Dairycrest shares slump after Tesco contract loss

Shares in Dairy Crest crumbled 18% today after the loss of a major contract with supermarket giant Tesco left investors crying over spilt milk.

The UK’s biggest retail chain has reduced its number of milk suppliers down to just Arla and Robert Wiseman, and left Surrey-based Dairy Crest to contemplate a potential hit to annual profits of up to £15m (€22.3m).

For East Kilbride-based Wiseman, the renewal of the Tesco deal comes a day after it secured a similar long-term contract with Sainsbury’s. Earlier this year, Arla was named as sole supplier to the UK’s number two chain Asda.

Dairy Crest will continue to supply Tesco with other dairy products but warned the milk loss would cause it to review its cost base. It pledged to discuss the impact with customers and suppliers but did not provide further details.

The company, which makes Cathedral City, Clover butter and Utterly Butterly, lost £84m (€125m) of its value following the share price fall, which saw the stock tumble 68p to 316p. In contrast, shares in Robert Wiseman surged 7% and Leeds-based Arla – best known for Lurpak butter – gained 3%.

Tesco, which is estimated to have a 12% share of the UK milk market, has increased the proportion of milk supplied by Robert Wiseman to 60% from 40%. No financial details on today’s deals have been given.

Wiseman’s new long-term contracts with Sainsbury’s and Tesco, which both come into force in January, will utilise its recent investment in dairies and depots, including a site at Droitwich. A further outlet is also due to open at an undisclosed location in the south east soon.

Robert Wiseman lost around £70m (€104m) a year from failing to renew the Asda deal but should have more than replaced the revenues in the last two days.

The group takes much of its milk from farmers co-operative First Milk, although this organisation also supplies Dairy Crest.

Morrisons, which now owns Safeway, is also thought to be re-negotiating its milk supply contracts.

Dairy Crest has ploughed more than £200m (€297.8m) into improving its facilities over the past four years with the creation of two “super dairies” at Chadwell Heath, east London, and Gloucester.

Cheese sales have been supported by a new creamery to open at Davidstow, Cornwall.