ACCC to look more closely at Coles plan to buy Saputo factories

"We have heard strong concerns across the industry about how the acquisition will strengthen Coles's position in the dairy supply chain," ACCC deputy chair Mick Keogh said.

But Coles says it sees "no lessening of competition in any relevant market".

"Coles already acquires approximately 80 per cent of the volumes at the facilities and will provide milk processing services to Saputo Dairy Australia under a tolling arrangement," its chief executive officer Leah Weckert said.

Coles announced in April that it planned to buy milk factories in Erskine Park in Sydney and Laverton North in Melbourne from the Canadian giant for $105 million.

The plants produce fresh milk for Coles own branded products, as well as for Saputo's Devondale brand and for other parties.

The ACCC identified two main concerns in a statement of issues released on Thursday:

The ACCC is now seeking responses to its statement of issues and anticipates making a final decision on September 14.

"For NSW dairy farmers, concerns have been raised that this acquisition may change Saputo's incentives to continue acquiring raw milk in NSW," Mr Keogh said.

"If Saputo does exit NSW as a result of the acquisition, this would leave limited competition in regions of NSW, which could result in farmers receiving lower prices for their raw milk."

Mr Keogh said the ACCC was also concerned that Coles's increased bargaining power could lead to reduced competition at the wholesale level, impacting on processors long-term viability and with the potential for flow-on impacts to farmers in Queensland and regions of NSW.

Coles currently acquires raw milk from farmers in both Victoria and NSW, and processes it at these plants under an arrangement with Saputo.

A significant number of industry participants raised strong concerns about the proposed acquisition, particularly given it would result in a major structural change as the first time a supermarket owns and operates its own milk processing facilities.

"Many industry participants have expressed concerns that the acquisition will result in Coles consolidating its private label milk production, which would increase its bargaining power in negotiations with dairy processors and dairy wholesalers," Mr Keogh said.

The ACCC is seeking submissions from interested parties in response to the statement of issues by August 3.

Coles CEO Leah Weckert said the company would continue to work constructively with the ACCC on these issues.

"We remain confident any outstanding concerns can be addressed so that the proposed transaction can proceed to completion," she said.

The ACCC kicked off a public merger review of the proposed acquisition on May 2.

Dairy farmer groups opposed the deal.

Australian Dairy Farmers president Rick Gladigau said the bid by the supermarket goliath to buy the milk factory was a worry.

"This is a deal ADF has voiced its concerns about - both publicly and in a submission to the ACCC," he said.

"Specifically, we are concerned about issues around price transparency, competition, market power and control.

"Already, Coles has the theoretical ability to set the retail price of its competitor brands in all its supermarkets.

"This deal would make Coles a processor, affording total control of every fresh milk price within the Coles sphere of influence."

EastAUSmilk chief executive officer Eric Danzi said competition would be significantly reduced by Coles becoming a processor and therefore the ACCC must block this purchase.

"It would give Coles the ability to destroy processors, processor brands and farmers by completely controlling the supply chain," he said.

"If approved, the northern dairy industry would be under significant threat including farmers, processors and retailers."

The two huge plants were built by former farmer co-operative Murray Goulburn as part of its ill-fated push into the Australian domestic fresh milk market.

The Laverton North facility cost $80 million and was opened in 2014, while the Erskine Park plant cost $60 million and was opened in 2015.

Each facility has the capacity to process around 225 million litres a year.

The factories were part of a 10-year deal between Murray Goulburn and Coles for the supermarkets house-brand contract.

The Coles contract with the co-op started in 2014 and cut out foreign-owned Lions and Parmalat, which had previously held the contracts for the fresh milk market in Australia's two most populous states.

But there were concerns that the deal locked in $1 a litre milk.

At the time, Coles said it was confident it could keep selling milk for $1/L and still pay a premium to farmers, which would be adjusted regularly in response to national market trends.

Murray Goulburn sold to Saputo in May 2018 for $1.31 billion.

From the outset, Saputo had concerns about the deal with Coles.

Even before the takeover was completed, Saputo was looking closely at the profitability of the plants in Melbourne and Sydney, and their cheap supermarket milk supply contracts.

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