Tesco, Sainsbury rejig milk supply arrangements

- Last updated on GMT

Related tags: Dairy crest, Asda, Tesco, Sainsbury's

Tesco, Britain's number one food retailer, and J Sainsbury, the
third largest supermarket operator, have streamlined their milk
supply operations, reducing the number of suppliers from three to
two. The moves echo a similar streamlining by Asda earlier in the
year, and leave Dairy Crest as the biggest overall loser.

While Asda's move back in May​ led to just one company, Arla Foods, becoming its sole supplier, both Tesco and Sainsbury opted for a duopoly to meet their liquid milk requirements.

Scottish group Robert Wiseman and Dairy Crest, based in southern England, were chosen by Sainsbury because they provided the best geographic fit for its stores in the UK, and will supply all of Sainsbury's milk by January 2005, a move which the retailer claimed would lead to a better deal for British dairy farmers.

Tesco, meanwhile, also opted for Wiseman, but preferred Arla over Dairy Crest, again partly because of geographic fit but also because these two companies consistently paid above average rates to dairy farmers, it said.

Supermarkets are frequently criticised for not doing enough to support local suppliers, and both Tesco and Sainsbury were keen to stress the importance of shortening supply lines within the milk sector and sourcing 100 per cent of their milk from UK farmers.

Ian Merton, director of fresh food at Sainsbury's, said: "By simplifying our milk supplies we can trade better in distinct geographic locations close to our stores, improve transparency in the supply chain and offer more stability to the milk industry. The move supports our policy to source milk locally wherever possible - Dairy Crest will continue to supply south-west customers with local milk through its Totnes dairy and Wiseman will supply Sainsbury's Scottish stores with Scottish milk through its East Kilbride dairy."

He continued: "The improved geographic fit will be better for Sainsbury's suppliers and the farmers who supply them. The supply base will be more closely aligned to customer requirements, connecting farmers with the needs of the market place and improving traceability. Sainsbury's will be using this new partnership to investigate ways of becoming more efficient and to work towards improving the returns for our farmers in the future."

Wiseman and Dairy Crest supply milk produced by farmers from the First Milk co-operative, the biggest in the UK, and its chief executive, John Duncan, agreed that the Sainsbury deal would boost the sector.

"As the largest milk co-operative in the country we have over 4,000 supplying farms and to receive clarity on volumes for a longer period of time from Sainsbury's is great news. This broad-based partnership means that Sainsbury's is giving real support to farmers at this volatile time."

Opting for two suppliers, rather than one, would also benefit more UK farmers, said Sainsbury in a thinly-veiled criticism of Asda: "This move reduces the number of milk providers supplying Sainsbury's requirements while giving a boost to many more dairy farmers across the country. The decision to create a partnership with two main suppliers contrasts sharply with the recent decision by another major retailer to select a single processing company supplied by a relatively small number of farmers."

Asda's move earlier in the year had been expected to lead to a shake up of the UK market, and the Sainsbury and Tesco deals will be particularly welcome to Wiseman after the takeover of Safeway by Morrisons earlier this year put the Scottish firm's lucrative contract with that retailer under threat - especially as Morrisons is keener than most to keep prices as low as possible.

The additional revenues gained by Wiseman through the Sainsbury contract (£70 million) are almost identical to those lost by the failure to secure a new deal with Asda, and while the company did not say how much extra business it would generate through the new Tesco deal, it did confirm that its share of the Tesco business would increase to around 60 per cent, helped by the opening of a new processing and distribution centre in southern England, one of Tesco's strongholds.

Dairy Crest, meanwhile, has been the big loser, notwithstanding the £8 million in revenues it will gain as part of the new Sainsbury contract. While it was only a minor supplier of Asda, losing revenues of £20 million after the Yorkshire retailer switched to Arla, the loss of the Tesco deal is more of a concern, given that it accounted for some £60 million of Dairy Crest's annual revenues. The company said the loss of the contract could shave £12-15 million off its profits this year, while the group's share of the UK retail market for liquid milk would drop from 26 per cent to 18 per cent.

"A range of initiatives will be implemented to mitigate this impact<"​ the company said in a statement. "These will inevitably involve further discussion with all of our customers and suppliers as well as a review of our current cost base."

Dairy Crest stressed that while the loss of the liquid milk contract was obviously a blow, it would nonetheless continue its relationship with Tesco, supplying other dairy products such as spreads, cheese and dairy desserts. This business was worth around £100 million to Dairy Crest last year.

Related topics: Market Trends

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