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.

Strong Brands Win Again - Dairy Crest Outperforms Robert Wiseman

Half year profit results from Robert Wiseman and Dairy Crest once again show the perils of being a one product, one sales channel company operating in a commodity market.

Wiseman’s who sell only fresh milk saw pre tax profits drop by 42%, from £20.2m last year to £11.8m, on a turnover which climbed by 1%. The profit problems arose because the price they paid to farmers rose three times this year, and energy bills rocketed, but supermarkets, on whom Wiseman depends for nearly all their sales, refused to pass these costs on to consumers. Indeed many will recall that retail prices have been slashed of late.

By contrast, Dairy Crest who sell big brands such as Country Life butter and Cathedral City cheese alongside fresh milk reported a profits rise of 9% on a revenue increase of 2%.

Its just as well that Dairy Crest has these brands.  Profits in their dairy division which sells the milk saw profits plummet by 89%, from £10.9m to £1.2m, a shocking performance which puts the fresh milk supply problem into sharp relief.

By contrast profits in the cheese division jumped by 32% due to higher selling prices, and butters and spreads profits grew by 16.5%.

For whatever reason, Wiseman seems to have held a the difficult milk situation together better than Dairy Crest,  possibly because of scale (Wiseman supplies about a third of all fresh milk). But as previous blogposts have indicated, the Wiseman story continues to be a tale of erratic performance, and it is difficult to see how their current business model of one product and one sales channel can be made reliable and sustainable.

Some investors point to their strong cash position, and much has been made of their new venture with New Zealand company A2 which may deliver innovative products such as a more easily digested milk for those who think they have a lactose intolerance. Then again though, Arla seems to have solved this issue with Lactofree.

Dairy Crest with its brands, its presence in cheese, butter, and spreads as well as raw milk, and its sales through more than just supermarkets seems better able to deliver the steady, predictable performance that suppliers, customers and investors like to see.

Pricing Power - A Tale of Two Companies With Lessons for UK Milk Coops.

Two dairy companies reported profit results in the last few days and the difference between the two is stark. Robert Wiseman gave a profits warning for 2008. Dairy Crest oozed confidence and said it will have another good year.

The make or break factor is the ability of each company to implement price increases sufficient to cover the huge rises in costs they both face. Basically, Dairy Crest has managed to get price increases through to the customers it supplies, but Wiseman has not. A Wiseman spokesperson said "We are operating in a very tough market at the moment, and in a tough market it takes a while to negotiate a settlement from your customer base." They declined to say exactly how much of their rising costs they had passed on so far. Dairy Crest said "To date we have been successful in implementing price increases to our customers", and Mark Allen their Chief Executive added that he was confident the company would be able to pass inflation costs on to retailers "as and when" it became necessary.

Whilst Dairy Crest is bigger than Wiseman, and operates in spreads, yoghurts and cheeses as well as liquid milk, the difference in pricing power between the two companies boils down to brands and spread of customers.

Dairy Crest has built big brands which consumers want to buy like Cathedral City Cheese, Utterly Butterly and Country Life. Brands like these can go up in price without much impact on sales, but if prices did go up too far and consumers buy less, Dairy Crest has the option of reducing them through promotions. They are in control. Contrast this with Wiseman who sell almost all their products under supermarkets' own brand names, and face the problem of supermarkets being reluctant to put prices up in case they lose their reputation of offering their customers good value for money. Wiseman has no control over what the supermarkets do.

Yes, Dairy Crest supplies milk under supermarket brands too, but I'd bet that when it came to price negotiations, Dairy Crest got alot less of an increase, if any, on liquid milk than they did on their brands. What they will have done is hike up the price of their own brands much higher than on supermarket ones, and ensure on average that costs were recovered. Wiseman does not have this flexibility and has suffered.

Dairy Crest is further helped by selling not just to big supermarkets but to smaller stores and door step delivery where it is easier to pass on increases. Wiseman has 70% of it volume going through the big supermarkets, and has less than 1% of its business through doorstep. Again it lacks flexibility.

And the lessons for Milk Coops? They need strong brands and a spread of customers. At present they are individually too small to afford to build brands and a broad customer base. They need to merge, and use the cost savings to invest in the market place. Just like Friesland and Campino with 5 times the farmers operating across three countries have managed to merge.

What is it with our Coops that they find this so difficult?