Under the Spotlight AUS: Bega Cheese Ltd (BGA)

Early European settlers to the NSW south coast brought cattle with them and made a living from selling butter and cheese. It was challenging to manufacture these products, but farmers in the area worked together and by the late 19th century formed the Bega Dairy Co-operative, pooling resources to build a central creamery to make production more efficient. As manufacturing became more reliable and the organisation grew over the following decades, Bega modernised its facilities to scale its output and expanded into the Australian Capital Territory and Victoria.

Over the years, Bega’s growth has been intertwined with the dairy farmers who supply the firm. This was particularly apparent at the turn of this century, when the deregulation of Australia’s dairy industry in 2000 ended state-based policies that enabled domestic suppliers to command higher prices than exporters. Instead, with the change in policy, prices that farmers received became determined by the free market. As a result, there was a consolidation of smaller operators, resulting in fewer, but larger and more productive, dairy farms.

Bega took a proactive approach to growing its own production line, acquiring 70% of Tatura Milk Industries in 2007. This move broadened its product range, adding infant formula, milk powders, nutritional products and cream cheese to existing offerings of processed and natural cheddar cheese, as well as whey powders. The company also expanded its cheese-making infrastructure by purchasing assets from De Cicco Industries and Kraft Foods in Victoria. 

Growth strategy

Bega Cheese Ltd ($BGA) listed on the ASX in 2011. Following the listing, it took over the remaining 30% of Tatura. The company also began to push into international markets, with a particular focus on Asia. However, a 2015 move to capitalise on the strong growth in customer demand for infant formula in China backfired, as Bega’s joint venture with vitamin giant Blackmores failed to meet its targets.

This setback did not halt the company’s ambitious strategy, with the firm announcing a $460m deal with global food giant Mondelez ($MDLZ) in 2017. Bega acquired most of Mondelez's business in Australia and New Zealand, including the iconic Vegemite brand, peanut butters and ZoOSh salad dressings. The takeover resulted in Bega gaining ownership of about a third of the $550m spreads category in Australia, helping the company to become less reliant on dairy and further its goal of establishing itself as a leading consumer goods business.

While revenue generated from the newly-acquired brands put Bega in a strong position to repay the debts taken to fund the deal, not all aspects of the takeover went smoothly. The acquisition had included a former Kraft-Heinz ($KHC) factory in Melbourne, but this led to a long-running legal dispute centred on Bega’s use of a jar with a yellow label and yellow lid. Furthermore, Bega also got into a multinational court stoush with dairy giant Fonterra over the use of the Bega brand on a range of peanut butter.

Maturing process

Bega almost doubled in size in late 2020 with a takeover of the dairy products range from Lion Drinks & Dairy, part of Japanese conglomerate Kirin. The purchase amounted to $534m after the Foreign Investment Review Board stopped the original bid from China’s Mengniu Dairy.

Today, Bega operates across two business segments - bulk and branded. The bulk segment is made up of nutritional powders and dairy ingredients, which are sold primarily to food manufacturers. Bega’s branded segment consists of consumer products sold via supermarkets, convenience stores, petrol stations and food service stations. Bega owns Australia’s leading brands in the milk-based beverage, yoghurts, spreads and water ice categories, such as Dairy Farmers, Yoplait and Zooper Dooper.

The branded segment accounted for $1.50b of $1.87b in revenue in H1 FY2024, with 72% coming from Bega’s top eight brands (Dairy Farmers, Dare, Pura, Farmers Union, Yoplait, Bega, Vegemite and Daily Juice Co.). The segment’s 8% growth helped offset the 16% decline in revenues from the bulk segment.

The bulk segment’s performance remains influenced by how milk is valued in relation to variables such as seasonality, region, farm size and global market trends, with a fall of 30% in dairy commodity prices in H2 FY2023 greatly affecting this part of the business.

An excess of milk manufacturing capacity compared to production levels in Australia, as well as persistent drought risks, adds to pressures on the broader dairy industry and Bega. However, with an emphasis on growing its brands, Bega’s acquisitions have enabled the company to not only position itself as a market leader, but to build up a vast infrastructure. The company has an extensive network through which it distributes chilled goods in regional and metropolitan Australia, as well as several manufacturing facilities, giving the firm control over different aspects of the supply chain.

Future outlook

Bega is hoping to capitalise on more health conscious consumers, with a focus on products containing less sugar and more protein. It’s also expanding its lactose-free options and exploring plant-based opportunities to cater to shifting eating habits. However, Bega has been affected by higher raw material costs, with the company typically slow to pass on increased costs to the businesses it supplies as it is required to give notice of any price changes.

Amid growing concerns about the cost of living, rising grocery bills have been a sore point among Australian consumers. While Bega has contracts with major supermarkets, many shoppers are turning to cheaper home brand products. Coles’ ($COL) and Woolworths’ ($WOW) dominance of the industry presents an ongoing challenge for suppliers and the current investigations into their pricing methods could bring further uncertainty to all those companies who work with supermarkets.

Bega has built a strong reputation among its clients and consumers, but working efficiently with the likes of the supermarket giants, while continuing to integrate all of its acquisitions, comes with its challenges. Time will tell if the firm has created the perfect recipe for long-term success and growth, or if it has bitten off more than it can chew.

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.