First Milk’s recent troubles have been laid bare in a scathing external review, which says it failed to follow “conventional business practice” and describes its previous governance as “inadequate”.
As the beleaguered dairy co-op gears up for its AGM on Thursday (29 October), the report by management consultants Greenburn Associates – and commissioned by new CEO Mike Gallacher after he took over from Kate Allum in March – sheds some light on why the business has struggled in recent years.
Reviewing the period between January 2012 and December 2014, during which First Milk suffered sharp financial losses and repeatedly cut the price of milk it pays its farmers, the 49-page Greenburn report (seen by The Grocer) also criticises First Milk for not putting enough focus on its core business, “despite negative price influence coming from major retailers”.
Instead, the focus had been on diversification plans, and there had been no “apparent attempt by the board to ensure that the business had the necessary sales, marketing and new business integration skills or experience at a senior level” to implement its strategic goals.
“There was a basic lack of established metrics and measurements within the business,” the report adds. “Any business plans and sales plans that did exist were either not robust, insubstantial or not linked to quantifiable metrics or key performance indicators.”
Due to these reasons, it concludes that it was not possible for the board to accurately measure performance or have transparency and control, and notes that some board members, past and present, claim they never had sight of business and sales plans.
First Milk chairman Sir Jim Paice cited the need for First Milk’s board to appoint “more people with real commercial and business skills” when he announced his resignation in June.
Since coming to First Milk, Gallacher has sought to boost the board, most recently bringing in Carl Ravenhall – former MD at Müller Wiseman – as a non-executive director, and Brian Mackie as COO.
Earlier this week, Gallacher announced a new governance structure for First Milk, which he said would involve a smaller, more commercially-minded board and a new council body to oversee business strategy and represent farmer owners. This would ensure the co-op “avoids some of the pitfalls of recent years and hence can provide the best possible return to farmer members”, he said.
“This change continues the pace of transformation at First Milk which has included the setting up of business units within the group, significant restructuring, a step improvement in the financial transparency of the business and a drive to focus on our core cheese and liquid contracts businesses.”
The Greenburn report also recommends the introduction of formal performance reviews for the CEO and efforts to re-establish its co-operative culture, among other measures.
Proposals for the new governance structure would be discussed with First Milk’s members at the AGM tomorrow, followed by a period of consultation, and will be finalised at a special general meeting in December, said a First Milk spokesman.
It comes as First Milk confirmed pre-tax losses of almost £25m for the year to 31 March.
The co-op’s annual report and accounts revealed it lost £1.2m in impairment charges for its underperforming sports nutrition subsidiary CNP, while more than £2m was spent on work to review its financial position.
The poor overall financial performance was “materially affected by the decline in market values impacting all areas of the business as well as performance issues in a number of areas,” said chairman Sir Jim Paice in the accounts.
The co-op’s precarious financial position was also highlighted by independent auditor Kenneth Wilson of PWC in First Milk’s annual report, who warned there were “material uncertainties which may cast significant doubt upon [First Milk’s] ability to continue as a going concern”, and noted First Milk had “continued to be loss making for the six month period to 30 September”.