Arla Foods to make first ever half year supplementary payment to farmer owners
Dairy cooperative’s half year results impacted by inflationary pressure across the supply chain
As the cost of producing milk rises significantly, Arla Foods will make its first ever half year supplementary payment to its farmers owners. In line with its new retainment policy, the cooperative will pay an additional 1 EURcent per kg of milk (0.85 ppkg) to all owners across Europe.
The first half of 2022 was dominated by inflationary pressures across all areas of the supply chain. Net revenue for Arla Foods UK in the first half 2022 is £1.15bn (€1.4bn), a growth of 8.3 per cent vs the same period in 2021. The growth is driven by prices increases in Arla’s retail and foodservice divisions, necessary to support famers with the on-farm cost challenges. As a result, Arla was able to increase its pre-paid milk price by over 30 per cent to its farmer owners. As the cost of production rises, on farm inflation has seen total costs increase around 51 per cent* in the UK since the start of 2021, with feed prices increasing around 73* per cent.
Revenue and price increases offset by cost inflation
During the first half of 2022, Arla Foods costs increased significantly across the supply chain on utilities, packaging and transportation, at both a total Group level and in the UK.
Ash Amirahmadi, managing director of Arla Foods UK, comments, “We are facing extraordinary times in food production as both our farmers and the company face high levels of exposure to inflationary pressures and costs increasing right across the supply chain.
“We are now seeing the impact of these rising costs in reduced milk volumes. This presents a significant challenge in balancing the price consumers pay with the need to ensure our farmers are paid enough to continue producing milk and protect security of supply. As consumers are trying to manage household budgets, we are doing all we can to absorb as much of the costs as possible to ensure dairy remains an accessible source of food. However the unprecedented volatility and cost rises we are seeing at both farm and business level mean that consequently our customers have also determined to increase their retail prices.”
Expected slowdown in branded performance
Total Strategic Branded Revenue Growth (SBRG) across the UK fell 6.3 per cent in the first half of 2022, as consumers’ shopping habits change and stabilise following two years of significant growth, driven by in-home consumption during Covid. Total Arla® Brands delivered a 4.5 per cent decline vs the same period last year, while the Starbucks® brand continued to deliver a strong performance with growth of over 19 per cent, driven by growing in-home and on-the-go consumption.
Following a rise in baking and in-home consumption which peaked during lockdown, Lurpak® has seen a 15.4 per cent fall in the first half of the year as usage occasions return to pre-pandemic levels, but remains category leader as butter continues to be a key staple in the home. In the yogurt category, the Arla Protein brand delivered a 58.4 per cent growth increase, driven by consumer demand for protein products, a strong mix of formats and the brand’s ability to tap into a younger audience demographic.
Arla’s Foodservice business continued to bounce back from the impacts of Covid and lockdown with a growth of 21.6 per cent as people return to eating out of the home.
Arla stays committed to sustainable dairy
In the first half of 2022, Arla announced the endorsement from the Science Based Target initiative (SBTi), confirming that its sustainability targets and plans are consistent with what is required to meet the Paris Agreement target of limiting global warming to below 1.5 degrees.
Arla’s UK partnership with Magic Breakfast also continued across the first half of 2022 and has now provided over 950,000 milk donations to schools across the country, enough to fill over 9.5million cereal bowls.
Total Arla Group results
Total Arla Group revenue was EUR 6.4 billion for first half of 2022 (up 17 per cent compared to EUR 5.4 billion in first half of 2021) driven almost exclusively by significant price increases in Arla’s retail and food service and commodity trading businesses. Following two years of exceptional branded growth in retail, as expected, branded volume revenue growth slowed down to –0.1 per cent. Profit share was 3 per cent.
Outlook for 2022
With ongoing inflationary pressure and political unrest negatively impacting global growth, Arla expects the second half of 2022 to be even more challenging as global milk production is expected to decline further and contribute to sustained high dairy prices, which will likely further diminish consumer confidence and consumption.
Arla is adjusting its expectations for full year revenue for 2022 in the range of 13.5-14-0, its branded sales volumes growth to -2.0 - -1.5 per cent. Year-end leverage expectations are 2.5-2.9 and net profit share at 2.8-3.2 per cent remain the same.
“2022 continues to be characterized by volatility and inflation, exacerbated by Russia’s invasion of Ukraine. Changes in consumer behavior continue to be multifaceted and difficult to predict and we expect our branded growth will slow down further. As a cooperative, we remain committed to be in a position to pay out the second instalment of our planned full year supplementary payment of 1.5 EURcent per kilo of milk to our farmer owners ,” says CEO of Arla Foods, Peder Tuborgh.
*Kite Cost of Production Report August 2022
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