British dairy sector needs to rapidly adapt to regain profitability
Challenging times in store for UK dairy
The UK dairy sector is no stranger to uncertainty. However, the current political, economic and social environment has whipped up a fresh array of issues, leading to several processors facing financial difficulty. The pressures in the sector have come further into focus following the administration of Tomlinsons Dairy last month.
Supply and Demand
Since the abolition of the EU milk quota in March 2015, the industry has followed a mostly supply led approach, with processors taking every litre of milk that farmers produce, regardless of demand, and increasing their production capacity accordingly.
This approach, in a sector that is in decline and in the context of fierce supermarket competition, has put significant downward pressure on milk and cream prices, eroding margins of both the processor and farmer. Even the largest and most established players in the market, Müller and Arla, have been impacted by this trend and have seen profit margins plummet in recent times.
But there are signs of change afoot, with Müller, the UK’s largest dairy processor, affirming that it will be a demand led business going forward. This has been backed up by its recent decisions to close its Foston dairy in Derbyshire by the end of the year and put 14 Scottish dairy farmers on notice, as part of its much publicised Project Darwin transformation programme.
The removal of capacity from the market, either through site closures or the inescapable failure of some businesses, provides an opportunity for the sector to stabilise its supply to match demand and improve margins throughout the supply chain. This may be particularly important when, in a post-Brexit world and with recently imposed US tariffs on dairy imports, the ability to access new export markets to offload domestic surpluses may become more difficult.
The rise of Veganism
The downward trend in consumption of dairy has been propelled by the surge in the number of people following special diets, such as vegan and lactose free, who perceive them to be healthier and more ethical. Right now, this revolution is being supercharged by well publicised and growing environmental concerns about the negative impact of farming on climate change.
This combination of factors is fuelling rapid growth in the market for plant based milk alternatives (+18% in 2019), such as soya, almond and oat milks, at the expense of cows’ milk. Accordingly, a number of larger players in the dairy market are having to invest heavily in their dairy-free alternative ranges in order to protect overall market share from new entrants, such as Oatly, Fairlife and Innocent Drinks.
Other Changing Consumer Tastes
As well as the growing trend towards plant-based and lactose free products, the UK food sector in general is seeing an increased level of health awareness amongst consumers who are demanding more organic, low sugar and clean label products.
On sugar, well publicised Government targets aim to reduce the sugar content in dairy products as a part of the Child Obesity Plan, which will likely impact sales of flavoured milks and yoghurts in particular. There are also calls for dairy products to be included within the scope of the so called sugar tax, currently only levied on soft drinks.
Accordingly, the industry is being forced to innovate to create new products that deliver good taste alongside a nutritional benefit, increasingly packaged for on-the-go consumption, in order to meet changing consumer habits and combat an overall market decline. Fast growing brands, such as The Collective and Freaks of Nature, are leading the way and so the established dairy processors must respond quickly.
Growing pressure from consumers has resulted in many large brands and supermarkets pledging to dramatically reduce their use of single-use plastics. As retailers start to demand that the goods they sell are supplied in sustainable packaging, processors will need to rapidly source sustainable alternatives.
Yet finding such alternatives is by no means straightforward. Where green substitutes do exist, capacity constraints are restricting supplies and processors must also consider what impact an uplift in packaging costs will have on their already slim margins.
And for the suppliers of the packaging itself, even a small dip in orders could leave some financially vulnerable. As such, there is always a risk that processors could find themselves without a packaging supply at very short notice. Taking steps now to ensure continued supplies is essential.
How we can help
We have considerable experience in supporting businesses across the food and drink sector to navigate cash flow challenges, undertake operational restructuring, activate strategic reviews and develop contingency planning, each of which are highly relevant to businesses of all sizes during this period of significant change in the sector. In particular, we help our clients to alleviate cash flow pressure through working capital optimisation programmes using purpose-built analytical tools and working capital transformation methodology.
If you would like any more information on some of our propositions, please get in touch.
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