Dairy Crest "spreading" Cathedral City appeal with Vintage, kids and light launches

Dairy Crest "spreading" Cathedral City appeal with Vintage, kids and light launches

Through the sale of its French spreads business, Dairy Crest has worked itself into a position where it has cash to invest in the business. As we heard in part one of this two-part interview, CEO Mark Allen is working to reduce the group's cost base and move its product mix up the value chain. But equally important is Dairy Crest's drive to get the top line moving. Katy Askew caught up with Allen to find out how the chief executive plans to achieve this.

UK dairy group Dairy Crest has had what it describes as a "transformational" year. Last summer, the firm sold off its French spreads business, St Hubert, in order to focus on the UK business.

Speaking to just-food, CEO Mark Allen says the EUR430m (US$540.1m) sale has provided the group with the opportunity to invest in the business. Broadly, Dairy Crest is looking at investments that will improve margins and grow revenues.

"There are two planks to our strategy - one is about making us more efficient... but just as important is making sure we do the right thing by the brands, making sure we advertise them, making sure we promote them and making sure we innovate.

"Most importantly [the St Hubert disposal] gives up the opportunity to invest back into the business, either in the form of acquisitions or, alternatively, value enhancing projects internally."

Dairy Crest has been on the look out for suitable acquisition targets since it completed the St Hubert disposal last summer. And, while a deal is yet to materialise, Allan reveals the company remains vigilant for any potential M&A opportunity - provided the target meets certain conditions.

"We will continue to look at acquisitions. But we won't overpay. We won't be spending above the value of the company or products that we would be interested in. And we will only buy something that is rational to our business and fits with the sort of things we do today," he insists.

While Dairy Crest is in acquisitive mode, the company is not reliant on M&A to drive sales growth. "Investing in our own businesses is just as important," Allen insists.

In its full-year results, released yesterday (23 May), Dairy Crest revealed the St Hubert disposal hit sales, which dropped 9% year-on-year to GBP1.38bn (US$2.09bn). Sales of Dairy Crest's four largest brands - Cathedral City, Clover, Country Life and Frijj - remained flat in the year. However, the company emphasised the brands increased market share in the face of falling UK consumption.

According to Allen, Dairy Crest has been able to grow market share for its brands partially thanks to strong innovation. Allen hopes to accelerate that in the coming year and the group has a number of product launches in the pipeline for its spreads, cheese and liquid milk businesses.

"We've got new product launches in pretty much all our categories in the next few months. They might be products or they might be packaging, but we will be very active on the innovation front. It is a key part of the way we do business," Allen says.

In liquid milk, Dairy Crest is working to develop Frijj flavoured milk and, while the brand's fourth-quarter performance was, Allen says, "a little bit disappointing", he is upbeat on the prospects for the business.

"Our competitors really upped their game promotions and there were quite a few new launches around [in the fourth quarter]. I think that's a short-term blip, I have very strong growth aspirations for Frijj in the next few years," Allen says.

"Flavoured milks are a really strongly growing category and Frijj, our brand there, is the leader in flavoured milks. It is the number one brand and it is very important to us. Almost certainly we will have new flavours coming onto the market later on this year. And we will carry on developing out UHT product, which gets us into the convenience side of the flavoured milk market."

Innovation has also boosted the performance of the group's cheese brands, such as market leader Cathedral City which, Allen says, has been growing "ahead of the market" for "many years".

He adds: "Cathedral City Chedds, which is our kids cheese, is up something like 71% this year, up to GBP8m. That didn't exist two years ago. And for Selections, which is the bag of individual portions of cheese that we launched this year, sales are already over GBP2m. It is the way that we look at the brand - spreading the appeal. Just a few years ago we didn't have Cathedral City Lighter, sales are about GBP40m now. We didn't have a kids cheese, we didn't have mild, and we didn't have the top end Vintage, all of which are now contributing to the success of the brand."

In addition, Allen hints the industry can expect "some new product launches in spreads later this year".

The categories in which Dairy Crest operates are highly competitive and promotional. Approximately 80% of UK cheddar sales are made on promotion. However, Allen refutes the suggestion the need to invest in promotions could hinder profitability at its cheese business, where profits fell by 6% in the year.

Allen suggests the "short board" reason for the drop in cheese profitability was a function of higher milk prices. However, he says: "Bear in mind last year was a very strong year for cheese. If you look at cheese over three years it did GBP28m three years ago, then it went to GBP35m, and now its dropped back to GBP33m. I think this year's performance is a really good performance. I think last year was an absolutely fantastic performance and we are slightly a victim of that."

He adds: "Promotions are a part of the way we do business. And particularly in the current climate where consumers are under a lot of pressure, promotions have become more relevant."

Allen, meanwhile, points out promotions in flavoured milk are drawing new consumers to the category and promotions in cheese are winning the company market share, "Promoting in cheese and flavoured milk is good news to our shareholders," he insists.

However, Allen concedes Dairy Crest would benefit from a lower level of promotional activity in the spreads category. "I would like to have less promotions in spreads, because spreads and butter is a category that isn't growing - it is flat or maybe slightly declining - so I would like to get fewer promotions there."

The Dairy Crest chief executive acknowledges consumers and customers are highly price sensitive in the current weak economic climate. However, he suggests Dairy Crest's strategy has enabled it to communicate the value of its branded products and, where necessary, pass price increases down the chain. "We pretty successfully get our price increases through. I don't see it as a big issue getting price increases providing we continue doing the basket of things we have talked about: carry on innovating, promoting and advertising."

And he remains upbeat on the group's chances of growing market share. "In all our categories it is challenging. What we have to do is concentrate on the things we do well. And we have shown that we do a pretty good job with innovation, a pretty good job in marketing the brands. I won't say it doesn't matter what our competitors do, but as long as we get our basics right then I see all our brands doing pretty well in the market place."

Allen therefore looks to the future with some confidence. "I don't give profit forecasts but, if you look at the facts, we have reorganised our balance sheet, which gives us an interest benefit that will move the profits up by around GBP7m. The benefits of some of the other things I have talked about will push it on a little bit further. I would expect profits next year to be up on this year."

To find out more about how Dairy Crest is investing to lower its cost base and grow margins in the long-term, click here to access part one of the just-food interview.