Liquid Products

Share of UK retailers’ own brand conventional milk

Source: DC estimates March 2010

Dairy Crest’s Liquids Products business processes and delivers fresh conventional, organic and flavoured milk to major UK retailers. It also manufactures, markets and sells FRijj, the leading fresh flavoured milk brand as well as potted creams including speciality and seasonal offerings and milk powders.

The business has four milk packing dairies located at Severnside in Gloucestershire, Chadwell Heath in London, Fenstanton in Cambridgeshire and Foston in Derbyshire. A large proportion of our potted cream and our retail milk powders are made at our creamery in Chard in Somerset. FRijj is produced at our Severnside dairy

Committed to an additional £75 million investment in our liquid milk dairies over the next three years in the three key areas of capacity, infrastructure and innovation

The Liquids Products business has a sustainable business model based on driving efficiency and cost reduction which provides customers and consumers with excellent quality and service through innovation and investment.

Lower milk costs, improved site operating efficiencies, reductions in milk and packaging wastage and lower distribution costs have contributed to a much improved financial performance.

We will build on this performance by accelerating investment in our liquid milk dairies. In addition to the recent investment of £34 million at our Foston site and our new regional distribution centre at Aldridge in West Midlands, we have now committed to additional capital expenditure of £75 million over the next three years in the three key areas of capacity, infrastructure and innovation. The capital plan will deliver new lines at our sites, driving efficiencies and creating capacity, and allow us to innovate through packaging and product technology.

The first phase of the programme has already commenced. In total we expect to commit around one third of the total cost during 2010/11. At Severnside we will invest around £13 million in the coming year. This will allow us to upgrade and expand milk processing and end of line capabilities, increasing the site’s capacity and reducing wastage. We also intend to replace our potted cream equipment and commission a new milk bag line and are investing in extended shelf life technology.

At Chadwell Heath we will invest over £4 million in 2010/11 in processing and cold storage capacity in preparation for new filling lines in 2011/12. We have already prepared the production areas for the first of these new lines. The Foston site is also now ready for an additional high speed filling line when the business needs it.

As our production facilities continue to become more efficient and we drive down costs we will also increase our focus on inbound and outbound distribution. We have a unique opportunity to use our national network of Household depots as regional distribution centres. By investing in advanced route planning systems we will integrate our dairies, regional distribution centres and selected household depots into a single supply chain from which we can offer customers efficient solutions whatever their store formats and sizes. This should allow us to reduce food miles, building on the recent improvements in vehicle fuel consumption.

We have grown milk sales to our major retail customers again this year. We have won new business with Lidl and the Co-op in the Midlands and this has helped increase our share of the retailer conventional milk market with a volume growth of 8% against a market decline of 1%. In Sainsbury’s, we are pleased to have secured a 3 year contract for conventional milk as well as national distribution for JUGIT and milk bags. This innovative new product, which reduces packaging by 75%, has won the best product innovation at the 2010 Sainsbury supplier awards. We are delighted by this and are excited about its future prospects.

Our leading milkshake brand FRijj, which now represents over 50% of the fresh flavoured milk market, increased its volume by 14%, again outperforming the market which grew by 10%. Innovative marketing targeted at young consumers has helped increase its retail sales to £44 million. Around a theme of swamp soccer, FRijj has sponsored Soccer AM and has used augmented reality technology to allow computer generated ‘Swamp Soccerettes’ to appear from the bottles. Since the year end the launch of the St George special edition has performed very well. Our investment of around £7 million over the next two years in packaging formats, processing capacity and new lines will allow further growth.

We have also been successful in improving the quality and health credentials of our range of own label flavoured milks as recipes move from using full fat milk to semi-skimmed. Investment in our production facilities at Chadwell Heath in London has enabled us to grow capacity and secure new business, which has helped generate volume growth of 55% for own label flavoured milk sales.

The organic milk market continued its decline with volume dropping 2% over the last year. However, new listings of Country Life Organic helped to drive growth in our organic milk volumes by 6%.

Addressing both health and indulgence markets, the WeightWatchers cream range has more than tripled in volume and the newly launched range of Baileys creams has secured listings in all of the major retailers and achieved strong sales in its first year.

We were particularly pleased by our service performance over the difficult winter conditions and the ability of our business to deliver the new Co-op conventional milk business that was acquired at short notice in June 2009. We are also proud to have halved the number of reported safety incidents in the year.

Our Ingredients operation, which is also based in Severnside, provides the Dairies Division with a flexible balancing solution and deals with the Group’s by-products such as whey and buttermilk. This operation has had a successful year on the back of rising commodity markets. Through careful management of seasonal supply and demand, the amount of milk and skimmed milk to balance was reduced significantly from the previous year and year end stocks were almost half the value of the previous year at less than £3 million.

During the year, we acquired the balance of the equity in Fayrefield Foodtec, which provides added value products in the ingredients arena and we have driven new branded opportunities in products such as Equilibrium stress relief tablets based on milk protein.

Looking forward, our focus remains on increasing efficiency and improving quality and service.

All of our 5 key brands were advertised on television in the year ended 31 March 2010. Our FRijj milkshake also uses innovative on-line marketing. FRijj is sponsoring a swamp soccer tournament and has recruited ‘Swamp Soccerettes’ to cheer the teams on	We have developed a patented milk jug, JUGIT, which reduces packaging by 75% and makes recycling easier. Sainsbury’s awarded JUGIT its 2010 best product innovation award and we are excited about its future prospects