Nation's largest dairy producer embarks on acquisition spree
Galakton, the nation’s largest dairy, has set its sights on increasing its market share to 25 percent in the next two years. That’s an ambitious undertaking: The dairy‑products market is heavily fragmented and few companies have traditionally sold their products beyond regional borders.
The dairy’s general director, Vadym Chagarovsky, said that the Kyiv‑based dairy would increase its market share through acquisitions and increased production. He said that a holding company was being created to manage operations of the dairy’s three existing plants.
Earlier this year, Galakton acquired the Kremenchuk dairy plant in Poltava Oblast, allowing it to increase overall market share from 10 percent to 13 percent. Though Chagarovsky wouldn’t disclose how much Galakton paid for the Kremenchuk dairy, he said that the growth didn’t come cheap.
“We paid a lot for the Kremenchuk factory,” he said. “It has a good chance to be among the country’s largest dairy facilities,” he said.
The company also has its eye on an unnamed plant in Western Ukraine. Acquiring that plant would bring the company’s overall market share to 18 percent, he said.
Chagarovsky said that Galakton presently sells 73 percent of its products in Kyiv, but that creation of the holding company will allow the firm to increase its sales in the regions as well.
Galakton isn’t the only dairy intent upon gaining market strength by acquiring small, independent competitors. Mykola Butenko, vice president of the Union of Dairy Enterprises, said that the industry is in the midst of a trend toward consolidation.
“Today, there are 400 dairy producers nationwide,” he said. “Within 10 to 15 years, consolidation should reduce the number of dairies to no more than 80.”
He said that 10 large manufacturers already control half of the dairy market. Small independent dairies comprise the remainder.
Even so, the industry’s fragmentation is such that Galakton can claim the largest market share with less than 20 percent. French‑owned Lactalis‑Ukraine, which produces President‑brand dairy products, has the second‑largest share with 8 percent, followed by the Pavlohrad and Kharkiv dairies, with 5 percent and 3 percent of the market, respectively. Uman‑based Bilosvit has a 2 percent market share.
Galakton is recovering from a troubled past.
Founded in 1961, the company grew to produce as much as 600 tons of milk and dairy products during the 1980s. The economic crisis of the mid‑1990s saw the dairy’s debts pile up, however, and by 1997, the company was operating only two days a week, and production volumes plummeted to 39 tons per day.
The arrival of new owners in 1997 marked the beginning of the dairy’s turnaround. Valery Khoroshkovsky, now economy minister, and entrepreneurs Vadym Hurzhos and Vadym Grygoryev bought Galakton and focused on ensuring the supply of raw milk by assisting farmers.
“We started to make loans to milk producers so that they could acquire fuel and fodder,” Chagarovsky said. “At that time, we weren’t thinking about profit. Our goal was not to allow production to fall any further.”
The next year, production at the factory stabilized. “To restore milk suppliers’ trust and build transparent relations, we reported on our profits and our plans every six months,” he said. “We wanted to show them that we were reinvesting profits in the business.”
Chagarovsky said the new shareholders upgraded the factory and created a new distribution system. They also stopped selling products under the Galakton brand and began marketing products under the Balance trademark.
“Galakton had developed a reputation for poor‑quality products,” Chagarovsky said. “There was a time when we hoped that customers wouldn’t remember Galakton’s name when buying our products.”
The company did better with its Balance brand. It was the first dairy in the former Soviet Union to introduce milk with a 14‑day shelf life. Previously, milk expired after just 36 hours.
The company reintroduced the Galakton brand last year, after consumer research showed that the public was no longer sour on the name.
The company also increased milk production to 300 tons per day last year. This year, the company hopes that its Hr 10.5 million investment in upgraded facilities will allow it to increase that figure, and to expand to 450 tons per day in 2005.
In all, Chagarovsky said that $10 million has been invested in Galakton since 1997. The company produces 70 different dairy products, including butter, desserts, bio‑products and traditional cultured products including kefir, ryazhenka and sour cream.
In 2002, Russia’s Planeta Management bought an 80 percent stake in the company. Though not well known in Ukraine, Planeta Management has holdings in food processing and finance, according to Ros Biznes Consulting. Started by a former Sibneft manager, Planeta Management has also acquired St. Petersburg‑based Darya, a frozen foods producer, and Nizhny Novgorod‑based Alliance, a retail firm. Galakton is the company’s first acquisition outside Russia.
Chagarovsky would not disclose whether Khoroshkovsky or other previous shareholders had retained minority stakes in the company.
He said the company’s owners plan to invest $6 million into Galakton by 2005.
There is still plenty of expansion in the marketplace for Galakton and firms like it.
Butenko said that although dairy producers increased production by 17 percent last year to slightly more than 1 billion tons, they still lagged far behind 1990’s production, when the factory produced more than 6 billion tons annually.
In 2002, Galakton’s sales reached $42 million. The Kremenchuk dairy, Galakton’s most recent acquisition, sold products valued at $21 million that year. By 2005, the company is hoping for combined sales of $115 million.
“We have come all the way from being a bankrupt company to being a market leader,” Chagarovsky said. “We are not going to give up first place to anyone.”
Andry Lukyanenko, marketing director for American Food Master Ukraina, which owns the Bilosvit dairy in Cherkasy Oblast, expressed skepticism about Galakton’s ambitious plans. He said that other fast‑growing dairies would prevent Galakton from capturing 25 percent of the market.
He said Galakton would face problems both in Kyiv and the regions. In the capital, dairy producers will fight for part of the lucrative market. And Galakton has yet to develop its distribution system in the regions, he said.“While Galakton invests in solving problems associated with its acquisitions, its competitors will not be sitting around twiddling their thumbs,” Lukyanenko said.
