One of Tesco’s biggest milk suppliers has insisted that a profits warning issued on Thursday was unrelated to Tesco’s decision this week to go head to head with Asda on retail milk prices for the first time.
After limiting deep-cut milk price promotions to its tertiary Creamfields range, Tesco slashed the price of its standard four-pint bottles of semi, skimmed and whole milk by 28p to £1.25 this week, eight weeks after Asda kickstarted a price war on grocery basics as part of a strategy shift away from below-cost selling of alcohol.
In the same week Tesco also increased the price paid to farmers in the Tesco Sustainable Dairy Group by 1.28ppl to 28.18ppl. Robert Wiseman denied, however, that a projected £16m dip in profits was related to this week’s moves by Tesco.
Wiseman said the warning resulted from an accumulation of market pressures. “The trading update is a result of fierce competition across all sectors of the market,” said a spokesman.
Tesco also denied asking Wiseman to help fund this week’s cut. However industry experts were quick to link the milk price wars to the difficulties being faced by processors.
“The processors are coming under increased pressure,” said one dairy expert. “Draw your own conclusion as to where the margin is going to come from.”
Another source suggested the “seismic change” in Wiseman’s forecast could only come as a result of contract negotiations. “There are three significant contracts for Wiseman. The Co-operative Group’s and Sainsbury’s contracts have been renewed recently, seemingly with no impact on market forecasts. That leaves only Tesco.”
As The Grocer went to press, Sainsbury’s also lowered the price of its standard milk to £1.25 while joining Tesco and Asda in a 2-for-£2 multibuy.
Sainsbury’s said it would not pass on the cost of the price cut to farmers. Asda also said it would take the hit for the price reduction it made in July.
While Waitrose said it had no plans to match Tesco and Asda, Morrisons brought back its 50p deal for four pints of 1% fat milk on Wednesday.
Tesco to pay more for milk as feed costs filter through (17 September 2010)
Robert Wiseman warns over fall in profits (16 September 2010)