Arla UK has survived a tense year of negotiations with Britain's major retailers, as new supply contracts and branded fresh milk promise a brighter future, reports Chris Mercer.
The dairy firm's UK sales crept up 1.3 per cent to £686m (€1bln) for the six months ending 31 March.
The rise came thanks to strong performances from its established Lurpak and Anchor butter and spread brands - now enjoying a 90 per cent share of the 'spreadable' sub-sector.
The company was also helped by falling raw milk prices, but underlying profits still slipped from £23m to £22m as a result of rising energy costs and a commitment to maintain its milk price paid to farmers during the six month period.
Even so, the firm said it had ridden out a stormy year in supermarket contract negotiations. "With all the major supermarket groups now having made their supply decisions we anticipate a period of stability in the sector," said chairman Sir David Naish.
Arla's sole-supply agreement with Britain's second biggest supermarket, Asda-Walmart, came into effect last November, offsetting reductions in business with Tesco and Sainsbury's. Arla's sales volume to the major multiples was eight per cent higher.
Meanwhile, the firm recently improved a supply deal with number four retailer Morrison's after the retailer dropped all contracts with Arla rival Robert Wiseman Dairies.
The new Morrison's deal will come on-stream in October this year with Arla's purpose-built £16m dairy in Lockerbie helping it to supply all Morrison's and Safeway subsisdiary stores in Scotland.
Alongside Arla's supply contract success, the firm also announced that market demand had exceeded production capacity for its Cravendale fresh milk brand, holding back growth by roughly seven per cent.
The firm said it planned to extend Cravendale's product range later this year, including flavoured and 'one shot' lines.
The brand is set to benefit from Arla's new factory in Stourton and a new £12m plant in Ashby-de-la-Zouch, which should be ready this summer and mid-2006 respectively.
Cravendale contains only one per cent fat and is viewed as one of the strongest fresh milk brands on the UK market - something that should help to ease retailer pressure on Arla's margins.
The firm, like many suppliers, has felt its margins squeezed by retailer price wars over the last six months. But, retiring chief executive Neil Davidson said the company had coped well.
"We expect to be realising the full projected merger synergies of £20m per year by the end of the current financial year, twelve months ahead of our original schedule," he said.