Asda said the move was prompted following concerns that farmers were not being paid enough for their milk. Farmers went on strike last autumn in protest against dairy companies, accusing them of swallowing up supermarket price increases without passing on any benefits to the farmers.
The supermarket group asked its three suppliers to come up with a new supply chain that would give Asda a dedicated group of farmers, with Arla winning the tender. This signals a return for Asda to its dairy roots, with Asda and Arla once being part of Yorkshire-based Associated Dairies, which was formed in the 1960's.
"This move means that for the first time in 40 years we will have a direct relationship with every single farmer who supplies us with milk," said Asda's agriculure strategy manager, Chris Brown. "Arla is able to provide Asda with a segregated supply chain using a dedicated group of farmers. This will enable us to trace our fresh milk from the farm through to the bottles in our customers' trolleys."
Danish-Swedish owned company, Arla Foods UK, was formed through a merger with Express Dairies last year. Arla Foods UK is now the country's leading dairy company, processing around 2.4 billion litres of milk a year, and employing 7,000 people nationwide.
Asda's move is expected to send shockwaves throught the UK dairy industry. Wiseman recently secured a new deal with Tesco, but it faces a series of critical talks with Morrisons to safegaurd its current volumes with Safeway. Wiseman is set to lose some £70m of revenues from losing its Asda contract. The company currently supplies almost half of Asda's milk, which accounts for 15 per cent of Wiseman's annual milk volumes. Its shares slumped by 17 per cent as a result. Dairy Crest's shares also fell by 4.65 per cent following the announcement, with the company currently providing 10 per cent of Asda's milk.
Gwyn Jones, chairman of the National Farmers Union's dairy group, described the move as "a positive step in connecting farmers with the needs of the marketplace." Although David Handley, chairman of Farmers for Action, expressed concern that the deal tightened Asda's control on dairy farmers.
Wal-Mart, the world's largest retail group, acquired Asda five years ago and has since changed its fortunes. Riding on the back of the company's success in the UK, Wal-Mart now plans to establish itself firmly on the European market.