Tuesday, 17 January 2012

Shaking Up the Milk Market - Why Muller Might Want to Buy Wiseman

At first blush it seems very odd that Muller Dairy, a very successful branded  yoghurt and desserts company, would shell out £279m to buy Wiseman – a one  product, one distribution channel company who are totally reliant on selling a commodity to fickle, hard negotiating supermarkets and  regularly issue profit warnings as a result.

Indeed, the Wiseman team saw the strategic writing on the wall nearly two years ago, in summer 2010, and appointed a financial advisor Greenhill to get themselves acquired. Muller apparently was the top contender. So Wiseman will be delighted with the outcome and as all the papers have pointed out the eponymous brothers have benefitted handsomely.
The rational for Muller is more difficult to pinpoint. Muller has a reputation for being secretive, and being privately owned is under no obligation to tell us the thinking behind their purchase. Their UK MD has confined comments to a bland statement about the two companies uniting to become a leading dairy player which can offer “exceptional products” to their customers.  Investment analysts seem baffled. Peel Hunt reckoned that there is no strategic logic to the move. Clive Black of Shore Capital could not see much benefit except in the area of milk procurement, collection and utilisation which he felt could be substantial.

Further mystery has been added by reports saying that the reason for purchase is not so called “hard savings”, ie the costs that can be shaken out of a merged business through streamlining back office functions like accounts, IT, purchasing, logistics, and administration. Apparently Wiseman will be left to run itself as it did – at least for now.
So we must look further afield for enlightenment. The clues could come from Mullers business in Germany. In Germany Muller sells not just yoghurts and desserts but cheese, butter, and fresh and UHT milk. It also has a big private label unit dedicated to providing brand and product development , packaging and logistics services to major European grocery players. Perhaps access to Wiseman’s milk supply would pave the way for some of their European products and expertise to be brought to the UK.

The one thing we do know about Muller is that it is highly innovative. Their entry into the UK yogurt market transformed the way it operated, improving quality, adding innovative products with the corner concept, and packaging innovation with the square container which is logistically more efficient than the round pots which previously prevailed .
Muller must see the acquisition of Wiseman  as platform for new product introduction which will wake up the hitherto rather  sleepy UK dairy market.

Players such as Dairy Crest and the milk cooperatives should standby for a milk shake up.

Friday, 13 January 2012

Tesco Pays the Price for Ignoring its Customers

It’s been a dramatic week for  supermarket watchers.

First, Morrisons who had been the clear leaders in the grocery war of late announced that their sales over Xmas period had grown by a tiny 0.7%. Dalton Phillips their Canadian chief executive said it was because cash strapped Brits were unwilling to splash out over the festive season.
Somewhat contrary to this picture of austerity consciousness, Waitrose announced sales growth of +3.8%. Now as anyone who has ventured through the doors of a Waitrose will know their food is not cheap, even following much publicised activities such as a price match with Tesco on 1000 lines.  Next came Marks and Spencer, also not a cheap place to shop, with sales growth of 3%. According to ex Morrisons chief executive Marc Bolland this was due to the introduction of 600 new products, and keen pricing on some lines. Indeed M&S customers seem to be gregarious types, powering sales of party packs of food to by 8% and fresh turkey by 25%.

Then we heard from Sainsbury with sales up 2.1%. According to their head man Justin King, their premium Taste the Difference range grew by 10%, but he did concede that at the other end of the scale their cheaper value range grew by 7%.

We have not heard from ASDA yet but they are reported by market researchers Nielsen to have had a good Christmas sales performance also.
And what can we say about Tesco whose Christmas trading performance was nothing short of dire, with sales down 2.3%. It is not just a short term issue either.  According to their chief executive Philip Clarke, Tesco’s “entire shopping experience” is not as good as it should be and he indicated that Tesco has failed for years to deliver on product availability, service and food quality.

And thereby hangs the clue as to what makes the difference between winners and losers. Yes, indeed British consumers are feeling the pinch, scrutinising all costs, budgeting, cutting down on waste. But, they are prepared to spend their money with grocers who offer the combination of price, quality, and specialness which makes them feel as if their money has been well spent.
The “upmarket” grocers between them have about 25% of the market and despite cash strapped times were rewarded because they offered that critical concept of value for money that consumers seek, especially when money is tight.

Those who keep close to their customers and listen to them generally do well. Tesco has not been listening, and has not done so for years, resulting in lost customers and falling market share.
Turning a deaf ear to customer needs leads to problems.