Australian group Lion has booked an impairment charge of A$338.8m on its dairy business, which it warned faced "considerable headwinds".

The company, part of Japanese food and drinks business Kirin Holdings, said higher milk costs, the loss of a major retail contract and competition, meant it has taken the charge on the unit.

"Despite substantial efficiency gains to date, Lion's dairy and drinks business faces considerable headwinds in fiscal year 2014. Based on the impact of the increased milk price, now well above historical levels, the loss of the Coles retailer own-brand contract from June 2014 - representing a sixth of annual milk volumes currently procured by Lion - and a sustained competitive and deflationary retail environment, Lion will record an impairment charge of A$338.8m (US$304.3m) against goodwill, milk plants, equipment and brands," the group said today (13 February).

In a trading update for the year to the end of September, Lion said the division, which sells brands including Pura milk and holds the local licence to Yoplait, had seen volumes fall 4.3% and "significant pressure" on margins "particularly in price-driven categories such as everyday cheese and juice".

The company said milk prices had risen 27% since the start of the last quarter of the financial year under review.

It said: "Lion's ability to pass costs through remained highly constrained. In response, Lion accelerated its long-term efficiency and effectiveness programme, aligning its business structure behind refreshed category and channel strategies and significantly reducing overheads and complexity.

"Lion also remained focused on growth in higher-value categories, such as dairy beverages and specialty cheese, and invested in targeted innovations to grow the profit pool available to all in the supply chain."

Lion, meanwhile, has retained its 9.99% stake in Australian dairy processor Warrnambool Cheese and Butter Factory, which has announced a takeover bid for it has closed.

Canadian dairy giant Saputo has secured just under 88% of WCB, which will remain listed on the Australian stock exchange.

Lion's stake was purchased when the battle to buy WCB intensified. The move was seen as a way of protecting its business interests. WCB produces cheese sold under brands owned by Lion.

Lion CEO Stuart Irvine, speaking as the company issued its trading update, said today: "Our recent investment in Warrnambool Cheese & Butter further strengthens the close relationship we have enjoyed with WCB in our domestic cheese business over many years."