The last few years have been ones of crisis and turmoil for the dairy industry. So the fact that Dairy Crest, the company behind Cathedral City Cheese, Frijj milkshakes and Clover, has renegotiated a key milk contract should be welcomed by the 1,300 dairy farmers that supply Dairy Crest.
Dairy Crest has renegotiated a contract to provide 210 million litres of milk a year to Sainsbury’s until 2017. The company has held the Sainsbury’s contract since 2004, and it’s a key deal as the supermarket accounts for around a third of its liquid milk production.
Dairy Crest, a FTSE 250 company and the UK’s leading dairy foods company, also has deals with Morrisons, Waitrose and Marks & Spencer.
Farmers have been pushed to the brink by cuts to the price of milk, and the number of dairy farmers in England and Wales has nearly halved in the last decade. Dairy farmers are fighting for new business and, facing tough competition, Dairy Crest had to drop its prices to secure the new contract with Sainsbury’s.
But the company has promised that the price drop won’t hit dairy farmers. Dairy Crest already has a somewhat sour relationship with its suppliers. It was one of the firms targeted by farmers in blockades last summer until it increased the amount it paid for milk by around 3p a litre.
Instead, Dairy Crest plans to fund drop in price by cutting costs and simplifying its business. Dairy Crest is moving to integrate its supply chain - a move cutting £5m of costs. It said that this would eliminate management duplication, improve the service for customers and help the group to meet its targets on profit delivery.
The restructuring, alongside the Sainsbury’s deal, should help Dairy Crest’s milk business look healthier.
Pre-tax profits fell by 16% to £19.1m in the half year to September. The Sainsbury’s contract means it is on course to meet its target of a 3% return on sales, the firm says (currently it is running at margins of about 1%).