Against a backdrop of farmer protests, milk value sales remain in the duldrums. What can be done to restore milk’s fortunes?

Supermarket price wars, eroded processor margins and dairy farmers staging protests en masse - it’s difficult not to feel the UK liquid milk market is in a permanent state of emergency. Amid the crisis talk, there is a recurring mantra: “we need to inject value back into the category”.

It’s not difficult to see why value has become such an urgent consideration. Over the past 12 months, milk value sales have barely moved, remaining flat at £2.9bn, with volume up by 1.5% year-on-year to 4.7 billion litres [Kantar Worldpanel 52 w/e 10 June 2012]. The figures don’t sound great but - shockingly - they’re actually an improvement on last year, when value fell by 6% year-on-year and volumes were up by 1.8% [Kantar 52 w/e 12 June 2011].

Volume growth of 1.5% might sound good, but with costs rising, the market is still a long way off where a healthy milk category should be, and the protests this summer have shown urgent action is needed.

Crucially, the overall category figures hide just how much pressure the mults are still under from the discounters. In the past 12 months, volume and value sales in the hard discounters have soared by 47.8% and 43%, while sales in Tesco - the supermarket that sells the most milk - have slumped 2.6% in volume and 2.9% in value.

Tesco milk sales have dropped because of a change in promotional strategy away from volume deals, says Kantar analyst Alex Bandini. “Shoppers have not made up for the smaller volumes by buying in store more often - meaning sales have fallen overall in the store.”

“Tesco shoppers have not made up for smaller volumes, so overall sales have fallen” Alex Bandini, Kantar

At the same time, the discounters have gone “from strength to strength” in milk, managing to attract both new shoppers and persuading existing shoppers to buy more, says Bandini. “The same is also true at a top-line perspective, with both Aldi and Lidl enjoying double-digit growth in total grocery,” he adds. “Fresh and chilled categories have been a key factor behind the increase in spend per trip in the discounters and milk is certainly a part of this.”

So what can be done to build value back into the category, and to prevent milk from turning into a loss leader for everyone concerned?

Paradoxically - given how focused on price cuts retailers have become through recent milk price wars - increasing the price of milk in the shops could be a productive starting point. In July, the supermarkets and - in an unprecedented move - discounters Lidl and Aldi increased their payments to farmers, while the major processors shelved proposed cuts to farmgate milk prices. Both can reasonably be expected to want to earn back the extra money they’ve spent and, if that can’t be done through reduced payments to farmers, consumers could be the obvious choice for footing the bill.

There would appear to be scope to increase retail milk prices. Liquid milk is one of the few grocery items to have bucked the inflationary trend in recent years - analysis from SymphonyIRI, released in July, shows the retail price of milk has fallen 16% over the past three years, while other grocery categories have seen average price inflation of 11%. Meanwhile, in July, a shopper poll for The Grocer by YouGov suggested 67% of consumers were willing to accept higher milk prices in the shops if farmers can be paid more.

A lighter take on the milk bottle

Milk bottles are changing rapidly as manufacturers develop lighter, greener and more attractive packaging. Alpla has launched a new “Eco Bottle”, which weighs up to 20% less than the average HDPE milk bottle and, Alpla claims, it will soon be “the new milk bottle standard in the market”. Crucially, the new bottle is compatible with processors’ existing bottling lines, requiring only minimal adjustments.

Alpla’s bottle has been trialled in small quantities in Tesco and Asda - through Arla and Robert Wiseman - since last year, but will hit the mainstream in a big way in 2013, when Arla will start using it in its new one billion-litre dairy in Aylesbury. The company is also in talks with other processors.

Alpla says it is confident it can achieve 30% recycled HDPE content in the bottles versus the industry standard of 15%, and hopes to achieve an even higher content in future. “It gives an added advantage to manufacturers because their lorries carry less weight, resulting in a carbon reduction, and consumers will have a little less weight in their basket too,” says Malcolm Finch, head of UK business for Alpla.

Meanwhile, in cream, the new buzzword is “pour-ability”. For years, Brits have bought their cream in pots, but these can make pouring difficult, as they are not easily resealable and a crust can form on the lip of the pot. Nampak Plastics is trying to address this with a new screwcap HDPE cream bottle, launched in May.

The company says research shows three quarters of consumers struggle to pour cream from traditional containers without spillage. They are also concerned about the perceived fragility of the container.

The new cream bottle is also a more attractive ‘straight to table’ package,” adds commercial director Jamie Tinsley. The bottle is already used by smaller players including The Proper Welsh Milk Company, Jacksons Dairies and Scottish Dairy.

Nampak isn’t the only company looking to refresh cream packaging. Last year Lakeland Dairies launched a 250ml cream in a Tetra Top carton with a screwtop lid, now in Morrisons.

The company claims the product - which has a shelf life of up to 60 days when chilled - is easy to stack and display because of its square design. A cream with a resealable lid made complete sense, says product manager Evan Scicluna. “It is much easier for consumers to use, and does away with mess, uncertainty over use-by dates and product waste.”

Consensus on price

The protests have also helped establish some consensus around how much it costs to produce a litre of milk - somewhere around 29-30ppl - and arguably, this new consensus should bring greater transparency to the supply chain and help make retail prices more sustainable.

Furthermore, there is evidence to suggest the intense price competition between retailers - which has resulted in numerous tit-for-tat moves on the price of four pints of milk in recent years - has reached a stalemate for now. Asda cut the price of four-pint bottles of standard own-label milk from £1.18 to £1 in July, but at the time of writing none of the other mults had followed suit, although Tesco and Morrisons offer four-pint bottles for £1 or less through tertiary brands.

The climate would seem to be right for retail prices to go up, but Patty Clayton, senior analyst for market intelligence at the Agriculture and Horticulture Development Board, doesn’t believe retailers will proactively put up prices. “Obviously, if milk prices worldwide shoot up again, the processors are going to have to pass higher prices for milk through to retailers,” she says. “They’re at a point where they couldn’t absorb it.”

It’s a view echoed elsewhere. Retailer returns on milk must be looking “somewhat depleted” following their commitments to give farmers more money, but it’s unlikely they will respond by upping retail prices, says one analyst. “Politically, it looks bad to pass the buck to the consumer right now - retailers got some glory for bailing out the farmers, but if they do this at the immediate expense of the battered consumer, it could all unravel.” If price rises are necessary, retailers will leave some time for the dust to settle after the protests, the analyst adds.

Besides, retailers may want to sit back down at the negotiating table if the rapid fall in bulk cream prices - heavily implicated in the dairy crisis this summer - comes to a halt, as experts now predict, amid milk shortages in key commodities markets such as the US (The Grocer, 25 August).

“When A2 comes in, it will deliver a greater cash return to the whole supply chain” Sean Uprichard, A2 UK

Brand power

In the meantime, the troubles experienced by branded and value-added milks shows how tough it is. Value sales of branded fresh liquid milk tumbled 7.8% to £640.2m in the past year compared with own-label growth of 2.9% to £2.1bn, while volume sales of brands have fallen by 11.3% year-on-year against own-label growth of 6% [Kantar].

Sean Uprichard, CEO of A2 Milk UK - a joint venture between Robert Wiseman and New Zealand’s A2 Corporation - believes the company’s new A2 milk brand, which will be marketed as an easier-to-digest alternative and is set to launch in Tesco this autumn, will provide retailers with a chance to establish a new benchmark in quality and price.

During a four-week period in Australia earlier this year, A2 grabbed a 6% value share of the Australian milk retail market. “In Australia, 57% of those buying A2 are buying it because they perceive it to be good quality, not simply because of its perceived digestive benefits,” Uprichard says.

Farmers supplying A2 milk will be paid a premium, and the brand will have a higher retail price than standard milk, Uprichard says. A2’s retail price in Tesco has yet to be confirmed, but in Australia it sells at double the price of standard. “When it comes in, it will basically deliver greater cash return to the whole supply chain - a better return to the retailer, processor and farmers, and should allow everyone else to move up,” he says.

Uprichard can certainly talk the talk but - as branded milk stalwart Cravendale has found - liquid milk is a tough category for added-value suppliers to compete in, no matter how strong or well-supported their brands. Filtered milk sales have suffered a 3% volume decline over the past year, with value down by 3.2% to £183.3m [Nielsen 52 w/e 9 June 2012], while sales of Cravendale are down 1% year-on-year to £165.5m and down 4.1% in volume to 194.2 million litres [IRI 52 w/e 9 June 2012].

Mike Walker, Arla senior director of branded milk and cream, admits the past year has been tough for Cravendale. “Filtered milk is still suffering from a challenging commercial landscape, given the trends we are seeing in standard fresh milk pricing and the growing influence of tertiary milks,” he says. Cravendale has lost some “lighter” buyers, Walker adds. In response, Cravendale owner Arla Foods launched a new 500ml PET bottle in May, which it hopes will attract more consumers to the brand through the food-to-go sector.

Cravendale also faces competition from own-label rivals such as Asda’s Fresher For Longer filtered milk, launched in May 2011 and, ironically, also produced by Arla.

Arla is determined to give consumers compelling reasons to buy Cravendale, says Walker. It is launching a new Cravendale on-pack offer on 8 September, giving shoppers the chance to get free packs of straws that can be turned into straw sculptures, and is bringing back its ‘cats with thumbs’ TV campaign.

The exception to the rule has been Arla’s other milk brand, Lactofree, which achieved 29% volume and 35% value growth in the year to 7 July [Nielsen]. And in July, milkshake brand Shaken Udder announced a move into standard milk. Although it is focusing on schools, it seems only a matter of time before it is trialled in the mults.

In addition, packaging manufacturers are working hard to make packaging more cost-effective for squeezed processors by reducing the amount of material used to produce a milk bottle, while various suppliers are also exploring the potential of marketing standard liquid milk as a sports drink.

Getting liquid milk out of crisis won’t be easy. But with milk firmly on consumers’ radars, a healthy flow of NPD in the pipeline and suppliers excited about new brand and merchandising concepts, the light at the end of the tunnel could be in sight.