Until recently, the milk production and processing industries were some of the most unattainable acquisition targets for foreign investors. However, this year, one of the largest milk production and processing companies, Rigas Piensaimnieks, has been successfully acquired by RPS Group. Considering the highly competitive threats imposed by the Baltics' presence in the EU, a further consolidation of the industry might well be a possibility.
In general, the dairy industry in the three Baltic countries is quite healthy. Milk purchases are stable, despite aggressive pricing.
In Latvia, milk purchases increased by 6.4 percent in 2004 and 8.2 percent in 2005 reaching 571 thousand tons, taking into account price growth of 30 percent per year during the past two years. In Estonia, a similar situation is observed with milk purchases growing by 10.5 percent in 2004 and 6.5 percent in 2005. Milk purchase prices increased 19 percent per year during the same period. In Lithuania, the situation is quite similar with milk purchases increasing in 2004 by 11 percent and 2005 by 5.3 percent, taking into account average purchasing price growth of 19 percent.
Pricing issues also favor the industry. The specifics of the dairy market in the Baltic States are highly concerned with the bargaining power of the main industry buyers, namely, retail chains. In the Baltics, the aggressive market strategies of all major retailers has led to a situation, where over 75 percent of all retail sales are made via supermarkets and hypermarkets. Due to the small scale of the Baltic markets, retail giants such as RIMI and VP Market have gained huge control over their suppliers, including milk and milk product producers. According to a study performed by the Competition Board of Latvia, retailer mark-up constitutes up to 38-56 percent of the final prices passed on to the final consumer, with milk producers earning a margin of 20-30 percent of the final price.
The dairy industry as a whole is highly export oriented. The traditional output market for Baltic dairy is Russia and the CIS countries, but with joining the EU, Baltic companies received access to the EU market via provided import quotas, and in general, benefited from higher prices and improved quality standards. Local export oriented enterprises got their edge with low value added bulk products, while possibilities for high value added products still remained scarce. The major local dairy companies are considered to be competitive on the EU market: exports to the EU remain stable and are growing.
Market analysis shows that the industry is strictly segmented geographically, primarily associated with dairy production and storage. However, on the regional level in each country the market is notably concentrated. For instance in Estonia, the four largest milk processing businesses control over 72 percent of the market, while all of the eight largest milk processing and production companies control over 90 percent of the market. A similar situation may be observed in Latvia and Lithuania as well. In Latvia, the four industry leaders' sales reached 153 million euros of the total milk and milk products in their market and in Lithuania the three market leaders control over 335 million euros of total domestic milk and milk product sales.
As dairies preserve stable balance sheets and improve earnings, local producers might be considered lucrative acquisition targets by European dairy companies, as well as by companies from Russia and the CIS, who are seeking a way to get into the EU market. However, it is important to mention that potential profits may be exaggerated due to limited competition in the local market and the protectionist nature of the industry.