Analyst: Asda's discounting has decimated milk margins
Speaking after Robert Wiseman Dairies shocked the City with a profit warning, Shore Capital analyst Clive Black said the competition in the liquid milk sector “now seems to border on the irrational”.
He added: “It may be too simplistic to blame the retailers for the compression of value in the trade, but the recent decision by Asda to discount liquid milk has been a key factor in the sub-sector’s current woes [Asda recently slashed the retail price of four pints from 153p to 125p, prompting rivals to follow suit].”
Asda’s decision to choose a highly capital intensive sector such as milk to improve its value credentials was also odd as there was little evidence that its heavy discounting had stimulated footfall, while Tesco’s decision to follow suit meant that any advantage gained by Asda was in any case short-lived, he argued.
Supply and demand
It had been assumed that the improved balance between industry capacity and demand would “make for a more robust response by the supply trade to retailer discounting”, he said. “However, this does not, seemingly, appear to be the case.”
However, one industry source said the fact that some of the assets previously owned by the now-defunct Dairy Farmers of Britain were now coming back into operation had recently changed this dynamic and put additional pressure on larger players such as Wiseman.
All eyes were now on Dairy Crest, said Clive Black, “but as a precaution, we have taken the step of downgrading our forecasts today."
"For now though, even with the mark downs, we also deflect from the category and reflect with some frustration the unwinding of several years’ hard work by those in the trade."
Dairy Crest: Don't panic
Dairy Crest in turn was forced to release a stock exchange announcement reassuring investors that its profits were predicted to be in line with expectations.
"The liquid milk market is currently very competitive. However, our broad customer and product base and clear improvements in our cost base, quality and service make us confident that we can deliver profits this year in line with our expectations and provide a sound base going forward."
