UK dairies milked in supermarket price war?

As Tesco and Asda scrap over the price of milk, Robert Wiseman is forced to issue a profit warning...

by James Taylor
Last Updated: 19 Aug 2013
How much is a pint of milk? It’s a question often used to test whether famous people have any idea what life is like in the real world. But at the moment, with Tesco and Asda seemingly embroiled in a price war, it’s hard even for proles like us to keep up. The latest is that both supermarkets appear to be selling two plastic four-pint bottles for a measly £2 - moo-sic to shoppers' ears, perhaps, but spare a thought for the farmers and dairies that are likely to see their margins squeezed as a result. Robert Wiseman Dairies issued a profit warning today – and although it didn’t mention the price war directly, it’s not hard to imagine what kind of ‘competitive pressures’ it's talking about...

RWD (best known for its cow-themed vans) said today that its profits for the full year would be £7m lower than expected in the second half of its financial year, and £16m lower next year - despite milk sales being 8.5% up on last year. This udderly-awful news unsurprisingly prompted many investors to have a cow, skimming 30% off its share price this morning alone. Dairy Crest also got creamed, forcing it to put out a hurried statement insisting that it wouldn't be hugely affected by the Tesco/ Asda shenanigans.

Robert Wiseman doesn't work with Asda (yet) but it does have a deal with Tesco - so it's not exactly a stretch to conclude (as many analysts have done) that today's profit warning is linked to Tesco's decision to match Asda's recent milk price reductions. And that's not it's only problem - it's also seen the price of its plastic bottles rise (along with the oil price), not to mention that of its raw milk supplies. Still, it insists it's strong enough to cope. Apparently it's planning to focus on cutting costs so it can rebuild margins.

On the face of it, this looks like another example of the big supermarkets using their massive purchasing power to put the squeeze on suppliers - something that we've seen before in the dairy industry. And since the industry is so fragmented - the retailers can buy from small dairy farms, co-operatives and the industrial operations like RWD - they have plenty of scope to pay hardball in their negotiations.

But perhaps wary of the backlash last time, Tesco is trying hard to avoid such accusations: according to the FT, it's also increasing the price it pays to farmers by a whopping 1.28p per litre. Squeezing out struggling British dairy farmers probably isn't the kind of PR message the supermarkets want to give out at the moment...

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