The supermarket giant dropped Dairy Crest in favour of Arla and Robert Wiseman.
The move mirrors Sainsbury's recent decision to deal with just two suppliers as well, Dairy Crest and Robert Wiseman, and suggests that conditions are getting increasingly tough for milk producers in the country as retailers look to squeeze prices. Back in May, Asda made Arla its sole supplier.
This trend towards supplier consolidation, say farmers, is bad news for an industry already in decline. UK suppliers have complained about their relationship with the four main supermarkets, prompting an audit by the Office of Fair Trading.
"Sainsbury dropped Arla as a supplying processor and today Tesco have announced they have dropped Dairy Crest," said UK pressure group Farmers for Action in a statement. "We now have a situation of two major milk processors who will be chasing milk volumes. The grave concerns we have are shared by both the Scottish NFU and English NFU and it is our intention to meet up early next week to come up with a strategy to prevent any of these so called changes impounding on primary producer price."
Dairy Crest, which has lost out from both Tesco's and Asda's decision to cut down on suppliers, saw its shares decline by almost 18 per cent this week. The group's current sales of fresh milk to Tesco are worth approximately £60 million per annum, and the profit impact of this change has been initially estimated at between £12 million and £15 million on an annualised basis.
And when Asda jettisoned both Dairy Crest and Robert Wiseman, shares in Robert Wiseman plummeted almost 20 per cent.
However, the retailers argue that the rationalisation of their supplier base, will allow them to trade better in distinct geographic locations close to their stores, improve transparency in the supply chain and offer more stability to the milk industry. Sainsbury for example believes that suppliers Dairy Crest and Robert Wiseman will sufficiently cover their milk needs across the UK.
"The move supports our policy to source milk locally wherever possible - Dairy Crest will continue to supply south-west customers with local milk through its Totnes dairy and Wiseman will supply Sainsbury's Scottish stores with Scottish milk through its East Kilbride dairy," said Ian Merton, director of fresh food at Sainsbury.
"The improved geographic fit will be better for Sainsbury's suppliers and the farmers who supply them. The supply base will be more closely aligned to customer requirements, connecting farmers with the needs of the market place and improving traceability. Sainsbury's will be using this new partnership to investigate ways of becoming more efficient and to work towards improving the returns for our farmers in the future."
Wiseman and Dairy Crest supply milk produced by farmers from the First Milk co-operative, the biggest in the UK, and its chief executive, John Duncan, argues that the Sainsbury deal will in fact boost the sector.
"As the largest milk co-operative in the country we have over 4,000 supplying farms and to receive clarity on volumes for a longer period of time from Sainsbury's is great news. This broad-based partnership means that Sainsbury's is giving real support to farmers at this volatile time."
Opting for two suppliers, rather than one, would also benefit more UK farmers, said Sainsbury in a thinly-veiled criticism of Asda: "This move reduces the number of milk providers supplying Sainsbury's requirements while giving a boost to many more dairy farmers across the country. The decision to create a partnership with two main suppliers contrasts sharply with the recent decision by another major retailer to select a single processing company supplied by a relatively small number of farmers."
The UK milk sector is certainly an incredibly tough environment in which to operate for small-scale suppliers, and as a result the industry is dominated by a few big players. Dairy Farmers of Britain's recent £75 million acquisition of Associated Co-operative Creameries for example suggests that further consolidation within the UK's milk industry is going on.
Dairy Farmers of Britain (DFB) acquired Associated Co-operative Creameries (ACC) from the Co-operative Group for £75 million. At 1.3 billion litres, DFB will be the UK's third largest milk processor. The group claims that the enlargement represents a better deal for customers and retailers, promising to deliver security of supply and a more competitive, flexible and cost efficient service.
According to DFB, vertical integration is critical to enabling its farmer members to achieve a sustainable milk price and a profitable platform from which to gain access to new markets for their milk and dairy products.