The UK cheese sector is one of the most promotion-driven categories in the country, not least with consumer confidence low and retail volumes under pressure. This week, just-food travelled to the Nantwich Show, a key event in the industry’s calendar, and met Richard Hollingdale, commercial director of the UK’s largest dairy co-operative, First Milk. In this month’s just-food interview, Hollingdale discusses the tough trading conditions at home and the company’s ambitions overseas.
With a seat on the British Cheese Board, it could be fair to say that First Milk’s Richard Hollingdale has some keen insight into the UK cheese industry.
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This week, just-food found him at the stand for First Milk’s flagship brand The Lake District Cheese Co. at the annual Nantwich Show, which gathers the great and the good – 44,000 in fact – of the industry under one roof for sampling, judging and talk of all things cheese.
The show took place a week after First Milk, the largest dairy farmer-owned business in the UK, reported a jump in annual profits.
Last Monday (18 July), First Milk posted a net profit of GBP6.8m (US$10.9m) for the year to 31 March, up from GBP327,000 a year earlier.
First Milk’s bottom line was helped by moves to lower its costs but turnover was also up 7% at GBP573.2m, which the firm attributed to “growth” in the company’s brands – and the associated benefit to margins.
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By GlobalDataIn the sweltering heat of the Nantwich show’s tent, Hollingdale, First Milk’s commercial director, explained to just-food that the co-op’s success in driving branded sales had come from “getting right the balance between value and quality”.
“Branded is the largest growing part of our business and the reason that it works is because people know what they’re going to get,” Hollingdale says. “If they like it they’ll come back because they can associate value as a balance between price and quality. For us, it’s about getting the right balance between value and quality on the brand and, at the moment, if the consumer is saying they are more about price then we have to work with the consumer. We can’t just say we’re going to sell [our cheese] for GBP10 a pack if they’re not going to buy it. I have to go with what the consumer is telling me they are willing to pay.”
Of course, as a co-operative, First Milk not only faces the demands of UK consumers but also its members, the farmers that supply the business with milk. Notably, its increase in annual profits was also achieved at the same time as the company upped the price it pays its members for milk.
“We’ve increased the milk price slowly … a couple of small steps on a regular basis,” Hollingdale told just-food. “We’ve made more profit and we’ve invested more money internally in terms of new equipment and acquisitions. So we’re in a good circle at the moment in terms of investment.”
The healthy financial results and the success in upping prices to farmers have come in what are, for many food manufacturers in the UK, some of the most difficult trading conditions in years. Battling the twin pressures of cost and weak consumer confidence is an issue for all in the industry.
“Costs are going up,” Hollingdale says, taking a swig of water. “We have to pay more for milk. Farm costs are going up, our costs are going up so we’ve just got to be more efficient in what we do. Be less complex. And margins are being squeezed for both the farm, the food manufacturer and the retailer. But there is inflation going into the food market ahead of volume growth and this year will be a tough year. I don’t think anyone thought it would be as tough as it is.”
According to a study published this month by SymphonyIRI, in the first quarter of 2011, manufacturers used promotions more to protect sales and profits amid what it called a “consumer recession”. In the UK, SymphonyIRI claimed, over 50% of FMCG products were sold on deal during the first quarter.
Hollingdale argues that the UK cheese category is one in which promotions will always be used by retailers to drive sales.
“Value has become a bigger part of all food categories in the last two years and the percentage of every category that is sold on promotion is going up,” he says. “A lot of categories will be up to 80% [sold on promotion] and those will be the big volume-driving categories, so products like cheese, which is in 99% of fridges. It’s a big volume puller for a retailer, so they will always promote. And Cheddar is 50% of the total cheese category, so, by default, Cheddar is going to be promoted because it’s an everyday product.”
He adds: “Given that that consumer is looking for value and the retailer wants to deliver value, cheese is one of the core categories that they will promote. Probably more than they should but that’s their call. It’s going to be very difficult for most categories to come away from such high levels of activity. The only thing that will stop that is when products become in short supply.”
Trading in the UK is difficult but some in the industry would argue it was ever thus. UK dairy companies are starting to look outside their domestic market more. Last month, Neil Kennedy, the chief executive of First Milk rival Milk Link, told just-food that his company wanted to become a more international business.
And Hollingdale believes that future profits for both the dairy farmer and manufacturers lies in export markets.
“Dairy commodities is a balance,” he says. “International buyers are willing to pay higher prices than buyers in the UK. More product will go out of the UK and, if you look at cheese, exports are rising at a very fast rate because the international market is willing to pay a higher price. That is a challenge to the big players in the UK. You can’t fight the market dynamics. Over time, you will go to where the market pays.”
Hollingdale says First Milk hopes to end up with around 20% of its total business in international markets. Currently, this is between 5% to 10%. In April, First Milk struck a deal with dairy exporter Eilers & Wheeler, which is shipping the co-op’s cheese to markets into Europe and further afield to the Middle East and Japan.
“We’re also acting as a broker for them, so if anyone wants milk powder, we’re buying milk off the British market, converting it to powder and then they’re selling it. They are returning a higher price than what the standard UK milk price is.”
International markets may also play a factor in First Milk’s M&A ambitions.
Last month, First Milk acquired two Scotland-based cheese makers – Kingdom Cheese and Kingdom Dairies – for an undisclosed sum. The company said the deals would allow it to expand the portfolio of products that it offers its customers. Hollingdale, however, says First Milk would not limit itself to buying businesses in the UK
“At the moment we are UK-based but we will go international if an acquisition facilitates that and it’s right,” Hollingdale explains, stressing the importance of any firm having an international presence. “You have to have an international presence, whether that’s owning a business internationally or working in an international market.”
Looking ahead, Hollingdale sees First Milk as having “a more diverse product base” and being “very focused on long-term projects that are commercially sustainable” in the future.
“We need to work with the industry in order to have a sustainable dairy industry. Whether that’s all about milk price or whether it’s about investment, with the farmers returning a dividend to the capital that they have invested,” he says.
“In five years time we want to have a more diverse product base, working in international markets, but clearly on sustainable, long-term adding value projects. And we will be bigger than what we are now. Not so that big is best, but big enough to allow us to diversify what we do.”
