Discounters' dilemma as Wiseman ups milk margins

Wiseman supplies Aldi and Lidl with own-label milk, as well as Iceland, and all have kept prices for four pints static at £1 for two years. But they will now have to decide whether to absorb a Wiseman price rise to drive footfall or to put up their prices, said analyst Darren Shirley of Shore Capital.

Shirley told FoodManufacture.co.uk that Wiseman was probably seeking a “ballpark figure of 2p a litre​” increase from the middle ground customers such as Iceland, discounters and convenience stores.

Wiseman, which published a first half pre-close trading statement today, hoped to complete negotiations in the next few days if possible, said a company spokesman. The rise will reflect the fact that it has agreed to pay its suppliers 1.85p more a litre from October 1 to cover their costs.

Negotiations​

Wiseman's major own-label supermarket customers, Tesco, Sainsbury and the Co-operative Group have direct payment relationships with milk farmers so are not involved in the ongoing negotiations.

But the timing of the negotiations was potentially challenging, Shirley said.

Tesco, which Wiseman supplies own-label milk, has just cut the price of milk from £1.59 to £1.25 for four pints in its latest discounting initiative the ‘Big Price Drop’.

However, the new Tesco price was now in line with Arla-supplied Asda, so was unlikely to spark a price war in the multiples. And it also still offered the middle ground a ‘price cushion’ of 25p, said Shirley.

About 40% of Wiseman's volumes sell to “middle ground” customers, he said: “We suspect over 50% of the middle ground price recovery has been successfully negotiated, and the sooner it is resolved the better. We may see some brinkmanship going on into the weekend​.”

Wiseman said it expected that trading would be within its expectations. But second half performance would depend on recovering costs from retailers.

Higher bulk cream prices, which had risen on average 15% to £1,620/t in the first half of 2012, helped to offset higher fuel and plastics costs which rose by a similar amount. But, the outlook with regards to cream prices was uncertain, it said.

The company started supplying the Co-operative Group own-label fresh milk in August, its largest ever single volume gain at 88M litres, business won from Dairy Crest. It also supplies own-label to Sainsbury and Tesco.

It said it was also continuing to invest to further increase efficiencies and eliminate costs across the business.

Attractive return​

For example, a new £1.3M refrigeration unit at its Manchester dairy was cutting gas and water use and offered a "very attractive return on investment"​, a spokesman said.

It had also increased fuel efficiency 7% year-on-year with technologies such as global positioning systems to optimise routes, and training and monitoring of the drivers of its 1500 vehicles to crack down on heavy braking and acceleration.

The dairy industry's first reverse osmosis plant at Wiseman's Bridgwater site was also allowing cost savings, he added.

The company will be paying a £3.2M settlement to the Office of Fair Trading in October, following its investigation of dairy retail prices.

Damian McNeela, analyst with Panmure Gordon, said that the retail environment remained challenging for Wiseman, with little opportunity to gain substantial additional volumes.

“We anticipate that first half 2012 profit before tax will be halved to around £10M as a result of reduced margins on major supply contracts to retailers and ongoing input cost pressure,​” he said.

Interim results for the six months to October 1 2011 will be announced on November 14.