Wiseman bullish despite rising input costs

Last month, Wiseman won new contracts from two of Britain's biggest supermarket groups, Tesco and Sainsbury, to supply their own-label milk, agreements which will add a further 100 million litres to the company's annual sales - and offset the loss of the contract to supply the UK's number two grocer, Asda.

Armed with this assurance of long-term volume growth, Wiseman's finance director Billy Keane was today able to put a positive spin on the company's performance. In a brief trading statement issued ahead of the publication of first-half figures in November, he said that the company's volumes and turnover were "in line with forecasts"​ and "despite recent increases in derv [diesel fuel], energy and plastic costs"​.

But while strengthening ties with such important customers as Tesco and Sainsbury (not to mention Morrisons and Somerfield, the fourth- and fifth-largest grocers) is clearly a positive development for Wiseman, it does increase the company's exposure to the impact of higher costs.

Fuel costs should be easier to manage thanks to the creation of a new distribution centre in Northampton, at the cost of £7.5 million, and Keane said that other potential depot sites were being investigated "to ensure we can effectively service our customers throughout Great Britain"​.

But while more distribution centres should reduce the distances travelled by the company's fleet - and thus fuel consumption levels - higher costs for packaging and energy are more difficult to offset, particularly as the company's dairies are still not operating at their most efficient levels.

Perhaps with this in mind, Wiseman is looking at expanding production of a number of products, and in particular those with a higher added-value. Own-label milk profit margins are notoriously low, with the grocers traditionally demanding the lowest possible cost price for their milk, so the development of alternative products with higher margin potential is a logical step for Wiseman.

The company recently took its first step into this market with The One, a new branded milk with just 1 per cent fat designed to appeal to the increasingly health-conscious British public, and the initial sales have been encouraging. Using its strong ties with the leading retailers, Wiseman has been gradually rolling out the brand -which is said to have the flavour profile of semi-skimmed but with a lower fat content - nationwide, and is hopeful of steady growth for the premium product.

The decision to move into the added-value market in a more concerted way was perhaps influenced by the success of rival Arla Foods, whose Cravendale milk is the only mainstream branded fresh milk in the UK. Since it began national distribution in May 2002, Cravendale has grown to be a £50 million-plus brand, accounting for 3 per cent of all fresh milk sold in larger supermarkets, and up to 6 per cent of some retailers' sales, according to Arla, with clear benefits to its margins.

The One may not be a mainstream milk brand like Cravendale, but by targeting the low-fat sector Wiseman has tapped into a market with significant growth potential. According to market analysts Mintel​, UK sales of skimmed milk grew by 20 per cent between 1999 and 2003 to around 749 million litres, while sales of whole and semi-skimmed (both increasingly seen as unhealthy) dropped by 2 per cent and 29 per cent respectively.

Wiseman is also moving into another growth market for the first time, according to Keane, installing extended shelf life (ESL) processing and filling technology at its Droitwich Spa dairy, at a not insignificant cost of £7 million.

British consumers have traditionally preferred fresh to long-life milk, but this appears to be changing, with the convenience and practicality of long-life milk becoming a major selling point. The margins in this particular sector are also relatively low, but with much ESL milk sold in cartons- rather than the increasingly expensive plastic bottles used for fresh milk - Wiseman clearly sees an opportunity to stake a claim in this growth market ahead of its major rivals.

But keeping costs down is also likely to have an adverse effect on Wiseman's suppliers. The company has a reputation as one of the highest payers - a factor which helped it win the Tesco supply contract - but recently reduced the sum it paid to direct suppliers to bring it closer to the levels of its rivals (though it still remains 0.6 pence per litre higher than the UK's biggest dairy supplier, Arla Foods, it claims).

But with the market remaining highly competitive, further price cuts are likely as Wiseman is forced to react to ongoing discounting by its main rivals, Arla and Dairy Crest.