Arla UK sees red as costs soar

By Chris Mercer

- Last updated on GMT

Related tags Arla Arla uk Milk

Soaring input costs have claimed Arla Foods UK as their latest
victim in Britain's dairy industry, sending the group into the red
for its first half.

Arla UK, one of Britain's top three dairy processors, said it made a loss of £0.9m in the six months up to 31 March, compared to profits of £25m last year.

The results, which were largely as expected by analysts, follows a 41 per cent drop in full-year profits for Arla rival Dairy Crest; indicating Britain's top dairy firms must work harder to offset cost pressure by growing brands and streamlining production.

Arla UK's Scandinavian parent firm, Arla Foods, said its British arm was underperforming. "We are proactively working with and encouraging Arla UK's management to develop and implement plans to deliver long-term improved performance,"​ it said.

The Arla UK team said cost increases for packaging, fuel and energy, driven by rising oil prices, "more than offset"​ money saved through the firm's efficiency plan.

Utility costs alone were more than £2m higher last winter than in 2004/05, it said.

Pressure from retailers at the other end, meanwhile, completed the margin squeeze.

Arla joined Dairy Crest in criticising supermarkets for cutting retail milk prices in March, eroding gains from a deal with retailers to raise prices in January.

Supermarkets slashed average milk prices by 14 per cent in early March, bringing renewed uncertainty to the fresh milk sector and raising concerns about the attitude of supermarkets, Arla said.

The cut also made private label milk cheap enough to halt the growth of Arla's Cravendale fresh milk brand, the group said, adding that the extra £3m it pumped into marketing Cravendale was rendered worthless.

There was good news for Arla in the continued growth of several other brands, however.

Sales of Lurpak and Anchor spreads rose six per cent. Newly launched Lurpak Spreadable Unsalted also successfully tapped the growing market for light spreads in Britain, without cannibalising other Lurpak products, the firm said.

The good performance on brands helped Arla lift sales to £683m, from £664m in its first half last year.

Added value and branded products are one the main ways dairy firms hope to secure future profitability, and insulate against the commodity price cuts in the EU's Common Agricultural Policy reform.

Arla said sales revenue from commodities dropped by a tenth during the first-half period, underlining the need to reduce reliance on these lower-end products.

Arla also re-iterated that it would combat ongoing margin pressure with more rationalisation and investment in its dairy supply network.

The firm completed its integration of Express Dairies in January by closing its Newcastle dairy. The Sheffield Park dairy will be next to go this summer.

New state-of-the-art facilities in Stourton, Lockerbie and Manchester should be able to churn out higher value products more efficiently.

Arla said its Stourton plant had achieved record low cost levels, though did not reveal figures. "Our intention is to replicate these cost levels wherever possible within our manufacturing base,"​ it said.

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