DAIRY CREST’S shares tumbled 17 per cent yesterday after the dairy foods group disclosed that it had lost one of its biggest milk contracts.
The shares fell 66p to 318p after the company said that, from next year, it would no longer supply milk to Tesco. It currently supplies £60 million of milk to Britain’s biggest supermarket group every year, bringing profits of about £15 million.
A spokesman for Dairy Crest, which employs 7,000 people, refused to rule out job losses after the company said it would review its cost base. The company said it would also hold “further discussion” with all of its customers and suppliers to mitigate the impact of the contract loss.
Dairy Crest will continue to supply Tesco with other dairy products, which currently account for sales of £100 million.
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Tesco will now source all of its milk from Robert Wiseman Dairies and Arla Foods UK, the former Express Dairies group.
Rory Codd, an analyst with Numis, said that the news was disappointing for Dairy Crest, and cut his 2005 full-year pre-tax profits forecast by £2 million to £84 million. He also cut his 2006 prediction, from £90 million to £75 million, casting doubt on the group’s ability to recoup the lost revenue from its added-value cheeses to spreads business.
Robert Wiseman Dairies, the Scottish dairy group, will take over Dairy Crest’s supply contract early next year, boosting its share of Tesco’s milk business from 40 per cent to 60 per cent. The news came a day after Wiseman boosted its supply to J Sainsbury from 20 per cent to 50 per cent, at the expense of Arla Foods UK.
Billy Keane, Wiseman’s finance director, said: “Our track record with Tesco has been a long-term one, and we were always optimistic that Tesco would support us with our development.”
Wiseman’s win is also a boost to the group’s efforts to make its mark in the South of England, where the new volumes from Tesco and Sainsbury’s are largely focused.
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The large supermarket groups have, over the past few months, been in negotiations to rebalance their milk supply contracts after Asda took the unusual step of making Arla its sole supplier.
The big retailers have until recently typically split their custom three ways, between the big milk processors. However recent switches, including this week’s moves by Sainsbury’s and Tesco, have seen the retailers consolidate their supply bases.
Analysts speculated that Wiseman’s contract win has come at the expense of margins, with the group thought to have accepted a lower price from Tesco. However, Mr Keane shrugged off the suggestion, saying he was more concerned about rising cost pressures, such as fuel prices.
Although the switch to Wiseman will have no direct impact on the farm-gate price of milk, industry watchers raised concern that any squeeze on margins would put pressure on farmers. Robin Tupper, head of food and farming for the National Farmers’ Union, said that consolidation in the supply of milk was inevitable, but added: “What the various processors have had to do to secure the contract concerns me. If they have offered reduced prices, our greatest concern is that those reduced prices get passed on to farmers.
“That would be totally unacceptable. It’s not an inevitability, but history would seem to dictate that.”
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Mr Tupper said: “The biggest concern that we have is that we want to try to maintain stability in the market.”
Robert Wiseman shares closed up 12½p at 236p.