Dairy sector must focus on added value
The shakeup that Dairygold has gone through in the past few years is testimony to the pressure the Irish food sector has been under for some time.
Some difficulties are homegrown and others are linked to the EU and CAP.
The implicit view in recent comments by analysts is that industry will remain under severe pressure as global competition hots up.
This can be seen in the fall in milk prices and in margin erosion in the area of chilled foods.
It was significant when Kerry announced its interim results recently that it talked about margin pressure in the chilled foods sector. When Kerry talks about pressures it’s time to take notice.
It has been highly successful over the past 20 years in keeping operating margins over 8%, but that figure slipped somewhat as competition gets tougher.
Much of this is driven by the big multiples who are putting massive pressure on food companies to deliver cheaper consumer goods.
Weekend reports in Britain suggest Tesco is facing a government investigation through the Office of Fair Trading into its increasing hold on the British grocery market, where it commands a 30% share.
It may also be hit with an inquiry from the British Competition Commission, it has been reported.
At this stage £1 in every £7 spent by consumers in Britain is at a Tesco store.
The Irish dairy sector is privately acknowledging that the removal of the below cost selling ban will open up the vista for Tesco even further in this country.
Caught in the middle of this war is the food processor, facing increasing pressure to deliver quality goods on paper thin margins. To survive, analysts conclude they will have to move into the higher value addedareas.
In recent comments on how they saw Glanbia’s future, both Liam Igoe of Goodbody Stockbrokers and Kevin McConnell of Bloxham Stockbrokers were less than enthusiastic about its prospects.
Kevin McConnell said clearly the group needed to transfer more of its operations to added value goods where margins are higher.
To be fair, Glanbia has been moving in that direction. But it still has a high milk content to its operations.
Given that commodity prices will continue to fluctuate on world markets it will be difficult for the group, the country’s biggest milk processor, to keep its earnings on steady growth.
Overall, Glanbia is putting a lot of stress on ingredients and nutritional foods, where it has growing expertise.
Whether it likes it or not with such a large milk pool it remains a hostage to the commodities market and indeed to its farmer suppliers where milk price is a big issue going forward.
The dairy sector is facing a transition period and it is under pressure to serve farmers, shareholders - many of them farmer suppliers as well as Tesco and the other multiples.
It is a bit like trying to square the circle and the outline proposal of Dairygold to set up a totally separate consumer division looks like an option Glanbia might be forced to consider.
It is difficult for the group to manage the transition it is pushing itself through while accountable to the stock market and to analysts.
If its dairy division was removed from the plc, Glanbia would have a freer hand to focus on added value without having to worry about the impact of milk price on its public arm.
Already it has entered ito strategic agreements with Dairygold on the dairy side and that may lead to a fusion of dairy interests down the line which could perhaps be a long term solution.
Dairygold is fortunate at this stage not to be publicly quoted and it seems Glanbia needs perhaps to clarify its own strategic view of itself if it is to keep the markets on side.
