The statement highlighted the weakness of Dairy Crest’s liquid milk business compared with its branded products’ performance. “Despite the progress we have made in identifying and delivering efficiency savings, profits in our dairies business remain under pressure,” the firm stated in the update, which it issued on March 29. “We are looking at a range of options to restore this business to a satisfactory level of profitability.”
Wild, food group director at Rollits, said: “Dairy Crest may see the writing on the wall. It may decide it’s not worth a gamble and I would not be surprised if long term it did not see a future in liquid milk. It’s an incredibly tough business now.”
Squeezed
He said returns for processors and farmers had been squeezed by retailers to such an extent that it was extremely hard to make money in the sector. Speculation was rife that Dairy Crest could exit its liquid milk business when it lost a big contract with Morrisons in the sector in 2005.
Analysts Darren Shirley and Clive Black at Shore Capital said in a note responding to the trading update: “Whilst H2 [second half of the financial year] was strong for food, the same cannot be said for the dairy division, which continues to struggle to deliver meaningful profitability on its c£1.1bn sales base. H2 profitability has been adversely affected by recent weakness in the cream price (albeit from high levels), whilst pressure is also building from rising HDPE (high density polyethylene for bottles) and fuel prices.”
Despite delivering the targeted £20M of cost savings, management were clearly not happy with the level of profitability, said Shirley and Black.
Rising costs
A Dairy Crest spokesman said there were several ways to offset rising costs in liquid milk: “We are putting the milk price up on the doorstep by 1p per pint. Our general view is that farmgate prices will be coming down.”
Other questions included whether Dairy Crest had the right number of depots. “We are looking at head office costs as well, not just factories,” he added. However, Dairy Crest said in its trading update that it was growing sales through its doorstep delivery internet channel Milk&more.
“We have faced £80M of cost inflation. The majority of that has been in milk operations, but we have also seen higher fuel and energy prices.”
By contrast to liquid milk, sales volumes of core brands such as Cathedral City; Country Life; Clover and Frijj had fallen in the first half of the financial year to March 31, said Dairy Crest: “However a strong performance in the second half means that we expect total full year sales volumes to have increased compared to last year. Cathedral City and St Hubert have both recorded record market shares during the final quarter.”