Neil Kennedy: Our view was that, to get a sustainable return back to our members, we had to get into processing, and that’s the journey we’ve been on for eight years; getting the finance right, lining up the customers, buying the assets and getting the value from them.
Through a series of acquisitions and rationalisations, we now have seven factories that we own ourselves, and a joint venture at Westbury. We have a turnover of £550m with 70% of our milk being processed through our own assets. We’re a leading player in cheese, a leading player in long-life, flavoured milks and are now making a competitive return to our members having started with lots of debts and at the foot of the milk price league table. We recognise that while we’re a big player in the UK, we’re pretty small in a European context or a global context, so there’s much that needs to be done. We’re still a work in progress. Eight years in an industry’s history is but the blinking of an eye.
Kennedy: Prior to the innovation centre, our principal business was working with our retail and foodservice customers on their brands. Those customers seek innovation and points of difference, and we’re seeking points of difference from our competition as well. We’re looking to add as much value to our members’ milk as possible. Just turning milk into dairy commodities doesn’t get you a very good return.
We had some limited development facilities, often at the other end of the country. You can only take kitchen development so far, and at some point you have to scale up. This often means you have to go into large-scale production. It’s a lot of product to commit to and you have to be confident that it’s absolutely right. So, about 18 months ago, we felt that we really wanted to kick up a gear in terms of innovation, make a statement to our customers about our seriousness and focus on innovation. We would have a dedicated team and it would be right across dairy.
Geographically, we felt it would ideally be in our heartland, southwest England. Devon is the biggest milk producing county in England, and Taw Valley is the leading Cheddar creamery, so it seemed the logical place. We were able to use some available space within the building, completely refurbish it, get it up to food grade standard and install a development kitchen, a pilot facility and small-scale production facility. We can produce a small quantity in ideal conditions and test-market it in half a dozen retail stores. And there’s no better test of consumers’ responsiveness to a new product than by asking people to buy it.
That has taken a bit of doing – getting the right place, installing the right equipment and getting the right team. We have a team of eight, people with a blend of skills, so you have packaging skills, development technology skills, creative ideas skills; that team has now come together. We had to source the equipment – kit that could mimic the same temperature and pressure settings that were in the main plants. It gives us a competitive advantage and it’s about developing our future income stream.
Kennedy: It’s easy in this current climate to get depressed and think that the only thing the consumer is interested in is price. I don’t subscribe to that point of view. While price has probably gone up in importance, value for money is probably more important. The cheapest products are not necessarily the best value.
I think consumers are looking for interesting, organoleptic experiences; products that stimulate the senses. And this is particularly the case for cheese. At one end of the market, you have staple products, replenishment items that consumers always have available. At the other end of the spectrum, you’re looking at taste experiences, interesting varieties, tastes and textures – an example of that would be, where do you go in the development of Cheddar. Some people think that Cheddar is Cheddar is Cheddar, but we don’t think so.
As you know, we have a product called Tickler – an extra mature Cheddar that we brought out 18 months ago. It’s a highly intense flavour without any of the nasty ‘off’ taste you can sometimes get with strong Cheddars, and we’ve developed a product that develops sodium lactate over life, little crunchy bits that consumers think are salt crystals, and consumers like that unusual, different taste experience. It’s more of a connoisseur’s Cheddar rather than a fridge item for general family use.
Consumers want healthier versions of dairy products that don’t compromise on taste. Dairy products that offer very low fat, very low calories, yet have a big compromise on organoleptic delivery are only appealing to a narrow section of the population – those on strict, fat-controlled diets. Of much broader appeal are products that are healthier, yet still deliver on most of the organoleptic requirements. In blind tasting tests, consumers couldn’t tell the difference between semi-skimmed milk and our 1% long-life milk, yet you have 40% less saturated fat, a meaningful amount but no trade-off in taste.
So we think there’s lots of opportunity in that respect in cheese. We watch with interest what some of our competitors have done and with some of the products out there where we believe that the reduction in organoleptic quality is too much.
We’re excited about the innovation centre. Over the coming years, we expect to see products coming out of our new facility that will be a major source of income. I think our innovation at this stage will focus primarily on milk-based products, on long-life products, and on cheese. I want lots going in at the top – lots of ideas – but we need a good filtering system to get the best out, because we know that every new product doesn’t succeed.
Testing its success will be looking back in two or three years and saying that I’m glad we took that step. But we believe we’ve got the right ingredients.
Kennedy: We made a strategic commitment to get involved in organic and we view this as a long-term trend, even though there may be some short-term challenges this year. The difficulty with the market over the past few years has been managing the demand/supply curve. We had a situation where demand got ahead of supply, so you’re encouraging farmers to convert to organic and then you have a danger that demand will fall right at a time when you have additional conversions coming on-stream. That’s a challenge for the industry to manage.
Ourselves, OMSCo and Yeo Valley – three significant players in this market – are working closely together and it gives the best possible chance of avoiding a crash. We have a view that this is a long-term game and if you go through a bumpy patch, you need to help the producers through that rather than ditch the whole thing.
Yeo Valley is the strongest brand in the organic dairy field. It has gone beyond just organic; it’s a brand with character, with credentials, so we use that brand on our organic Cheddar that we produce in Taw Valley. It was a learning curve for us because we hadn’t produced organic before. You use a different rennet, and organic milk does have different natural constituents, but we’re pleased with the product. It has developed its own character.
My view is that organic products need to be different to, rather than identical with, their conventional peers. I think part of the success of Yeo Vally Organic yogurt is that it’s a different yogurt and has its own positive characteristics. In cheese, we try to replicate some of that thinking.
A consumer seeking value applies as much to a consumer who’s inclined to buy organic or is inclined to buy welfare products or better quality products. I don’t think we should presume that value is purely the domain of people that don’t have much money.
Kennedy: This subject has really shot up the agenda over the past couple of years, and it operates at different levels. In our processing operation, we’ve had to gain Integrated Pollution Prevention and Control (IPPC) certification, which sets your standards for dealing with effluent, emissions and water usage. Historically, dairy businesses have been focused on compliance and cost savings, and IPPC has set the compliance levels much higher.
Our focus in terms of what things we want to do that have the most environmental benefit? Well, energy costs have been so high – that’s certainly a focus. We’re saying isn’t it great that oil is down to $40 dollars a barrel, well go back two or three years and we were paying $20 dollars a barrel. Energy is expensive and particularly in making cheese, evaporating lots of moisture out of milk, so we’re big energy users.
So, for power, electricity, gas and water usage, the most effective thing we can do for the environment and for cost is be efficient. That’s about oil replacement and getting the best technology; about using a combined heat and power system. We’ve spent a lot of money across the business getting more efficient, but we haven’t finished yet. There are still upgrades to do.
Equally, at the other end, it costs money when you have failures and waste, and that’s about how you design your packing and processing systems. In the amount of materials we use, customers are looking for weight reduction and that saves costs for both parties. Technology helps you with thinner materials that have the same barrier properties: less plastic, less card.
I think one of the big trends of the last 10 years of supplying grocery multiples has been the development of shelf-ready trays to save labour. Yet, that tray is serving no product protection purpose; it’s serving no consumer benefit purpose. The development of finding systems where your transit packaging can also be your display packaging, without spending a king’s ransom, is a challenge for the industry.
There’s a lot of media coverage on food waste at the moment. In certain parts of the country, consumers have to segregate their food waste, and I think it’s bringing home to them how much they’re wasting. I think manufacturers have a role in helping consumers, because there’s been a trend to ‘bigger pack, better value’. But ‘bigger pack, better value’ can equal more waste. In dairy, six-pint bottles may be great for some consumers, but once you open it, you really want to be using that in three or four days. There’s evidence that there’s a considerable volume of milk being wasted because consumers are buying inappropriate pack sizes. I think this is a green issue and it’s an area where the food industry and our industry can help the consumer.
Another issue is milk and food miles. Milk miles in and food miles out represents a large part of the cost of getting a product to a retailers’ shelves, and I think there’s lots of opportunity to squeeze out more efficiencies. We’re looking for vehicles to travel the least distance possible with a full payload, and one thing that’s slightly counter to that is customers wanting to de-stock their supply chains and have just-in-time deliveries. There’s a big job to do there, and it demands more cooperation.
And we’ve been working with others to say to our retail customers, ‘Why do you feel the need to import certain products when we can make them here?’. And I think we’ve made a lot of progress over the last two or three years, and I don’t want to lose the ground that we’ve gained because of the recession. We want a sustainable, indigenous British dairy manufacturing industry. How we play this year, with all its pressures, will greatly influence the degree to which we have a vibrant, sustainable industry in the future.”
Neil Kennedy is managing director of integrated dairy business Milk Link.
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