Mark Allen, Dairy Crest's chief executive was interviewed by Graham Ruddick in today's Daily Telegraph. Mark talked about Dairy Crest's latest venture into demineralised whey powder. Read the full transcript below:
Mark Allen in the Monday Interview - Daily Telegraph
Dairy Crest was created in the 1960s by the Milk Marketing Board to turn the 80m gallons of milk left over each year into butter and cheese.
Dairy Crest was spun off into a separate company in 1980 and eventually privatised through a float in 1996, but it does not appear to have lost its ability to turn seemingly surplus organic materials into edible products for British consumers.
The company's latest plan is to make baby food. This will be created by using the excess liquid - known as whey - created when it produces cheese at its factory in Davidstow, Cornwall. Demineralised whey powder is a key ingredient in baby food.
"You have to make cheese to get whey," Mark Allen, chief executive of Dairy Crest, explains. "So, when you start the cheese process, the cheese and the milk separate into two things."
"It separates into curd - which goes on to become cheese - and the vast majority of what is left is water, but it contains minerals, vitamins, proteins, and sugars. We currently dry that, so take the water away, and make whey powder."
"Whey powder is traditionally sold into the food industry to a lot of the big confectionery and cereal manufacturers. What we are doing now is making demineralised whey powder by taking out some minerals from the liquid whey that are not appropriate to be served to an infant."
"That powder goes to the baby food manufacturers who add other things to make a product that eventually becomes baby food."
Baby food is a new direction for Dairy Crest, which is better known as the maker of Cathedral City cheese, Country Life butter, flavoured milk Frijj and own-brand supermarket milk.
Allen and his team have decided to move into baby food because advancements in technology mean that it can now make better use of its excess whey. Before choosing to make demineralised whey powder, Allen even strongly considered using Dairy Crest's whey to make body-building food.
Dairy Crest intends to bring in a partner that will eventually sell the baby food under its own brand, but still expects significant returns. The company plans to spend £40m - including expanding the Davidstow factory - and is looking to receive that back in eight years. This would mean adding £6m every year to Dairy Crest profits, which at present stand at £50m.
This sort of innovation has been key to Dairy Crest developing as a public company. Its core business of milk has painfully thin margins. The company supplies about 15pc of UK milk, but the £1bn of revenues in its dairy business delivers just £10m of profit, which is a 1pc operating margin.
The milk business remains exposed to fluctuating commodity prices and the notorious demands of supermarkets, which has led to tension between Dairy Crest, the 1,300 farmers in England and Wales that provide its milk, and retailers.
However, since floating, Dairy Crest has built a significant branded business to offset the volatility of milk, led by Cathedral City cheese, which is now the biggest branded cheese in the UK and worth £250m of annual sales.
Allen first joined Dairy Crest in 1991 and ran the cheese business before becoming chief executive in 2007. He has overseen a stark transformation of the cheese range, with other innovations including the introduction of resealable packaging and, more recently, the launch of a three-year-old mature cheese under the Davidstow brand.
"I think it is the only commercially sold UK manufactured cheese that is three years old," Allen says proudly in his Staffordshire accent. "If you talk to people that are much better at tasting cheese than me, they would say that Davidstow is a very creamy, smooth mature taste, rather than a harsh mature taste."
Allen has set an ambitious target that 10pc of sales every year should come from products developed in the last three years. The target is often not met - it was 5pc last year - but Allen says it is about "creating a mindset" for the business.
"You have to recognise that people change," he explains. "People are changing the way they shop, people are changing their purchasing habits, but they are also changing their taste profiles."
"If you go back 50 years when I was a small boy, most people consumed mild cheese in the UK. That is not the case in the UK today; most people consume mature cheese of one level or another. It's a massive change."
The focus on innovation marks a welcome change from a fairly miserable 2012 for Dairy Crest. Write-downs on its dairies business dragged the company to its first annual loss since privatisation and farmers blockaded its milk processing plants in Derbyshire and Gloucestershire in protest at Dairy Crest cutting the price of milk.
Allen, who is also chairman of the Prince's Rural Action Programme, admits that Dairy Crest made a mistake by trying to cut prices at short notice.
"Our objective is to pay a fair price to farmers, recognise the challenges that they face and try to support them," he explains.
"The reason we want to do that is we are a British dairy company. We are the only British dairy company in public ownership and for us to be a dairy business we need to have high quality British milk."
"On that basis, to encourage farmers, we have got to be fair and treat them right."
He adds: "Last year was just about as tough as it could get for farmers, but actually it was pretty tough for dairy companies as well. We had to hold a mirror up to ourselves, look at the way we do business and try to evolve in a way that recognised the importance of milk and therefore farmers to us."
"We did a number of things. We very quickly signed up to the voluntary code. The second thing we did is that prices have been increasing consistently since then and are now 10pc-ish above where they were this time last year."
"The third thing we did, which was unique, was we were the first dairy company to devise a formula [to set the price it pays for milk] that takes into account farmers' problems as well as the markets. It looks at on-farm costs of feed, fuel and fertiliser, then it looks at things off-farm like the price of cream and the price of milk in supermarkets. We think that is a fair way of doing it."
Dairy Crest has been forced to close dairies to cope with the challenging market conditions in milk, including historic sites in Aintree, Merseyside and Fenstanton in Cambridgeshire.
But Allen is optimistic for Dairy Crest's milk business and Britain's agriculture industry, in which dairy is still the largest sector and worth £3bn a year.
Dairy Crest is looking to grow margin in its milk business to 3pc, which would see profits increase from £10m to £30m. Allen also believes the company and farmers could be boosted by a growing demand for fresh food sourced in Britain after the horse-meat crisis.
"The sector sits on a huge opportunity from the consumer demand for shorter supply chains, the demand to know more and more about where their food comes from."
"I think farmers in the UK, not just dairy but right across the sector, should treat that to be a real opportunity."