City analysts have expressed continued concerns over Dairy Crest’s dairies business, following the release of the firm’s first quarter trading results yesterday.
The group revealed that key branded sales – Cathedral City, Country Life, Clover, Frijj and St Hubert Omega 3 – were up 5% in the second quarter, compared with 3% for the first, driven mainly by price increases.
But analysts Graham Jones and Damien McNeela from Panmure Gordon said that they still had concerns over Dairy Crest’s dairies business.
“[We] see a potential threat of increased competition in spreads from Unilever, particularly in Europe,” they said.
McNeela told FoodManufacture.co.uk that Panmure Gordon had noticed Unilever providing greater competition within the UK spreads market, resulting in movements in terms of market share.
He noted that EU spreads provide Dairy Crest with around one third of group operating profits, with margins around twice what they are in the UK.
Asked whether Unilever was better able to cope with rising commodity costs within spreads – which erode margins and led Dairy Crest to pass on price rises to retailers earlier this year – McNeela said that both firms faced the same issues.
But he added that Unilever is more diversified at group level and has better negotiating power with retailers (to pass on price increases) given its size.
On May 19 Dairy Crest recently revealed plans to stop production of Clover at its Crudgington, Shropshire factory (where it will continue to make Country Life products and retain its group innovation centre), in pursuit of ongoing efficiency savings.
Strategic spreads fit
The company currently manufactures Clover (targeted at “health and taste conscious consumers”) at sites in Kirkby, Liverpool and Crudgington. But production is set to cease at the latter with the loss of 90 jobs, while around 45 new jobs will be created in Kirkby.
Dairy Crest began a consultation process with employees and trade union representatives in May, and said it expected the changes would take around 12 months to plan and implement.
The company has also acquired ‘one calorie’ spray and salad dressings maker MH Foods for £13m, as a strategic fit with its spreads business.
Chairman Anthony Fry said MH Foods was “the leading brand in its sector and fits well with our spreads business and we believe the acquisition will allow us to build on our strong portfolio of lighter brands”.
But Jones and McNeela said:“We will reserve judgement on the merits of this relatively small acquisition until we see the extent of any innovation and potential growth prospects for the business.”
Dairy Crest said in its annual report that the UK butter, spreads and margarine market was now worth £1.2bn.