Dairy Crest contract losses to hit profits
recent gains will not be enough to stop profits slipping, and rival
Wiseman warns rising costs will be hard to recover.
Dairy Crest announced in a trading update that "profits for the six months ending 30 September 2005 will be significantly lower than in the first half of last year".
The firm has suffered after losing a milk supply contract with Tesco for 170m litres in August last year. The group had earlier lost a 40m-litre contract with Asda and, despite picking up contracts with Sainsbury's and Morrison's this year totalling 100m litres, it has struggled to recover.
The gloomy news from Dairy Crest accompanied an earlier statement from rival firm Robert Wiseman Dairies that expressed concern over rising derv, plastic and energy costs, mainly linked to soaring oil prices.
"Competition in all sectors of the market is intense and makes recovery of these increased costs uncertain," Wiseman said, adding that these costs had also offset the higher milk selling prices the group had negotiated in March this year.
Wiseman predicted its pre-tax profits would drop £0.5m this year.
The news from both companies highlights the significant pressure Britain's top dairy processors face to secure profit margins.
Arla UK, subsidiary of Arla Foods and the other of Britain's top three dairy processors, said in August that rising costs in raw materials and energy, together with aggressive retailer price cuts, would damage profits in 2005.
The firm faces trouble despite doing the best in the past year's milk contract re-shuffle, gaining 120m litres overall and becoming sole milk supplier to Asda.
A report this month by Britain's Milk Development Council revealed that retailer profits for liquid milk have risen by a quarter in 10 years, growing more rapidly since 2003. Processor margins, in comparison, have fallen.
The MDC said dairy products were the second biggest sellers for UK supermarkets, generating sales worth £7.8bn. This shows that dairy has become a big profit earner for retailers.
The pressure has made industry consolidation a hot topic. Dairy Crest snapped up Midlands Co-op Dairies and Starcross Foods in May this year, something expected to produce savings after initial 'swallowing costs'.
There is also some good news for products. The MDC highlights in particular that UK sales for higher value branded milk grew 23 per cent between 2003 and 2004, while branded cheese went up 11 per cent.
Britain's top three processors are benefitting from tapping into this trend, though the MDC warned that the UK's added value sector was still behind that of other European dairy industries.
