The companies struck a deal on Thursday to establish a common business that will be the second largest player in Europe's chilled dairy sector. The shares will be split 40-60 in favour of Lactalis, despite Nestlé's position as the world's biggest food firm.
The deal covers all European Union countries except Austria and Germany and also includes Norway and Switzerland.
"It is a departure from the classic Nestlé approach in the sense that we have accepted a minority share in an operation," François-Xavier Perroud, Nestlé spokesperson, told www.DairyReporter.com.
He said the company, which does not yet have a name, was intended to build up "a business that has not been satisfactory for us for some time".
In chilled dairy "many producers now work for a private label market that clearly in some aspects has not been good for branded products.
"We believe that by creating a new, strong player in the market we can overcome this unsatisfactory situation."
Nestlé is keen to make use of Lactalis' supply network, logistics expertise and its greater presence in private label chilled dairy. Yet, Perroud said Nestlé would bring important brands and open up research and development facilities to the venture.
The joint-venture will look to develop brands and private labels side by side, particularly in strongly growing product areas like yoghurt and desserts as well as fresh cheese.
"Nestlé has a good position in desserts in many countries, but Lactalis is stronger on private label," said Lactalis spokesperson Luc Morelon. He added that Lactalis had a particularly good private label business in the UK and Spain.
Then there is also the question of French dairy group Danone, the undisputed leader of Europe's chilled dairy sector.
Neither Lactalis nor Nestlé said competing with Danone was a main reason for their joint-venture, although Perroud said it would be nice "if we can give them a harder fight" in the next few years.
The Nestlé-Lactalis group is expected to have sales of around €1.5bn in its first year. Danone's fresh dairy sales were €5.3bn in its first nine months of this year, although the group sells outside of Europe too.
As for competition fears, the European Commission will have to look into the joint-venture, but both sides think they will be ok. Perroud said Nestlé and Lactalis were not direct competitors in any one area.
Morelon said that Lactalis was number two in most dessert markets and had a 22-23 per cent market share of chilled dairy in France. Danone has a 30-33 per cent market share of France's chilled dairy sector.
Both Lactalis and Nestlé said they expected to make cost-savings from the joint-venture, although Morelon said there were no concrete figures yet.
The proposed new organisation will be managed by a board composed of senior executives from both partners, with Lactalis in a majority.