UK Milk Market – Examining Opportunities for Growth

Tetra Pak, multi billion pound maker of drinks cartons, has just published a review of the UK liquid milk market, setting out where growth opportunities might lie.

The company estimates the total market, retail and catering together, to be around 6 billion litres, with sales down 1% year on year. Growth in retail sales is partly offsetting a decline in catering. (For comparison, DairyCo’s latest numbers for retail show the market to total 5 billion litres, up 0.4%).

According to Tetra Pak, functional products with added health benefits are the biggest growth opportunity. They point out that products like Unilever’s Flora Pro Activ which promises lower cholesterol, and Lactofree from Arla are growing strongly, and increasing health consciousness will drive growth still further. This has apparently happened in America where products with added health benefits are booming.

Whilst Tetra Pak are correct to say that keeping healthy is a worry in the UK, launching successful products will not be easy. Health benefits do not trump a poor tasting product, so much research and development will be needed to ensure that the products not only deliver their claims but also taste great, and vast marketing budgets are needed to explain a benefit to a public generally mistrustful of anything which smacks of being modified.

A more straight-forward opportunity identified by Tetra Pak lies in the flavoured milks market, where, helped by the launch of exotic varieties, the market has grown to 200 million litres in 2009. An EU ruling that subsidies for milk now apply to secondary as well as primary schools may encourage teenage consumption. And at the youngest end of the age scale, Tetra Pak has noted a rise in sales of baby and toddler milks.

One of the quirkier facts in the review is that goat’s milk is the fastest growing sector of all.

And so to brands and innovation. The Tetra Pak review shows that the share of branded milks has grown to over 20%. EU regulations whereby milks of varying fat levels can be labelled as milk, rather than milk drink, allowed a new sector to emerge, led by Wiseman’s “The One %". Cravendale filtered milk from Arla with its longer shelf life has been a shining example of innovation. The product is sold at a premium and the sector has come from nowhere to be now worth £229million. Lactofree is another branded success. All demonstrate that premiums and innovation are possible even in a so called commodity market.

Anders Olsson of Tetra Pak reckons that more creative thinking and better consumer understanding would lead to a more dynamic milk market. He says that “The current state of mind is auto-pilot”. It may sound harsh but he has a point. Liquid milk is a huge but static market, and there is a crying need for innovation to reduce dependence on sales of low margin standard milk to major retailers, to get the value of milk sales up, and to return some of the higher value margin to milk producers.

Notes from DairyCo’s consumer sales audit for the 12 months to 1st November 2009
- the liquid milk market is up 0.4% in volume and 6.7% in value
- filtered milks grew by 10%
- organic milk sales are down 2%
- Jersey and Guernsey are doing well off a small base, up 13%
- UHT milk is down 2%, but a new sector, sterilised milk, is growing rapidly albeit is still very small. DairyCo thinks this is because it offers a longer shelf life.
- soya milk sales are down 5%

Prices Down, Consolidation and Cooperation Up – Key Messages from Royal Agricultural College Conference

At the Cirencester annual conference, Christine Tacon of Co-operative Farms and John Shropshire of G’s Marketing addressed the theme of “Business strategies for the next decade”. With a turnover of £50million, and running 60,000 acres of their own and partner companies’ land, the Coop is the largest arable, vegetable and fruit farmer in Britain. It supplies the Coop Group, as well as other customers. G’s is a £230million turnover company, supplying major supermarkets, independent outlets and the catering trade with vegetables and salad crops.

Their businesses are different but their messages similar.

Message 1 – Producers profits will be further squeezed

Whilst neither speaker put it quite as baldly as that, Christine said that “these are tough times for growers”. The Farms unit is prepared to take a lower price for produce from its Coop parent in return for security of supply, and acknowledges that Coop buyers would rather not be tied to buying from the Farms but to chase lowest prices by dealing with a number of suppliers. John Shropshire was categoric – “Price is everything”- and cited celery where half of the crop this year was sold on promotion. He says growers are finding it difficult to make money even now, and forecasts that prices will drop in real terms. Perhaps controversially, he does not favour contract prices, believing that producers tend to contract at below the market average, and also that contracts mean businesses lose touch with what is happening in the market place.

Message 2 – Big is beautiful

The notion that producers’ profits are under pressure is not a surprise, but the emphasis these industry speakers put on the need for accelerated and radical consolidation might be.

Christine mentioned Thanet Earth, a veg and salad crop venture in Kent owned by a 4 business consortium, whose website proclaims that the unit has enough glass to cover 80 football pitches. She also said that UK meat and dairy industries are too fragmented and inefficient to compete with overseas companies. John was clear that further consolidation in the supply chain was urgently needed to reduce costs and offset pricing pressure. John, with G’s having farms in Spain as well as the UK, also forecast a “Europeanisation” of the supply chain in an effort to get economies of scale.

Message 3 – Cooperation will be key

Coop Farms either own land or run farms for private landowners so are well used to dealing with farmers directly. G’s is a cooperative of 20 farmers with each farmer having one vote regardless of size. Both are committed to close working relationships, and feel that the more integrated the supply chain the more chance there is to examine costs from end to end and reduce them to offset price pressure. John Shropshire particularly stressed the need for close partnerships where information flowed, and supply chains could react with speed and accuracy.

Perhaps as a reaction to the extremely difficult economic climate, there was less talk of growth producing as opposed to cost cutting strategies. However speakers commented on the need for good customer understanding, and a continued attempt to try new things even when money is tight.