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?
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