Dairy's new power players

Winds of change are blowing through the UK dairy industry. In boardrooms up and down the land executive teams are being overhauled as businesses come to terms with the demands of managing a modern dairy operation.

Memories of the Milk Marketing Board era, when the job of UK dairy plc was to market British products to British people, are fading fast. The UK is now a small cog in a global dairy machine where milk prices are dictated by commodity markets and British farmers and processors compete with their peers across Europe and the world.

Reflecting on the state of flux within the senior management teams of UK dairy businesses, one industry source is forthright in his assessment of why change has come about: “There was a prevalence of key players in the industry 10 years ago who came from a farming background and used to know a lot about stainless steel. We have seen management teams with that kind of background getting pretty brutally exposed of late.”

So what does the upheaval in UK dairy management tell us about the challenges facing the market, and who really holds the balance of power in UK dairy right now?

One trend that is apparent is for the appointment of business leaders with a strong commercial background. From embattled First Milk’s hiring of former Mars Petcare MD Mike Gallacher as chief executive to Müller’s poaching of Bergen Merey from P&G to run its UK dairy business, there is a clear tendency towards hiring a breed of executive with international experience, a commercial background and a history of building brands. As the industry source says: “There’s a new crop of senior managers emerging who recognise that the British dairy industry is part of an international market and to a large extent has given away market share to overseas competitors due to a lack of investment and a narrow outlook, hence our huge deficit.”

“We set ambitious targets for innovation and finding efficiencies. We need leaders with the ability to drive them through”

Mark Allen

Mark Allen, the Dairy Crest chief executive who joined the business in 1991, says the modern dairy industry needs leaders who are flexible and embrace change. “At Dairy Crest we set ambitious targets for innovation and finding efficiencies. We need leaders who have the ability to identify and drive through those initiatives.”

First Milk is arguably the best example of a business desperately trying to come to terms with the changing face of UK dairy. The co-operative has seen numerous comings and goings at executive and board level in recent years, including the departure earlier this summer of former Tory minister Sir Jim Paice as chairman, as it seeks to deliver a turnaround strategy that will lift it out of its current malaise.

Another industry source cites First Milk as a classic case of a dairy co-op that has struggled to find individuals who can drive their brands and business forward in a sensible, added-value way. “They’re a bit like a football team who have never fully performed to their potential and so keep changing the management,” he says.

On relinquishing the chairmanship, Paice acknowledged the need for First Milk to appoint “more people with real commercial and business skills”. Gallacher fits this mould perfectly. In a long career with Mars - considered a finishing school for grocery industry leaders - Gallacher worked in a number of senior roles across confectionery, petcare and food in Europe and Asia and was heavily involved with the integration of the Wrigley business in China. He has wasted little time in bringing a hard-nosed commercial edge to First Milk. In an interview with The Grocer in March, Gallacher said he had already begun an internal review of the business and promised to deliver a dramatic turnaround plan, based on cost and job cutting and an overhaul of its milk price formulas.

And Gallacher is not alone. One of Peter Giørtz-Carlsen’s first tasks as Arla Foods UK executive VP was to announce a restructure with up to 100 job losses in order to make the co-op more agile, efficient and competitive. Going forward, Arla would focus on building its brands, upweighting its innovation and delivering more for its customers, said Giørtz-Carlsen shortly after his appointment in April 2014.

For an insight into where such a ruthlessly focused commercial vision can take a dairy business one need only look at Müller, whose transformation under ex-Nestlé executive Ronald Kers from a chilled yoghurt and desserts maker to challenging Arla as the UK’s biggest processor has been nothing short of phenomenal. Kers has recently been promoted to lead the entire Müller Group but will retain overall responsibility for a UK business that now employs 6,000 people across its 19 sites.

As an employer, the company benchmarks itself against leading international food companies rather than other dairy companies in the UK, according to Jane Reay Jones, Müller’s UK HR director. One of Müller’s greatest strengths is its agility. Reay Jones says it’s within Müller’s DNA as a company to take decisions and move quickly to implement them. “A great example of this is the creation of our butter manufacturing facility in Market Drayton,” she says. “From taking a decision to invest in our first production of butter in a purpose-designed state-of-the-art facility took less than 12 months, and involved tremendous collaboration across many different functions in our business.”

Scale

Müller’s latest salvo in its assault on the UK dairy market is the purchase of Dairy Crest’s dairies business in a move that will significantly enlarge Müller’s milk pool and leave Dairy Crest free to focus on growing its successful branded cheese & spreads operations and its nascent infant formula business. Allen says the deal should enable the British dairy industry to compete more successfully in global markets by creating two businesses with scale and focus that are sustainable and strong.

Scale is a key word in dairy right now. The UK is becoming increasingly exposed to global market forces - most recently through the removal of EU milk quotas. The response has been rapid consolidation in the sector over the past decade that has created a small number of large businesses - mainly multinationals - with the means to compete on a global footing, along with a handful of predominantly small independent players trying to find their niche.

Yet influence over the UK market does not always directly correlate with size. All the while Arla’s UK milk price is set on the Continent, and demand for dairy products in China can dictate the price Müller pays to a milk farmer in Cornwall, the degree to which any UK boss can exert control over the domestic market will remain limited.

The task for UK dairy leaders is to use what influence they have to the greatest effect. “The key challenge for a CEO is to insulate the business from import competition, particularly from the Eurozone, which is going to be able to undermine price for the foreseeable future,” says Rabobank senior dairy analyst Kevin Bellamy. “This could maybe be done through brand management or finding niches, or maybe through efficiency.”

Allen points out that Cathedral City has grown from a £7m Cheddar brand in 1994 to a £285m one today, with a fluid pipeline of innovation meaning Dairy Crest is consistently giving consumers new reasons to buy the brand, regardless of wider market conditions. 

“Those brands that are able to add value to their offering are best placed to reduce their vulnerability to global trends,” says Bellamy, who notes that First Milk actually returned a profit in 2013/14 when commodity markets were strong, but was hit hard when dairy markets subsequently collapsed, contributing to cashflow problems later in 2014 and into 2015. Unlike Dairy Crest, First Milk does not have a powerhouse brand like Cathedral City to insulate it from market forces.

Farmers

Within the UK dairy supply chain itself, the issue of power is perpetually high on the agenda. Dairy farmer protests about the price they receive for their milk have received prominent media coverage, with the supermarkets often pitched as the bullies in the relationship; but some within the industry are becoming less convinced by this characterisation. 

“If you want to single-source the bulk of your own label there’s probably only one or two companies you can go to”

Dairy supplier

“I think retailers on their own-label choices of suppliers have never been weaker,” says one cheese supplier. “If you’re one of the big four or five in the UK today, if you want to single-source the bulk of your own label there’s probably only one or two companies you can go to. Likewise if you look at the liquid milk category in some areas they’ve only got one supplier. If I were in charge of retailers I’d be concerned about that and I’d be looking to nurture the potential suppliers of tomorrow.”

Suppliers, on the other hand, are generally bullish about their futures. “I’ve never felt more optimistic,” says Wyke Farms MD Rich Clothier. “When I first started producing the Wyke brand there were probably eight or nine decent Cheddar makers in Somerset we were potentially competing against; now there are very few people who can do what we can do in the category. Consolidation has made Wyke even more unique.”

The obvious losers in the current climate are farmers who are not only at the mercy of global forces but have also found their margins squeezed by fierce price wars between the supermarkets.

It’s hard to find much light at the end of the tunnel if you’re a dairy farmer. 

Calls for tighter government intervention go against a global push for open and freer markets and any extension of the Groceries Supply Code of Practice to include indirect suppliers to supermarkets is likely to take years to come to fruition, leaving the relationship between dairy farmers and supermarkets outside the scope of the code. 

The worry for farmers looking ahead must be that with the move to appointing more commercially minded leaders of UK dairy businesses, their voice in boardrooms could gradually be drowned out.

This article is part of our Dairymen feature.