Dairy Crest Group Plc.

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Dairy Crest Group Plc.

Dairy Crest House
Portsmouth Road
Surbiton
Surrey KT6 SQL
United Kingdom
Telephone: + 44 181 910-4000
Fax: +44 181910-4111
Web site: http://www.dairycrest.co.uk

Public Company
Incorporated: 1987
Employees: 3,400
Sales: £773.8 million ($1.27 billion) (1999)
Stock Exchanges: London
NAIC: 311511 Fluid Milk Manufacturing; 311512 Creamery Butter Manufacturing; 311513 Cheese Manufacturing

Dairy Crest Group plc, the dairy products processing arm of the former British Milk Marketing Board milk monopoly, has developed into one of the United Kingdom’s leading producers of consumer dairy products, dairy-based food services products, including doorstep milk delivery, and fresh milk products. The company has transformed itself considerably during the 1990s, from a milk processor dependent on fresh milk products for some 90 percent of its sales, to a diversified producer of a wide variety of dairy and dairy-based products, including cheeses, butters and other spreads, drinks, and—through its 49 percent participation in the joint venture Yoplait Dairy Crest—yogurt and “fromage frais” (fresh cheese) products under the Yoplait and other brand names. Dairy Crest is currently the U.K. brand leader in dairy spreads, through sales of its Clover brand. Moreover, the company’s Cathedral City and Davidstow brands have enabled it to capture a strong share of the British cheddar cheese market, the largest cheese category in the United Kingdom. After acquiring Millway Foods in 1999, Dairy Crest has also strengthened its position as leader of another favorite British cheese category, that of Stilton cheese. Dairy Crest is among the United Kingdom’s top five purchasers and processors of raw milk and supplies fresh milk products to leading retailers. While Consumer Foods forms the largest-and fastest-growing—part of the company, representing more than two-thirds of annual sales, the company also maintains a strong presence in the Food Services market. With foodservice sales of nearly £300 million in 1999, Dairy Crest is the United Kingdom’s leading dairy ingredients supplier. The company also operates the leading doorstep delivery service in the East Anglia/London region. Dairy Crest has been led since 1990 by CEO W.J. Houliston.

Milk Monopoly Spinoff in the 1980s

While Dairy Crest itself was formed in the early 1980s, it nonetheless had its origin in Depression-era England. Britain’s dairy farmers were under increasing pressure from the nationwide recession and resulting price instabilities. At the same time, the increasing use of automation in milking and milk preparation techniques made possible a vast increase in milk production, placing dairy farmers under even more pressure. Farmers began lobbying the government for some form of protection, which they received in 1934 with the establishment of the Milk Marketing Scheme. This scheme established a government-controlled milk buying and selling monopoly.

Dairy products manufacturers, having lost the ability to find competitive milk pricing, quickly began lobbying for a counterpart Milk Products Marketing Scheme to protect them from the Milk Marketing Scheme’s monopoly pricing power. After some five years of negotiations, the government at last agreed to provide dairy products manufacturers with relief, creating the Milk Products Marketing Board in 1939. Britain’s entry into World War II, however, quickly brought all of the United Kingdom’s dairy industry under government control as rationing rules were placed in effect.

The dairy industry was then placed under the control of a single government department, the Milk Marketing Board. While rationing was eased after the war, the Milk Marketing Board continued to regulate the UK’s dairy industry, not only fixing pricing levels, but also enacting production quotas. At this time, the dairy industry represented little more than traditional staple products, such as whole milks, butter, and cheese. Other products, such as yogurt and low-fat milk, were relatively unknown in the U.K. market of the time.

The United Kingdom’s entry into the European Community in 1973 not only forced a change in the functioning of the country’s dairy industry, it also brought about changing consumer habits—and product demand—as well. An early effect of European Community membership was the institution of production caps on member states. Not only were member states placed under production quantity quotas, they were also required to export a fixed percentage of dairy production to other member states each year.

As foreign milk and dairy products began to appear on the U.K. supermarket shelves, the Milk Marketing Board responded with the creation of its own “brand” of milk and dairy products. In 1981, the Milk Marketing Board established Dairy Crest as its dairy products processing unit. Dairy Crest began introducing its own branded products to rival its new competitors, as the United Kingdom’s consumers adopted new dairy consumption habits. The market share of low-fat milk, for example, rose from next to nothing to nine percent in the early 1980s; by the mid-1990s, that share had risen to 51 percent of the total milk market. Dairy Crest itself scored a success with the introduction of its Clover brand of imitation butter spread in 1984, as the U.K. consumer began seeking more healthful alternatives to butter. By the 1990s, Clover had taken the lead of the spreads market.

Dairy Crest was spun off as a company, still under the Milk Marketing Board’s control, in 1987. As the European Market edged toward a single-market structure, the food industry had begun to experience dramatic changes. Increasing quotas encouraged greater exports to member countries; as a result, Dairy Crest had found itself facing stiffer competition on supermarket shelves, with a growing variety of dairy products fighting for consumer attention. Dairy Crest, while starting to diversify, still relied on liquid milk products for as much as 90 percent of its total business. In addition, the newly spun off company faced other pressures. First, it was forced to maintain a bloated production infrastructure of more than 32 dairies and creameries, as well as a workforce of some 32,000. The company also maintained an extensive doorstep delivery business, despite the fading popularity and increasing costs of this service in much of the country. Moreover, Dairy Crest was required by law to purchase all excess milk production in the United Kingdom, whether or not this was beyond the company’s own needs.

Public Company in the 1990s

The British government came under increasing pressure to end the Milk Marketing Board’s monopoly, especially as the countries’ dairy producers and manufacturers were finding means of using the European Community trade rules to exploit loopholes in the Milk Marketing Board’s control of the U.K. milk production market. Preparations to abandon the milk monopoly began in the early 1990s, including the division of the U.K.-wide Milk Marketing Board into separate, smaller boards for the regions of England, Wales, and Scotland. As part of the breakup of the Milk Marketing Board, a new voluntary cooperative body, dubbed Milk Marque, was created. Farmers were then allowed to sell their milk to Milk Marque or to one of its private competitors, including Northern Milk and Unigate. Nonetheless, Milk Marque managed to sign up more than 80 percent of U.K. dairy farmers.

The breakup of the Milk Marketing Board was originally intended to coincide with the listing of Dairy Crest on the London Stock Exchange. In preparation for the listing, Dairy Crest, under the leadership of W.J. Houliston since 1990, had undergone its own transformation. During the first half of the 1990s, Dairy Crest succeeded in slimming down its operations, eliminating nearly half of its production facilities to consolidate its processing operations into just 14 creameries, dairies, and other processing and packaging centers. The company also steadily trimmed its workforce, bringing its total employees below 4,000. Meanwhile, Dairy Crest chose to exit most of its doorstep delivery business, keeping only its East Anglia market, where it held a leading position. In 1995, Dairy Crest realized an important acquisition, buying Mendip Foods Ltd., which enabled it to gain a leading share of the cheddar cheese market, the largest-selling cheese category in the United Kingdom.

Dairy Crest’s public listing was delayed because of government disagreement over the form of the milk industry’s deregulation. It was not until August 1996 that the company finally went public. Under the offering, the country’s 28,000 dairy farmers—considered the indirect owners of Dairy Crest after the breakup of the Milk Marketing Board—were given the option of taking shares in Dairy Crest or receiving a direct payment. More than 90 percent of the farmers opted for shares in Dairy Crest. This show of support also placed Dairy Crest under majority control of the farmers, which served to shield the company from any takeover attempt.

After its cost-cutting efforts and a strong investment program in revitalizing its industrial park, Dairy Crest turned to transforming its market focus. Seeking to reduce its exposure to the low-margin liquid milk business, Dairy Crest turned to higher-margin products such as yogurts and cheeses. By the late 1990s, the company had successfully reduced its liquid milk business to just 60 percent of its annual sales. Aiding this transformation was the joint venture company, Yoplait Dairy Crest, set up with France’s Sondiaal to market the yogurt brand Yoplait in the United Kingdom. Dairy Crest’s share of the partnership was 49 percent. The company’s Petit Pilous and other products proved quickly successful with the British consumer, and by mid-decade Yoplait Dairy Crest had taken the market lead in many of its product categories.

Company Perspectives:

We have established our operating base and achieved a position of financial strength from which to develop our future as a broadly based U.K. dairy food company. As one of the U.K.’s largest buyers of raw milk, Dairy Crest has always appreciated the vital role milk producers play in the success of the dairy business. The management’s task is to continue to develop Dairy Crest’s potential for the benefit of its shareholders.

Dairy Crest was also finding success with its other brands, including the Clover spread, which had captured the country’s lead in this category, and a line of fresh dairy drink products, called Frijj. Dairy Crest also began making a series of strategic acquisitions, including those of Anglia Dairies, for £4.6 million in 1997, and Raines Dairy Foods Operating Companies, bought for £66 million in 1998. The Raines purchase, made through the Yoplait Dairy Crest partnership, helped boost Dairy Crest’s European position as well, adding plants in several countries, including five production plants in France, and plants in Spain, Poland, and the Czech Republic. Another acquisition, made in January 1999, of Longs Dairies, helped strengthen Dairy Crest’s position in the East Anglia doorstep delivery market. At the same time, the company boosted its marketing of several of its key brands, including its Cathedral City cheese and other brands.

Dairy Crest’s transformation into a value-added dairy products company helped ensure double-digit sales growth in the years following its public offering. The company showed no sign of slowing down at the turn of the century. The company took the leading position in the Stilton cheese market with the acquisition of Millway Foods, from France’s Bongrain, in 1999.