Sainsbury’s is set to reopen its milk supply tender this summer, a year earlier than expected, amid a crisis of profitability in the liquid milk processing sector.
The Grocer understands the tendering process for the retailer’s own-label milk supply contract had originally been delayed until 2020 in order to avoid clashing with the expected outcome of the CMA’s inquiry into the Asda/Sainsbury’s merger.
But following a collapse in profit margins across the sector’s largest processors - and lobbying by Müller Milk & Ingredients in particular - it is understood Sainsbury’s is now expected to start the tendering process by July, with the new contracts due to come into force next summer.
Up for renegotiation would be the contract processing rate Sainsbury’s pays its processors, which roughly makes up about 30% of the farmgate price it pays for milk, and covers the processor’s profit margin, manufacturing and delivery costs.
Read more: As profit margins shrink, what’s going wrong in liquid milk?
The move follows warnings by MMI CEO Patrick Müller that the sector had become “unsustainable” as he launched Müller’s £100m Project Darwin cost-cutting drive in February.
Speaking to The Grocer at the time, he said the business was “already reviewing relations with retailers” and confirmed some milk supply deals could be renegotiated.
“Müller has been quite explicit in warning it can’t keep making losses from its liquid milk business,” suggested one dairy industry source, “so it’s no surprise they have been pressuring Sainsbury’s.”
Müller currently supplies about 50% of Sainsbury’s own-label milk as part of a three-year contract which started in July 2017, with Arla supplying 20% and mid-market players Medina and Tomlinsons making up the rest.
Sainsbury’s, Müller, Arla and Medina all declined to comment, while Tomlinsons did not respond.
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