Dairy Crest secures Morrisons contract, but at what price?

30-Sep-2010 - Last updated on 01-Oct-2010 at 16:03 GMT

While Dairy Crest says that full-year profits should be in line with expectations, City analysts have been engaged in feverish speculation over the price it has paid to retain its milk contract with Morrisons.

Their comments came after Dairy Crest confirmed that it had retained its business with Sainsbury's and secured an extension to its 210m-litre annual milk supply contract with Morrisons until 2015.

Panmure Gordon analyst Damian McNeela told FoodManufacture.co.uk: “Although there is no indication of the pricing of the new contract we would expect margins to be down given the recent industry action.

“Although Dairy Crest has secured milk with its major retailers we expect that they are also likely to be at lower margins, leading us to remain cautious on the prospects of the £75m current investment programme to deliver an adequate return."

The price of contract retention

Shore Capital analyst Clive Black added: “We were concerned that Dairy Crest may be subject to a challenge from Wiseman, which must have been the case for this contract [with Morrisons] and so it is reassuring from a Dairy Crest perspective to see the secured volume.

“However, we must also assume that a price has been paid for this business, noting as we do that Dairy Crest signalled post the Wiseman profit warning that it saw no need for 2010/11 forecasts to change for its company.”

Given that Dairy Crest had not downgraded profit forecasts, it was possible that returns from the doorstep business were higher than some analysts had factored, that it had achieved greater efficiency savings, or that returns from its foods division were subsidising the dairies, he speculated.

Meanwhile, the fact that Asda was maintaining its sole supplier relationship with Arla was disappointing for both Dairy Crest and rival Robert Wiseman, he said.

Dairy Crest: Trading in line with expectations

Dairy Crest, which said trading in the six months to September 30 had been in line with expectations and ahead of the same period last year, said growth had been underpinned by increased profits in its cheese business.

However, milk volumes to the middle ground market were lower than last year.

Sales of its five key brands (Cathedral City, Clover, Country Life, St Hubert Omega 3 and Frijj) were ahead of the previous year, while it was “particularly pleased” by the growth of its reduced fat, extra mature and mild brand variants.

Bosses were also becoming increasingly confident that the new online ordering service milk&more could address the long-term sales decline in its doorstep delivery business.

Chief executive Mark Allen said: "We are confident that we can deliver profits this year in line with our expectations."

Müller takes 3.04% stake in Dairy Crest

Meanwhile, Theo Müller’s move to increase his stake in Dairy Crest earlier this week was interesting, added Panmure Gordon’s Damian McNeela, but should be viewed with caution.

“Whilst some of Dairy Crest’s brands could be attractive to the German dairy company we fail to see the attraction of its liquid milk business.”