The UK’s dairy sector has undergone considerable consolidation over the past year or so in an attempt to come to terms with some pretty big challenges – not least those involving supply security and increased competition as EU milk quotas come to an end.
Over the past year some big players have rationalised their operations to remain competitive, while others have proved to be acquisitive, expanding operations to boost their supply base, throughput and product portfolio.
The big are getting bigger. Müller Dairy, for example, has set its sights beyond being the UK’s largest yogurt manufacturer by building a new butter plant and through its acquisitions of Robert Wiseman Dairies, a Cadbury chilled desserts facility and, most recently, own-label yogurt supplier Nom Dairy UK.
Arla Foods and Milk Link merged to become the UK’s largest dairy manufacturer last year, while Dairy Crest is moving into the buoyant global infant formula market with demineralised whey. Elsewhere, First Milk has moved into whey proteins and sports nutrition through its acquisition of CNP Professional.
“There is clearly a good level of investment and new products,” says Simon Bates, communications director at Dairy UK. "These all reflect underlying confidence in the prospects of the marketplace."
Challenges ahead (Return to top)
The prospects of the marketplace may be good but also offer challenges, with dairy producers and manufacturers facing diminished supply after the unfavourable weather conditions of 2012 into 2013 and the continued challenge of price-focused retailing.
“Short-term challenges are focused on the sustainability of milk production in the UK, which was severely tested last year with prices that were under pressure and a horrendous season in terms of weather,” says Lee Truelove, head of communications at First Milk. “In 2013, milk volumes in the spring in particular were held back and many farm businesses are still suffering from the hangover of 2012 conditions.”
In the Northern Irish milk sector, shortages have created ‘milk wars’ as manufacturers such as Linwoods and Strathroy struggle to secure supply and have expanded their search into the Republic of Ireland.
Meanwhile, austerity continues in retail. “Supermarkets and discounters are fighting to retain their share of cash-strapped purses, many using milk to demonstrate their value credentials,” says Ronald Kers, chief executive of Müller UK & Ireland Group.
And many consumers are not only buying cheaper but also less often. “People are wasting less,” says Arthur Reeves, corporate affairs director at Dairy Crest, which reported a difficult six months for butter and spreads in its latest trading statement. “A couple of years ago, consumers probably had more than one spread in their fridge.”
Dairy Crest hopes to improve its efficiency in the category with a new £50M spreads and butter factory in Liverpool set to open mid-2014.
If any positives can be taken out of increasing volatility in the dairy sector, the market has become more adept at dealing with it, says Robert Kennedy, marketing manager at the Irish Dairy Board-owned Meadow Cheese.
“Volatility is something that has become commonplace,” he says. “We’ve been hit by high prices but it hasn't been quite the shock it was in 2007 when customers were reneging on prices.”
In addition to the negative impact of weather conditions on milk supply, issues threatening the dairy sector range from production in unsustainable locations to the long-term steady growth of the market ahead of supply and knee-jerk reactions by governments, he comments.
“There is no buffer in price,” says Kennedy. “When there is something, it impacts straightaway.”
The end of national quotas in 2015 is unlikely to alleviate an unpredictable EU dairy market. “The EU market is likely to witness greater volatility when milk quotas are removed,” says Truelove. “The supply and demand balance could easily shift and then take a few years to settle.”
“We can produce more milk and seek new markets but our neighbours will be looking to do the same,” says Bates of the UK sector.
The end of the quota is “a bigger deal for Ireland, which only consumes 20% of what it produces,” says Kennedy. “There are lots of opportunities out there and lots of growing markets. China is developing a taste for dairy products. In the BRIC [Brazil, Russia, India and China] countries, there are huge opportunities.”
long-term trends (Return to top)
“Long-term prospects for dairy are encouraging,” says Truelove. “You need to look at the market globally and see the source of the demand.”
Scottish Development International is assisting First Milk with expansion into global markets, and the manufacturer has opened a new office in Hong Kong, exhibited at trade exhibitions in Hong Kong and Shanghai and hosted a visit by Indian food buyers in September.
The business has also secured a contract with Emirates Airlines, which is serving Lake District Dairy Co cheddar portions on its flights.
Ireland is expected to significantly ramp up its dairy production in the new open market, with Rabobank forecasts suggesting Ireland, Germany, France and Poland could collectively increase milk production by as much as 10bn litres over 2015 to 2020.
Earlier this year, Glanbia Ireland announced it was to build the Republic of Ireland’s largest dairy. And while exports represent an opportunity for the UK dairy industry, imports represent a growing concern.
“There is an underlying issue facing UK dairy, which I think is being badly overlooked,” says Kers. “That’s the extent to which we are giving a large part of our home market away for cheese, butter and even yogurt to overseas processors.”
Valuing annual UK dairy imports at £2.245bn, Kers says the UK dairy sector needs to focus on its competitiveness and ability to innovate and invest with the loss of quotas only set to increase competition. “Those who are inefficient, uncompetitive on an EU/global basis, who fail to develop brands, fail to have below average costs of production, will struggle,” he says.
Outlining Müller’s business in Europe where it produces products across the dairy category, Kers says: “In the UK by comparison, we have until recently been a little underweight, a little dormant for some time.” The business plans to use its capacity acquired through the Robert Wiseman Dairies acquisition to “maximise the value of every drop of milk” and supply the UK market with a full range of dairy produce. To this end, Müller is building Britain’s biggest butter plant: a £17M facility in Shropshire expected to commence production imminently.
Many manufacturers are aiming to shelter their businesses from the vagaries of commodity markets with a greater focus on value-added dairy produce.
Meadow Cheese is using knowledge gained from a sister cheese processor acquired in the US to shift emphasis from “commodity-based selling to more consultative selling, building relationships and bespoke solutions”, says Kennedy. “It’s route to volume versus route to value. With the quota lifted, we will be looking much more at that long term.”
Meadow Cheese's acquisition of The Cheese Warehouse in Shropshire will allow the business to send some capacity over from Ireland, and focus further on growth in value-added produce.
First Milk has recently launched a naturally fat-free, spoonable soft cheese The Lake District Dairy Co Quark and a fresh fruit, milk drink Frumoo, which also tap into the market for healthier options.
“The whole nutritional area offers challenges and opportunities,” says Bates, with research increasingly backing up milk’s merits as a sports drink, for example.
Cause for concern (Return to top)
One issue of concern for manufacturers is the forthcoming introduction of front-of-pack nutrition labelling, which “might suggest that milk is less healthy than Coke”, says Reeves.
Branded produce plays a greater role in the UK than other European dairy markets, and a number of manufacturers have also been investing in major marketing campaigns over the past year.
First Milk’s first national TV campaign for Lake District Dairy Co aired in September. The manufacturer aims to diversify and broaden the appeal of the brand, which is currently one of the fastest growing in the UK dairy sector. A key selling point is First Milk's status as the only major dairy company 100% owned by British farmers, says Truelove.
“There’s a lot more branded products within the UK market,” says Kennedy, with recent launches by Meadow Cheese including Mu, a family-orientated, branded product exclusive to Tesco which currently includes cheese and milk drinks and is to be rolled out further.
For Dairy Crest, its Cathedral City cheese brand has been outperforming the market on the back of strong promotional activity and innovation.
“There are undoubtedly opportunities,” says Bates. “It is now up to the sector to work together to maximise opportunities out there.”