Supermarket price war eats into cheese margins

The supermarket battle for market share eroded their margins on cheddar last year, according to a new report.

Retailers avoided charging customers more, as farmgate prices increased and wholesale cheese markets crept upwards in the 2013-14 milk year, DairyCo’s cheddar supply chain research showed.

For mild cheddar, the retailers’ gross margin fell from 49% in 2012-13 to 41%. For mature cheddar, their margin dropped from 48% to 42%.

Processors’ margins remained steady as farmgate milk prices and wholesale markets moved up together.

Their gross margin stayed flat at 9% for mild cheddar and dropped 2% to 14% for mature.

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DairyCo analyst Rebecca Hughes said better returns from the wholesale markets and competition for milk between processors saw farmers paid about 4p/litre more in 2013-14 than a year earlier.

“While wholesale and farmgate prices rose, retail competition between the big five retailers and the discounters, such as Aldi and Lidl, restrained price increases for cheddar at the retail level,” she said.

“Processor gross margins were largely stable over the year, but are likely to come under pressure in 2014-15 as global wholesale prices move to lower levels, as markets adjust to the improved global supply situation.”

Cheese production used just over a quarter of milk produced in 2013-14 and the total make was 2.4% higher on the year.

Lower milk production in 2012-13 had left cheddar stocks low, which helped wholesale prices rise even as farmers around the world produced much more milk.

But on the supermarket side, the average retail price for mild cheddar fell by the equivalent of 0.2p/litre and rose 0.3p/litre for mature.

The report said that retailer margins remained historically strong but would stay under pressure while the discounters grew their grocery market share.

“At the moment, the retailers appear to be absorbing the effect of new low pricing strategies arising in response to retail competition,” DairyCo said.

“However, if this continues and the wholesale markets rebalance to lower levels, it could start to negatively impact on processor gross margins.”