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.

Tesco Recovery Plan - Not Radical Enough

Following January’s shock profits warning Philip Clarke, CEO of Tesco, has set out what he will do to restore growth to the UK, and one is left with the feeling that a player with nearly a third of the market, and nearly twice as big as its nearest rival could have come up with something more imaginative.  

The main planks of Clarke’s plan are:

 Sharper prices

More staff to keep the shelves filled

Better quality products

Nicer looking stores

Clearer marketing messages about why shoppers should choose Tesco over the competition

Easier shopping over the internet including the chance to order on line and pick up in store

Less store openings

It is difficult to argue with any of this, but reaction has been tepid, the general view being that Tesco have underestimated the how difficult it will be to get back on track at a time when their competition is being uniformly successful.

Clarke has admitted that Tesco has lost touch with its customers, and is now committed to getting them to love Tesco again. He is aiming for warm and cuddly versus cold and hard.

 However, scale does not have to be bad. Used wisely scale confers terrific business advantage. Philip Clarke could have seen scale as a power for good and used it to provide exciting plans that really would make a difference to Tesco’s growth prospects.

Tesco’s scale means they employ more people, and so have a bigger net from which to catch the truly talented.

They have bigger research and development budgets which should mean market leading innovation in products and services

They have huge marketing budgets which gives them the chance to communicate to more people, more often and through more channels.

 They have unparalleled purchasing power which they could use to support suppliers in return for lower prices rather than just bully.

So Tesco could have faced the world last Wednesday with a commitment to using scale to do good. They could have announced bigger budgets for research and development, a revised innovation process to get new ideas to market more quickly, a new supplier code of conduct, and even a deeper drive to provide the pricing and value that hard pressed shopper need in the current difficult economic climate. Instead we got a standard list of actions that every other supermarket is implementing.

What Philip Clarke’s announcement lacked was an overarching view of how Tesco could be made different and special again, so that customers do indeed find that shopping in Tesco delivers what they seek, if not an experience that they will love.

More Staff and Brighter Stores Won't Cut It - Tesco Needs a Culture Change

It is not often that a business story makes headline news but that is what happened when Philip Clarke of Tesco announced that he would start managing their UK arm direct, leading to the resignation of the man he appointed to run the business just a year ago.

The news prompted a rush of comment from investment analysts and business writers. Most referred to a profits warning following a disastrous  Xmas where a much publicised £500m price drop campaign actually turned out not to be such a good deal after all with customers instead going to other supermarkets where prices were not much different but the shopping experience much more pleasant. Deeper digging though shows that Tesco’s troubles have been going on for years. Market share, that critical barometer of competitiveness has been steadily dropping, and sales per square foot have been declining.

How did the mighty Tesco, much trumpeted taker of 1 in 8 pounds spent on retail products, get to such a state. The commentators talk about the resurgence of the other big supermarkets, Morrisons, Sainsbury and ADSA, and the growth of Waitrose at the top end of the market,  and discounter ALDI , all putting a squeeze on Tesco’s middle ground position. They talk of non availability of funds for investment in the UK because of the drain on resources from overseas investment. They point to structural issues like the rise of on line shopping making purchase of items such as books and CD’s in store less attractive.

Philip Clarke’s reasons for taking control of the UK are that “Greater focus will allow me to oversee the improvements that are so important for our customers”. To this end he plans to invest in more people and more exciting stores.

Clarke and the analysts have overlooked a key issue - it is arrogance that has landed Tesco in its current difficulties. Tesco has believed that it is so big and powerful it can treat customers (and suppliers) how it wants, and get away with it.

 It has forgotten the most fundamental principle of business success, namely that you ignore your customers at your peril. For years every article about Tesco has received hundreds of comments about the customer experience, some good, but mostly bad. Even a cursory tracking of shopper views across the internet, on Twitter, on social networking sites like Mumsnet would have revealed how many claimed to be fed up with shopping at Tesco. Tesco’s own market research must have told them this too. Yet, they did not act.

So, unless Mr. Clarke leads culture change at Tesco, shows some humility, and pays more than lip service to what shoppers want, brighter stores and more assistants at the fresh food counter won’t turn this ship around.  It remains to be seen whether a person who started at Tesco when he was 14 stacking shelves in his father’s store and been with them all his working life can recognise and correct the cultural issues.

Consumers Continue to Feel Gloomy

Despite the welcome uptick in consumer confidence reported in January many people remain worried about their finances.
Institute of Grocery Distribution data shows that over40% of the population feel that they will be worse off this year than last. It would seem that a slowing of the inflation rate combined with modest decreases in the price of gas and electricity are not enough to offset rising fuel prices, and a lurking fear that redundancy may be just around the corner. The gloom is confirmed by Bord Bia, the Irish Food Board people who regularly monitor consumer sentiment in Britain, Ireland’s largest export market. Their latest survey in the “Feeling the Pinch” series indicated that when asked the question “How well do you think things are going in the British economy these days?” 86% of people answer badly or very badly.

Little surprise therefore that when asked “What one thing will become more important over the next six months?”, 58% of people answered “saving money”. (Source IGD).

Out in the market place we see supermarkets continuing to burnish their value credentials, with offers ranging from money off promotions to vouchers for petrol. The generally quoted figure for goods sold on promotion is close to 50%. Even the more premium grocers have had to jump on the promotional band wagon with Waitrose recently saying that their percentage of goods on promotion had increased in the past year from 17% to 28%.

That said, consumers are not always hell bent on buying the cheapest possible items. When asked which  products were worth paying extra for,  54% said they were prepared to spend more for high quality ingredients, 47% for high welfare/ free range, and 41% for locally produced. The percentages dropped to 26% for Fair Trade and well known brands, and 20% for organic products. (Source: IGD).

There are some glimmers of light among the general battening down of the hatches. 2012 is an event packed year for the UK, and a combination of Euro 2012, the Olympics and the Diamond Jubilee may encourage some to splash out. Generally though, consumers will remain wary.

Red Tractor Logo - The Reality

The hoo-hah among some farmers about Countryfile’s piece on food labels and what they mean for animal welfare seems to have died down, replaced by a new furore over Panorama’s look at whether rich/non farming types should receive the single farm payment.

If the people behind the Red Tractor are returning to business as usual, breathing a sigh of relief that the story has blown over, then they should think again.

Careful viewing of the Countryfile piece reveals no inaccurate reporting but rather a gentle effort by John Craven to get at the facts behind three labels – Red Tractor, Freedom Foods and Soil Association.  

The bald facts are that when it comes to welfare the Red Tractor label stands for little more than compliance with minimum legal standards.  This was tacitly acknowledged by their spokesman.

Freedom Foods requires more than the legal minimum in some areas. Animals cannot be transported for more than 8 hours compared with the 24 allowed by the Red Tractor. Pigs get more space than the legal minimum. They have to have bedding to lie down on, and be able to root around, neither of which is mandated by Red Tractor. Farrowing crates are being phased out next year, but Red Tractor has no plans to forbid them. When it comes to chickens, Freedom Food says no more than 15 per square metre compared with 19 for Red Tractor, and chickens must have natural light and straw bales to peck on, neither of which are required by Red Tractor.

The Soil Association also requires more than the legal minimum in some areas.

What the Red Tractor team need to understand is that animal welfare matters to consumers, and whilst there is still huge confusion among the majority about the facts behind the different labels, consumers are becoming more sophisticated and knowledgeable by the day, prompted by campaigning groups and enabled by technology which allows instant access to the internet for research and verification.

Red Tractor therefore needs to be clear in itself about what it promises, and transparent about what it communicates because it will continue to be exposed if it is not. It is no bad thing for it to stand for a guarantee that the food which carries its label is produced to legal requirements. But it has to be confident that this is indeed the case. Headlines such as “AFS promises action after shocking Red Tractor expose” (Farmers Guardian February 2012), must not be allowed to happen. It would help avoid another expose if it uncompromisingly stood for food produced in Britain instead of being prepared to accept all comers and rely on having a Union flag on the packet to confirm Britishness.

Whichever way it moves forward, the 15 member strong Red Tractor board would do well to give thought to the changing nature of consumer feelings, the rise of ever stronger campaigning groups, and the place of Red Tractor in this new environment.