While the cheese market is proving resilient in the recession, own label has taken a battering as branded products fly off store shelves at prices as low as 70% below rsp. Richard Ford and Jane Simms report


We're in a recession consumers just want cheap." It was the last thing cheese makers wanted to hear at the beginning of the year as they were desperately trying to add some genuine value to the category (as opposed to the inflation-driven sort). Yet this was what retailers were demanding and this is what they got.

Almost a third of the cheese sold in supermarkets over the past year has been sold on promotion (see Assosia box, p67). Some of the deals have been jaw-dropping. In October, for instance, Asda ran an advert in the tabloid press offering 400g blocks of Cathedral City Cheddar for just £1, a massive 70.3% reduction from the usual £3.37 retail price.

The strategy has, to a certain extent, worked. Dairy Crest announced in its November interim results that Cathedral City Cheddar had reached £200m for the first time and the heavy promotional activity has undoubtedly driven overall volume growth branded sales have risen 11.1% by volume, pushing the category's sales up 2.7% this year compared with just 0.3% last year [TNS 52w/e 6 September 2009] .

But total value growth has slowed from 12.1% last year to 8.2% this year. And the success of the brands has come very much at the expense of own label, sales of which are up 4.8% by value but down 2.2% by volume. Territorials have been one of the worst-hit sectors, with volumes dipping 1.1% in stark contrast to the 12.6% growth seen last year.

With the fall in milk prices making the sector look less attractive for producers, and cheap imports devaluing it further, the line between a category in relatively good health and one teetering on the edge of crisis is looking increasingly blurred.

The retailers will need to revisit their promotional strategies if they want to avoid shooting themselves in the foot when it comes to own label, warns Milk Link marketing director Hamish Renton.

"Retailers that have ensured there is a balanced promotional programme in place have seen growth in both branded and own-label Cheddar," he says. "But in retailers where the focus has only been on deep-cut branded Cheddar promotions there has been a negative impact on their own-label business."

A Tesco spokesman says its own-label sales have been hit by the level of promotions on branded cheeses. Sainsbury's, which ran 71 more cheese promotions this year than last, has also seen a drop in its own-label market share because of branded promotions, admits Sainsbury's cheese buyer Finbar Cartlidge.

"We've seen a greater proportion of sales go through on branded cheese, as they compete aggressively against each other for market share. In the medium term, this promotional mix is unlikely to be right for the retailer," he says, conceding that the level of promotions has, on a number of occasions, resulted in branded cheese being cheaper than own label per kilo in the big retailers. The multiples will need to refocus their efforts away from price-cut offers and concentrate on the strength of their own-label cheese, he suggests.

Narrowing the gap
Even without promotions factored in, the prices of own-label and branded cheeses have been edging closer. "In the past 12 months, the price differential between own label and branded has narrowed, whereas it used to be quite significant," says Kerrygold MD Carl Ravenhall. "As the rsps have gone up on the own-label budget and standard levels quite significantly over the past couple of years, the brands haven't gone up as much."

The innovation that the own-label category has demonstrated over the past year is evidence that retailers are aware they need to raise their game.

At the beginning of the year, Sainsbury's redesigned its standard Cheddar range and introduced colour-coding across its block, sliced and grated Cheddar orange for mild, green for medium and red for mature to make shopping the category simpler for consumers.

Asda, meanwhile, became the first retailer to introduce recloseable ziplock packaging across its full own-label range. Both initiatives are attempts to add value and to stem the tide of shoppers switching to branded.

Tesco, however, has said it has no plans to move its own-label ranges into ziplock packaging. It would add unnecessary cost to the supply chain and go against its strategy of packaging reduction, the retailer argues.

"There is a clear impact in terms of sustainability and corporate responsibility that means Tesco will not be exploring any move towards ziplocks across our own-label Cheddar range," says a Tesco spokesman. The retailer will instead focus its own-label product and format development on the 'macro-trends' of health and convenience, he adds.

As the retailers up their own-label game with NPD, the large manufacturers are vying for an even bigger bite of the branded market.

Dairy Crest is continuing its focus on value-added branded products moving it further away from its commodity-driven past. Cathedral City has been one of the key brands driving total Cheddar category sales, and a £10m relaunch including a packaging revamp and a new TV campaign that hit screens mid-November should ensure it continues to do so.

At £195m [Nielsen 52w/e 3 October 2009] its sales are streets ahead of its nearest Cheddar competitor, but the battle for second place is hotting up, with Pilgrims Choice, Wyke Farms and Seriously all vying for position [Nielsen 52w/e 3 October].

Over the past year, Seriously has held on to second place with sales of £56.7m and Pilgrims Choice is in third place with £52.5m but Wyke Farms is not far behind. Its sales have risen an astonishing 64.9% to £48.7m and it has extended its reach by launching its first nationwide TV campaign, winning listings in Iceland, The Co-operative and Waitrose in the past year.

"We keep saying we are the challenger brand within the Cheddar category and we have a challenger mentality that we will execute over the next couple of years," says Wyke Farms managing director Richard Clothier.

Seriously brand owner Lactalis McLelland appears to sense the threat to its number two spot as it has invested £1.6m in advertising this year [Billetts]. This, it claims, has increased its household penetration by 250,000. Unlike its rivals, it has sought to drive growth by extending the brand into spreadables this year adding two more products to the range, a chilli and a smokey variant.

"These two distinctive Cheddar spreads aim to convey our brand message further 'Seriously Strong, it's all about the taste' and bring even more people into the 'intense taste' category," says David Bennett, marketing manager for Lactalis McLelland's Cheddar brands.

First Milk's brands which include The Lake District Cheese Company, Pembrokeshire Cheese Company and Scottish Pride may not be challenging Seriously's position, but the co-operative hopes to generate 20% of its cheese sales from brands in 2009/10 a significant step up from the 5% target it set itself for 2008/9.

While First Milk's brands are going from strength to strength, it's been a very different story at another dairy co-operative. This year saw the much talked about demise of Dairy Farmers of Britain (DFB).

The collapse in June is likely to shake things up in the coming year. DFB's cheese business was considered by many industry observers to be the jewel in its crown, and Lactalis was quick to snap up DFB subsidiary Lubborn Cheese, to give it an instant portfolio of Somerset Brie, Somerset Camembert and the Capricorn goat's cheese brand.

Milk Link purchased DFB's Llandyrnog Creamery in North Wales, which included Cadog Welsh Cheddar and the 1st Grade Cheddar brand giving the co-operative an important foothold in both the Welsh and the organic markets.

Milk Link has since unveiled plans to ramp up its marketing support for Cadog to rival other Welsh cheeses on the market such as Collier's Powerful Welsh Cheddar, and has kicked off with a UK-wide Asda listing for Cadog Organic Mature and Cadog Double Gloucester.

It appears territorial cheeses such as Wensleydale could also do with such a push. Although sales of territorials are up 9.3% by value, they have dipped 1.1% by volume, a figure that looks even worse when compared with last year's 12.6% uplift.

Sainsbury's claims to have experienced slight growth in territorials, but concedes that sales are behind those of other cheeses.

"The strong promotions on Cheddar combined with very limited new news in territorials have led to customers trading out of the range," says Cartlidge.

Promotions by branded players have been the main cause of territorials' woes, agrees Nigel White, secretary of the British Cheese Board. The consumer, it seems, is happy to put provenance on a back foot when money becomes tighter.

"If you've got the opportunity to buy cheese at £4/kg, and you're normally buying a regional cheese at £6/kg, there's a temptation to switch as you're going to be using the cheese in an similar way."

The specialist farmhouse Cheddar makers, he says, have been particularly feeling the pinch.

The Wensleydale Creamery, however, claims it has not been adversely affected. "We find that customers are prepared to pay a premium for hand-crafted, authentic products such as Real Yorkshire Wensleydale," says a spokeswoman.

In the autumn, the company announced it would advertise on TV for the first time, and it has added a stamp of authenticity to its packs in a bid to build consumer awareness of its provenance ahead of securing an expected Protected Designation of Origin status next year.

Despite Wensleydale's apparent success, Tesco sales value figures suggest that crumbly territorials are behind the sub-sector's decline.

"Low levels of promotional activity within territorials, in a category that is highly promoted, are a driver of this value decline," adds a spokesman.

In an effort to boost sales, territorial suppliers have continued to launch new products. In February, Milk Link unveiled 'The Red One' a tangy Red Leicester and Joseph Heler launched an industry first into Tesco, a Red Leicester-style cheese that contains 30% less fat than standard Red Leicester, shortly after. Stilton maker Long Clawson also added a Leicestershire Red to its portfolio in July.

Feeling blue
While territorials have struggled in volume terms, the worst performance by value has been the blue cheese market, which has seen sales increase just 0.6% by value although volumes are up 1.3%. The country's largest producer of blue cheese, Long Clawson, which posted a loss of £100,000 in the financial year to April 2009 compared with the previous year's £3.8m profit, attributes its poor performance to consumers downtrading during the crucial Christmas 2008 period.

"This was primarily driven by consumers changing to smaller piece sizes to reduce purchase price, as well as an increase in sales of promoted lines," it said in its 2009 annual report.

Downtrading would continue into next year, it predicted, adding that it was taking steps to diversify its range. "We have a product portfolio that is significantly weighted towards standard and premium products," it said. "We have launched some value products to balance this portfolio but continue to monitor this risk closely."

In January, the Competition Commission cleared the sale of Hartington Creamery to Long Clawson, which is also likely to give the company added strength although the three-month investigation into the acquisition placed a heavy financial burden on Long Clawson.

The company has subsequently integrated the two businesses by closing down the Hartington dairy.

Continental cheeses
Excluding blue cheese, the rest of the Continental cheese market has grown 4.8% in value and 2.4% in volume [TNS]. At first glance, the picture suggests Continental cheese has done relatively well. However, like UK-produced Cheddars, Continental cheese brands have had to cope with the change in shopping habits brought about by the recession.

They've also faced unfavourable exchange rates, which have made their products more expensive for customers to buy. Like Cheddar suppliers, Continental cheese brands have responded with promotions. However, there's a PR job still to be done, believes Anne-Sophie Guyader, brand manager for Coeur de Lion.

Continental cheese suppliers must do more to break down the barriers that prevent shoppers buying into the category, she says. Whereas consumers know their Cheddar and how they like it, they can find the Continental cheese category overwhelming because of the wide range of types and tastes, she says.

"The second-highest barrier to larger consumption is that Continental cheese is seen as a special cheese, one that you reserve for special occasions and treats," she adds.

Continental cheese producers are keen for UK consumers to consider their products a more everyday purchase. However, this must not come at the expense of quality, stresses Camille Mancelle, UK key account manager for French cheese brand Isigny Sainte-Mère.

The key to riding out the recession is maintaining quality standards instead of devaluing their proposition, she says. "We believe quality is the ultimate key to customer satisfaction. Continental cheese suppliers cannot afford to disappoint faithful customers, which is why at Isigny we will never compromise on quality."

Value and imports
While Continental manufacturers have been working hard to maintain premium standards, the UK Cheddar market has come under threat from an influx of cheap imported Cheddar much from the Republic of Ireland.

As the price paid for butter and milk powder fell in the second half of 2008, there were better margins to be had using these products to make cheese. The cheap Cheddar that subsequently entered the market has dragged prices down, says the British Cheese Board's White.

"With the collapse in butter and milk powder prices across the world, it became particularly attractive for the Irish to put cheese into the British market," he adds.

Farming bodies such as the NFU have responded by stepping up their verbal assault on foreign cheese imports this year, calling for retailers to source more British product.

"While some retailers have pledged recently to source 100%-British where possible, there are still many that choose to import Cheddar from countries where production standards may fall below ours," an NFU statement said in September.

Sainsbury's showed it was listening when, later that month, it announced it was extending its Dairy Development Group programme which had previously only been available to its liquid milk suppliers to farmers whose milk went into its own-label cheese.

Suppliers have also taken heed. Dairy Crest is flaunting its British credentials and giving the Red Tractor logo more prominence on the front of packs of Cathedral City as part of its £10m relaunch. And Northern Irish dairy co-operative Dale Farm, a major supplier of own-label and branded cheese into UK supermarkets, also plans to introduce the Red Tractor logo to some of its products. "We wholly support the drive for country of origin labelling and clearly see our products as British," says group commercial director Andrew Nethercott.

Meanwhile, it appears the flood of imports is slowing. DairyCo data shows that from January to August 2009 the UK imported 10,500 tonnes less speciality cheese than in the same period last year a drop of 5.5%.

There was also 3,300 tonnes, or 3.9% less Cheddar coming into the UK than in the same period in 2008. Notably, 2,700 tonnes of this was Irish Cheddar. Within the past few months, prices for butter and milk powder have started to climb back up, resulting in the mix of products from Irish manufacturers being more weighted towards milk powder and butter than it has been for some time. Coupled with that, there is also less milk available in Ireland.

"For some time, it has been known that UK milk production is in decline. There's no sign that's going to bottom out, so milk availability and milk going into cheese will fall," says Ravenhall. "Now they're starting to see that in Ireland as well."

The upshot will be less cheese available for Ireland to export, he says. "I would predict that for the rest of the year, the amount of Irish Cheddar coming into the UK will begin to fall substantially, which will turn into challenges for supply, and in turn, this will help pricing," adds Ravenhall.

It isn't only Irish cheese that looks set to become more expensive for retailers to source. Storing cheese in warehouses isn't cheap and British manufacturers of commodity Cheddar have been thinning out stockpiles in the past few months in a bid to reduce overheads.

Coupled with this, low prices have discouraged domestic production.

"UK cheese making has been reduced because it hasn't been profitable to produce," says White.

For Cheddar, at least, these developments, together with smaller import volumes coming through, are good news for manufacturers. "There are signs that there is an upturn in price," says Milk Link corporate affairs director Will Sanderson.

It might be good news for manufacturers and if prices filter down for dairy farmers, but it's not such good news for retailers or shoppers, who are likely to be paying more for their cheese.

Convenience in vogue
That said, retailers and suppliers are reporting growth in convenience cheese products, which command a higher price point than their block cheese counterparts.

"We've seen more customers trading into sliced and grated cheese as customers look for convenience and make lunches at home," says Cartlidge.

Own-label sliced and grated variants have helped to offset some of the drop in own-label sales of block Cheddar, adds Ravenhall. Grated cheese has even been endorsed by the Food Standards Agency, with one ad in the FSA's saturated fat campaign claiming: "Simply grating cheese instead of slicing can mean you eat less of it, which can help reduce your saturated fat intake."

Continental and speciality cheese brands are now joining the march into sliced and grated formats started years ago by Cheddar. In September Norseland introduced grated Jarlsberg and in October Emmi UK launched a grated Emmentaler, and Raclette slices.

Clothier believes that ready-grated formats are here to stay. However, he is more sceptical about the longevity of cheese slices. "I'm yet to be convinced by slices, but we'll see. I don't know whether there's a perception that slices are like those horrible slices of cheese you get in burgers and, as a result, people don't want to eat them," he says.

While there is no doubt that consumers are looking for value, price does not win out over everything. Sliced and grated cheeses are thriving, and sales of mini portions which, like convenience cheeses, command a higher price per kg than their full-size counterparts are up 9% in value and 7.6% in volume.

The challenge for the industry going forward is to convince consumers to pay full-price for their full-size products. Consumers may be prepared to pay extra for cheeses with added value such as grated versions, but have they become too accustomed to buying block cheese on promotion?

One industry expert says in an ideal world the way to wean consumers off their promotional habit would be to break it cold turkey. However, with this unlikely to happen, a more balanced and mature approach to promotions is needed.

Focus On Cheese

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