established brand in the organic market with a loyal consumer base, this would be attractive to non-organic dairy companies who already have an existing infrastructure for processing and distribution, plus a presence in the dairy case in supermarkets.
2. An extension of the supply contract with CROPP for another ten years with a minimum volume requirement and a price that reflects the cost of supplying organic milk from the New England region which has a higher cost of production. There would need to be an annual re-assessment of the price paid to producers to ensure it reflected any increases in inputs, and cost of living with an adequate return on investment. This would allow CROPP to continue to have an active and competitive producer pool of milk in New England and the Northeast, therefore ensuring that there would be at least two buyers in the region.
3. Danone has a history of working closely with producer groups in Europe to establish contractual agreements that reflect the costs of production and a sustainable return on investment. The biggest impediment to this as a solution is the lack of trust that it would be a long term commitment. The organic consumer is clearly discriminating and selective in their purchases. Danone and Stonyfield have built a strong consumer loyalty based on the perception that they have mutually beneficial agreements with their producers. When they find out that organic brands are now controlled by big conventional companies (like Danone) consumers don’t like it. If the relationship with their producers was part of the branding of their product on an ongoing basis and had oversight from producer and consumer groups as well as the Department of Justice, this might be a proactive solution that could establish Danone as a leader in expanding the organic market based on sustainable producer pay price.

What is next?

Danone predicted that they would complete the merger by the end of 2016, which now seems unlikely. The Second Request will usually ask for more details on the nuts and bolts of how the deal may affect the market and, since this is the first mega merger/acquisition in organic dairy, the DOJ is obviously moving cautiously. Will New England legislators get involved? Will consumer groups concerned about the integrity of the organic label have an opportunity to present their concerns? Will producers be freed of their contractual restrictions by their buyers to comment on how this may affect the future of their family farms? There are more questions than answers and we do not have a crystal ball or the money to employ lawyers that specialize in representing interested parties in these situations. If you think you will be affected by this merger/acquisition please let the DOJ know your concerns either directly or through NODPA.

To complain directly:

Citizen Complaint Center, Antitrust Division
950 Pennsylvania Ave., NW
Room 3322, Washington DC 20530

Posted: to Industry News on Thu, Jul 7, 2016
Updated: Tue, Oct 16, 2018