Battle heats up in milk supply chain

The statements revealed that a major contract to supply Co-operative stores with fresh milk had transferred from Dairy Crest to Wiseman, leaving analysts questioning Dairy Crest’s strategy.

Dairy Crest said in its statement that it terminated a contact with the Co-operative Group on fresh milk supplies because of a failure to agree price terms this month (March).

It will stop supplying fresh milk to Co-op from next August. Meanwhile, Wiseman reported that from August it will start supplying own-label milk to around 4,000 Co-operative food stores.

Dairy Crest claimed it would be able to get a better return on the milk earmarked for this contract by selling it elsewhere and that there would be no impact on its performance in the 2011/12 financial year.

Short term gain, long term pain?​

Analyst Damian McNeela of Panmure Gordon told FoodManufacture.co.uk: “In the short term, Dairy Crest can offset the lost margin through commodity markets, but in the longer term I would not rely on that. It would be much better to have an extended contract with a retailer.”​

He also expressed concern that Dairy Crest was not investing “at the right pace”​ in its dairies, particularly compared to its rival. News that Dairy Crest was progressing with paying down its debts was, however, welcome. “Paying down debt remains a good strategy as it will give it scope to buy other brands,” ​said McNeela.

McNeela said Wiseman remained the best placed of the three major UK dairy processors – Arla, Wiseman and Dairy Crest – to thrive going forward.

He also noted that Arla’s plans to complete a new superdairy in Aylesbury by Autumn 2012 had hit delays due to planning approval obstacles.

Meanwhile, Clive Black, an analyst with Shore Capital, said the trading update from Dairy Crest left him with “neither strong upward or downward conviction on the stock.” ​And he remarked ​that 2010/11 had been “a year to forget​” for Wiseman. “The company will be thanking its lucky stars for the robustness of cream prices,”​ he said.

Dairy Crest’s cheese buffer​

In its trading update Dairy Crest said that good performance in its cheese business had compensated for more challenging trading in spreads and dairy products. It reported pre-tax profits in line with expectations for the year ending March 31 2011.

Trading in its fourth quarter had remained strong, it said, with more milk to the major supermarkets over the year, and a contract win to supply Tesco.

Dairy Crest said its strategy involved growing sales of its brands and other added-value products and controlling costs: annual savings were ahead of the start of year target of £20m despite rising input prices.

All five of its key brands – Cathedral City, Clover, Country Life, St Hubert Omega 3 and Frijj – had increased sales this year and it had also increased sales through its doorstep delivery internet channel, milk&more. A consistent commitment to advertising was key to this improvement, it said, and it had again increased expenditure in this area.

Debt reductions​

To partially offset input cost rises, Dairy Crest has committed to another £20m cost reduction programme for the next financial year. It was also claimed to be making satisfactory progress in recovering higher costs from its customers. Net debt will be lower at the end of the year than it was at the start, it said.

Mark Allen, chief executive of Dairy Crest, said: "This has been a year of strong progress for Dairy Crest in which we have consistently delivered on our strategy despite challenging trading conditions. We are well positioned with strong brands, tight cost control and an efficient supply chain." ​The company will announce its preliminary results on May 19.

Wiseman’s operational improvements​

Meanwhile, Robert Wiseman Dairies said in its statement that it expected turnover and underlying profits for the year to April 2 2011 to be in line with previous expectations.

The commissioning of the final phase at its Bridgwater dairy in November 2010 increased capacity at the dairy to 500m litres a year. It also led to operational improvements reduced overtime working at other dairies.

Wiseman​ announced that its small Okehampton dairy in Devon and its distribution depot in Cupar, Fife will close during April, with up to 67 jobs expected to go at each site.

Bulk cream prices throughout the period remained higher than the same period last year and were expected remain stable in the short-term, reported the company. It will announce its preliminary results for the year to April 2 on May 17.