Wiseman Dairies wins Sainsbury supply contract

Robert Wiseman Dairies has won a long-term £66 million a year milk supply contract to UK supermarket giant Sainsbury, three months after losing a large contract with Asda. The deal almost makes up for the loss of the £70m Asda deal, a move that caused shares in the Scottish dairy to drop by almost 20 per cent. Dairy Crest, which was also ditched by Asda, will become Sainsbury's other partner from January.

Sainsbury said that it was keeping on the two dairies in order to maintain relationships with a larger number of farms than its rival Asda, as both Dairy Crest and Wiseman are supplied by First Milk, one of the country's largest milk co-operatives with 4,000 farms.

The announcement represents a dramatic change of fortunes for these two suppliers. Earlier this year, Asda decided to appoint Arla as its sole UK milk supplier and drop its other suppliers, which included Wiseman and Dairy Crest.

The loss of its Asda contract was predicted to have cost Wiseman some £70 million in revenues. Wiseman supplied almost half of Asda's milk, which accounted for 15 per cent of Wiseman's annual milk volumes. Its shares slumped by 17 per cent as a result.

Dairy Crest's shares also fell by 4.65 per cent following the announcement, the company having provided 10 per cent of Asda's milk.

Sainsbury's decision therefore alters the balance of power in this tight sector. But while the Sainsbury announcement is music to the ears of both Robert Wiseman and Dairy Crest, it is a blow to Arla UK. The Arla subsidiary stands to lose business with Sainsbury worth approximately £74 million at retail values.

However, the business is set to maintain butter, cream and cheese contracts worth more than £80 million.

Arla UK had been confident of consolidating its position as the country's leading dairy company following its recent selection as Asda's sole milk supplier, which has resulted in Arla selling an additional 200 litres to the retailer. Nonetheless, Arla's milk pool remains one of the largest in Britain, and its recent merger with Express Dairies created the country's largest dairy company, processing around 2.4 billion litres of milk a year.

The UK milk sector is certainly an incredibly tough environment in which to operate for small-scale suppliers, and as a result the industry is dominated by a few big players. Dairy Farmers of Britain's recent £75 million acquisition of Associated Co-operative Creameries for example suggests that further consolidation within the UK's milk industry is going on.

Dairy Farmers of Britain (DFB) acquired Associated Co-operative Creameries (ACC) from the Co-operative Group for £75 million. At 1.3 billion litres, DFB will be the UK's third largest milk processor. The group claims that the enlargement represents a better deal for customers and retailers, promising to deliver security of supply and a more competitive, flexible and cost efficient service.

According to DFB, vertical integration is critical to enabling its farmer members to achieve a sustainable milk price and a profitable platform from which to gain access to new markets for their milk and dairy products.