Blog: The "sheer folly" of the UK liquid milk sector
Dean Best | 20 April 2012
Dairy Crest's announcement this week that it is to close two dairies is yet another sign of the difficulty of trading in the UK liquid market.
Increased competition, volatile commodity costs and demands from retail customers have all put pressure on profits in the sector in recent months. Milk is often used as a loss-leader by supermarkets to bring in customers and, with retailers competing fiercely for ever-more cautious and promiscuous consumers, processors often face demands on price that put pressure on profits.
The rising cost of fuel and plastics, plus lower bulk cream prices, have put further pressure on Dairy Crest's dairies business, which has become a cause for concern. In March, the UK company said it was looking at a range of options to get the business back to a "satisfactory level of profitability".
Among those options, it now emerges, was the closure of a dairy in Aintree and one in Fenstanton, with the potential loss of 400 jobs.
Analysts welcomed the move to improve the performance of Dairy Crest's dairies division. However, with the closures to lead to Dairy Crest incurring GBP15m in costs, some industry watchers remain unsure about how the closures will benefit the company.
"We note our concern on the short-term cost for what may yet prove to be a somewhat intangible gain over the medium term; remember Arla Foods has yet to open its capacity-busting dairy in Buckinghamshire," analysts at Shore Capital wrote.
Alongside the announcement of the planned closures, Dairy Crest also announced it had lost a milk contract with Tesco. Robert Wiseman Dairies and Arla will be the retail giant's suppliers, although Dairy Crest tried to play down the loss by saying it only accounted for 3% of volumes.
However, Shore Capital argued the contract loss highlighted how tough trading in the UK liquid milk sector had become - and how short-sighted some in the industry had been to chase market share.
"It underscores the sheer folly, that we forcibly expressed at the time, of an industry that showed cataclysmic indiscipline over the past two years in a dash to gain and maintain share," they wrote. "A dash that delivered a collapsed liquid milk margin for all concerned."
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