Merger with Arla – Milk Link Secures Stronger Future for Farmer Owners

The proposed merger between Milk Link and Arla has been warmly applauded by dairy industry watchers, and rightly so.

Against a background of ever stronger retailer power, increased globalisation by major players with turnovers in the £billions, and a realisation that dependence on commodity markets usually means erratic profits it was becoming more and more obvious that Milk Link, a company with sales of around £700m operating in one country and without the benefit of strong brands, was unlikely to deliver the returns that investors deserve. And so it has proved. For years Milk Link’s price to farmers on a pence per litre basis has consistently languished near the bottom of the league table.
The merger with Arla means that Milk Link is allying itself with strength.  Arla, as has been pointed out is big, innovative and invests heavily in the industry. It is also highly commercial and unafraid to take the tough decisions in order to provide the best returns to its farmers as shown by its announcement last week that it intends to cut its cost base by some 500 million Danish Kroner to ensure it remains competitive.

No doubt there will be tough decisions ahead in the UK as the two businesses are streamlined, eliminating over capacity in production and duplication of ack office services such as administration, finance and IT.

The Arla Milk Link move follows aquisition of Wiseman by German company Mueller and it will force remaining companies in the dairy industry to examine future strategies with some urgency. First Milk will need to do some hard thinking, and even relatively strong Dairy Crest, which is publicly quoted and therefore more in the spotlight will be facing close questioning from investors.

The existence of larger, well capitalised, forward thinking processing companies selling higher added value products should result  in bigger profits. With that should come increased returns to farmer owners, and not before time.

Shoppers Further Batten Down Hatches in Face of Economic Gloom

According to the IGD’s latest research, 59% of shoppers say that their most important concern just now how much they spend. Not surprising given that since 2007 prices have grown by 14% compared with wages at 9%, the spectre of unemployment  looms and every day brings a fresh story of economic woe.

As Giles Quick of Kantar Worldpanel pointed out in a recent presentationto dairy and red meat levy boards, in the search for spending control, shoppers have two options - either buy less or pay less.

It is clear that they are following both routes.

Both IGD and Sainsbury in its recent results presentation confirmed that consumers are indeed buying less. Justin King of Sainsbury told us that shoppers are putting less items in their shopping trolleys, and he and the IGD pointed out that shoppers are making more trips per week in an effort to cut down on total spend by buying only what they really need, and minimising waste as less products are thrown out due to being past sell by dates or starting to shrivel in the fridge. IGD data shows that the percentage of people making 3 or more shopping trips a week has gone up from 39% to 49 % in just two years.

Shoppers try hard to pay less. For the first time since late 2009 sales of supermarket value lines are growing faster than their premium ranges. The amount of product sold on promotion shows no sign of decreasing and 40p in every £ is spent on deals. Supermarkets have recognised this trend to shopping around and responded. ASDA promises to be 10% cheaper than everyone else, Sainsbury have countered this by giving their shoppers a coupon at the till which refunds the price difference if a branded product could be bought more cheaply that day in Tesco or ASDA, and Waitrose have now pledged to match Tesco on all branded items except when these are on promotion.

Pricing at a “round pound” is another tactic being pursued to attract shoppers. ASDA first started the trend towards pricing goods at £1, £2 or £3, and such goods now account for 40% of their sales in categories where the tactic operates. Tesco and Sainsbury are responding by stepping up the number of goods they sell in this way.

Paying less encompasses reductions in fringe shopping costs. The effort to reduce fuel consumption has led to a rise in on line shopping, and buying from the local convenience store. Sainsbury recorded a 20% increase in online grocery sales in the past twelve months, and IGD tell us that 17% of people currently shop for groceries on line.

All in all it’s a story of hard pressed consumers who think that they will be even harder pressed in the coming months. 46% say their future spending will decrease a little or alot compared with just 15% who think their spending will increase a little or alot. And it’s a story of highly competitive retailers changing strategies, and coming up with innovative ways of fighting for every tenth of a point of market share.

Removing a Barrier to Organic Market Growth - Prince of Wales Charitable Foundation Funds Programme to Boost Organic and Low Input Farming Yields

Few people reject the idea of organic products. Indeed according to the Soil Association’s market report 2012, 8 out of 10 households have bought at least one organic product in the last year, and most people have some idea of what organic farming means, with the top reasons for buying organic being  fewer chemicals, cited by 62% of people questioned, natural and unprocessed (57%) and healthier for me and my family (52%).

Nevertheless, according to the Soil Association the market fell by 3.7% in value terms in 2011 and the problem is price.  91% of people questioned say that high price stops them buying more organic food. The problem is made worse by the current difficult economic climate. So much so that the Soil Association concedes that “Prospects for revival in the organic market are inextricably linked to trends on the high street and conditions in the wider economy”.  Even Waitrose, known for its well heeled customers, and an enthusiastic promoter of Duchy Originals organic produce saw sales drop by 2.2% in 2011.

There are two ways to tackle the price issue – either persuade consumers that it is indeed worth paying the higher price for organic produce, or work to reduce the cost of production and pass any savings on to the consumer in the form of lower prices.

It is therefore good news that the Prince of Wales Charitable Foundation is allocating £200,000 to help organic farmers and those striving to farm on a low input system to rely less on expensive bought in materials, step up their yields, and possibly increase nutritional performance whilst holding true to sustainable principles. It is especially good news too that the scheme will be open to conventional farmers many of whom will be keen to reduce reliance on bought in material s such as fertilisers.

As for future growth in the organic market, any work which reduces production costs and therefore the price needed to charge consumers can only be beneficial. Whilst it is important to continue explaining to people why they should buy organic, translating good feelings about this way of production in to actual purchase will always be difficult whilst the current price gaps between conventional and organically produced foods remain at current levels.