Tough conditions in the milk commodities sector, combined with continued pressure on liquid milk sales, took their toll on first half profits at the UK's biggest dairy producer Dairy Crest, but the company remains confident of an improvement in the second half of the year.
Interim profits were down 6.5 per cent to £31.6 million (€49.7m), while turnover was down from £691.6 million to £637.7 million. The downturn was caused mainly by overstocking in the UK cheese sector which pushed prices down to an 10-year low point, as well as the continued decline in doorstep milk deliveries and the company's withdrawal from less profitable retail milk operations last year.
But while the milk sector remains tough, the second half has already seen a recovery in the cheese market and Dairy Crest is confident of substantial profit improvements during the last six months of the year. Much of this improvement will come from the added value business, where Dairy Crest has recently strengthened its position with the acquisition of the St Ivel spreads business from Uniq. The company already owns the Clover, Cathedral City, Frijj and Petits Filous brands, among others, and will now add Utterly Butterly and St Ivel Gold that that portfolio.
Drummond Hall, chief executive of Dairy Crest, said: "As the UK's leading chilled dairy foods company, our main strategic focus remains our branded and added value business and our programme of brand development continues to deliver strong results. Our spreads business has again performed strongly. Clover continues to grow, with sales volumes increasing by 13 per cent over the first half of last year, compared with the spreads and butter market at 5 per cent. In addition, both Country Life butter and Country Life Spreadable have also shown significant volume growth.
The launch of Argento [an olive oil-based spread] in June 2002 gave Dairy Crest a presence in the growing olive oil based spreads sector. The brand is currently being supported by launch advertising and its initial performance is encouraging."
But if Dairy Crest's position as the UK's leading manufacturer of branded and added value cheddar exposed it to the fluctuations in the UK commodity market, there was an altogether more encouraging performance from its flagship brand, Cathedral City, which lifted volumes by 12 per cent over the sameperiod last year in a flat market.
Hall said that the performance of the Yoplait brands - which Dairy Crest produces and markets in the UK through a joint venture with French company Sodiaal - was flat in the first six months, reflecting industrial action at Yoplait's plants in France. Nevertheless, the Petits Filous brand grew by 14 per cent and, with full supply now restored, the Yoplait brands are showing good growth. However, market conditions in the retailer brand yoghurt sector continue to be demanding.
Trading conditions in the retail liquid milk market were challenging, Hall said, but investment in new dairies would give the company a competitive advantage in a market which is likely to consolidate further.
"Our organic fresh milk business has been impacted by pressures in the retailer own brand sector, which we are addressing by increasing sales of the Rachel's brand (under licence from Horizon Organic Dairy) and bringing supply into balance with anticipated demand over the next 12 months. Frijj continues to benefit from our marketing focus and had yet another good half year, with sales volumes increasing by 16 per cent. Overall, profits in our liquid products business for the first half were slightly below last year."
While the overall doorstep delivery market continued to decline at the rate of around 12 per cent a year, the Dairy Crest doorstep operations performed well and made a strong contribution to the group's profit, helped by the integration of the Unigate doorstep business.