THE British dairy market is notoriously competitive, but investors were not prepared for yesterday’s shock profit warning from Robert Wiseman. Although its first-half numbers are in line, the second half is going to turn sour. Full-year profits are now forecast to be £7m lower than thought.
A crushing round of price negotiations with Tesco is the culprit. It is desperate to match Asda’s milk price, meaning a cut of 12p to £1.25 for four litres. And dairy farmers have waged a successful campaign against the supermarkets, claiming that lower prices mean they are living in poverty. Tesco and rivals are insisting that the farmers are paid more, keeping them happy and avoiding bad PR.
So Wiseman is being squeezed by the buyer and the supplier. Its full-year margin this year will be just 2p a litre, falling to 1.5p a litre in 2011-12. Turning a profit on margins this tight won’t be easy, especially as it is holding its dividend at 18p this year. It will undoubtedly have to scale back plans for investment, meaning it will be ill-prepared to capitalise if a recovery in prices arrives. There’s no point crying over spilt milk, but it’s time to offload any Wiseman stock.