Robert Wiseman’s profits warning shocked investors who promptly knocked 30% off the share price. The problem, says the company, is “intense competitive pressures across all sectors of the market”, and so they are reducing second half profit expectations by £7m, and 2011 by £16m.
The background has been well documented. Basically a price war has broken out on milk, with ASDA starting the fight, and Tesco promptly retaliating. The cost is being borne by processors, and the situation is seemingly exacerbated by smaller dairies being prepared to cut prices to gain more volume.
The most surprising thing about this announcement is that everyone is so surprised. Wiseman has a history of profit problems due to negotiations with the big supermarkets. In May 2005 the Group warned that profits had fallen by 15% versus the prior year due to losing a contract with ASDA. In May 2008, the company warned that profits would take a hit of £8.5m because it was taking longer than anticipated to get retailers to agree to price rises which were needed to cover escalating costs.
Here it all goes again, and with the firm’s current business model, profit performance will continue to be volatile.
The big issue with Wiseman is that it sells one product, fresh milk, and is reliant on one distribution channel, the major supermarkets. It has nowhere to go if things get difficult – no other product sectors, no major brands, and few other sales outlets. Unlike its competitors Arla, and Dairy Crest, the latter rushing out an announcement of their own saying that they expected full year profits to come in as forecast. They did admit though that the fresh milk market was proving challenging.
The optimist would point to Wiseman’s cash generating ability, and a good record on cost reduction. Unfortunately neither seems to be enough to protect against supermarket whims and power.
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