Dean Steps Up Drive to Widen Margins With Acquisition of Horizon Organic

Dairy giant Dean Foods Co. is blending its product mix and shaking it well in an aggressive bid to whip up greater growth and wider profitability. Using a series of major acquisitions, Dean already has built itself into the nation’s largest fluid milk company and now is augmenting that key base with specialized dairy products that offer more zing at both the top and bottom lines. The latest value-added addition, announced in late June, was Horizon Organic Holding Corp., the largest player in the organic milk and dairy products market, which is growing at a rate of 20% annually. Dean agreed to pay $216 million in cash and assume $40 million in debt to purchase the 87% of Horizon it did not already own. Horizon, based in Boulder, Colo., racked up $187 million in sales last year and hit the $200 million mark in April 2003. Horizon is the latest example of what industry analysts, who generally hailed the deal, see as a multi-pronged strategy that Dean is pursuing to take advantage of its industry position and play the mind-boggling countertrends within the dairy industry. Dean’s core fluid milk business is flat, mature, and low-margined, although its share provides the scale needed to survive in that kind of market. Perhaps more important, the bulk-up in fluid milk has allowed Dean to assemble one of the largest chilled products distribution systems in the country, which has plenty of capacity for handling and accelerating the sales and spread of specialized products. “This makes a ton of sense for them,” Bruce Cohen of food industry consultant Swander Pace says of the Horizon deal. “It’s an opportunity to take a stronger position in a growing segment.” A widening list of specialties Horizon joins an extensive stable of specialized products within Dean that include Silk soy-based milk, International Delight coffee creamers, Hershey’s chocolate milk and milkshakes, and the Jakada coffee and milk beverage. “The clear strategy for Dean is to take their asset base and continue to margin up by introducing higher value-added products,” Cohen says. Barry Fromberg, EVP and designated spokesman for Dean, did not return phone calls placed at his office in Dallas. Cohen notes that the growth of the value-added area of dairy products featured in supermarket chilled product cases has attracted a number of other food and beverage firms and is headed for more intense competition. He cites such developments as Coca-Cola Co.’s tests of milk-based products, the development of Smoothie beverages, and Dannon’s liquid yogurts. That puts a premium on Dean’s distribution system and existing brand names, such as the well-recognized Horizon Organic, as well as its ability to offer complementary chilled products such as juices. Additionally, Cohen adds, the ownership of brands such as Horizon Organic can allow the distribution system to feed additional retail outlets that may not yet be Dean strongholds. That would include supermarkets such as Wild Oats and Whole Foods as well as smaller outlets that specialize in organic foods. “They (Dean) have a distribution system that is one of the most powerful in the country,” Cohen states. “It has areas where it can still grow. Their opportunity is to continue to grow the value-added businesses and areas of the core business where there is growth, and that includes organic, single-serve milk-based beverages, and other refrigerated value-added product lines.” Top player in a growth niche Horizon is the No. 1 producer of organic milk, dairy products, and juices under the Horizon Organic name in the U.S. and also has the top spot in organic milk in the United Kingdom with the Rachel’s Organic brand. Dean, originally known as Suiza Foods, established itself as an acquisition-geared milk industry consolidator during the 1990s. The company assumed the Dean name when it acquired the former Dean Foods in 2001. The old Dean brought with it minority interests in Horizon and privately owned White Wave, which developed Silk into the largest soy milk brand. Also coming with Dean were interests in other chilled-case products, such as Marie’s dips and dressings, pickles, and other specialty food products. Copyright 2003 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com