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KEY NOTE Milk and Dairy Products : August 2004

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This report covers:healthy eating, allery concerns,milk voucher scheme, bio products,milk review and subsidies, functional eating lunchbox products, children's products, organic dairy,liquid milk, cheese, yoghurts and chilled desserts, yellow fats, cream,

Companies and brands covered include: Arla Foods UK, the Cheese Company, Dairy Crest, Danone, Kraft Foods UK, A MCLelland, Milk Link Holdings, Müller Dairy UK,Nestlé UK, Robert Wiseman Dairies, fUnilever Bestfoods Uk, Uniq,Alpro, Associted Co-operative Creameries, Bonne Maman, Campina UK, Delamere Dairy, Galbani UK, Highgrove Foods, Ilchester Cheese Company,Kavli, Kerry Foods, The Kerrygold Company, Lactalis UK, McNeil's Consumer Nutritionals, North Downs Dairy Company, Onken Dairy UK, Rachels Organic, So Good International, Alpro,Food & Drink Expr, fInternational Food and Drink Trade Show, Good Food Show, Duchy Originals, Exclusively East Anglian, Filippo Berio, Heartily Healthy,LesKol, Quickes Traditional, Royal Farms Windsor, Butlers Farmhouse Cheeses, H & B Food Provisions, Losely Chilled Products, United Milk, GB,

EXECUTIVE SUMMARY

Executive Summary

This report examines the UK retail market for milk and dairy products, which Key Note estimates to have been worth £7.43bn in 2003. Sales have shown only slight levels of growth in recent years owing to many sectors within the market being relatively mature. However, new product development (NPD) activity is ongoing, ensuring that the market remains buoyant. The main sectors considered in this report are liquid milk, cheese, yogurts and chilled desserts, yellow fats (butter and spreads), and cream.

Growth in the market has been dampened by various factors. Consumers view products such as liquid milk as basic commodities and are therefore relatively unconcerned about aspects of branding. Price promotions have featured heavily in some sectors, serving to maintain consumer interest but eroding market value. The wide-scale success of retailer own-label products has also caused stagnation in overall market value. Own-label products are now available across most sectors of the milk and dairy products market and tend to retail at lower price points than branded products.

Much NPD in the milk and dairy products market has tended to focus on adapting existing ranges of products to address consumer health concerns. Reduced-fat brands are well established across a number of sectors and, since the end of the 1990s, activity has tended to centre on the type of fat found in products. For example, in the yellow fats sector, products based on olive oil have been well received. Functional ingredients designed to lower cholesterol or boost the immune system are now found in a wide spectrum of products, having debuted in spreads and yogurts. Consumers have also become more concerned about food allergies and this has fuelled strong sales of dairy alternatives, such as soya-based milks and yogurts.

Liquid milk accounts for the largest sector of the UK market by value and has seen some value growth with flavoured, filtered and regional products. Cheese sales have enjoyed some success through the successful assimilation and adaptation of trends seen in the wider food market, such as the desire for premium products and reduced-fat options. Yogurts and chilled desserts have also managed to tap into key areas of demand, while also gaining from a positive healthy image. Cream has established itself as an indulgent ingredient or accompaniment, although it faces strong competition from alternatives.

Suppliers to the milk and dairy industry encompass small independents, co-operatives, multinationals and quoted groups. The wide portfolio of products in the market and the specialist nature of some foods have managed to support this structure. However, since 2001, there has been considerable activity among the major groups, with mergers and joint ventures as well as acquisitive activity.

The relatively mature nature of the milk and dairy products market, along with the high consumer penetration levels, means that possibilities for growth are limited. However, companies are investing in brands and developments, and this should contribute to higher sector values in some areas of the market. Overall, Key Note anticipates that the market will show limited growth in real terms over the next 5 years (2004 to 2008).

TABLE OF CONTENTS

Executive Summary

1. Market Definition

REPORT COVERAGE

MARKET SECTORS

MARKET TRENDS

Healthy Eating

Allergy Concerns

Functional Eating

Lunchbox Products

Children's Products

Organic Dairy

ECONOMIC TRENDS

Gross Domestic Product

Table 1: UK Gross Domestic Product at Current and Annual Prices (£m), 1999-2003

Household Disposable Income

Table 2: Average Annual UK Household Disposable Income (£ and %), 1998-2002

Inflation

Table 3: UK Rate of Inflation (%), 1999-2003

Unemployment

Table 4: Actual Number of Unemployed Persons (million), 1999-2003

Population

Table 5: UK Resident Population Estimates by Sex (000), Mid-Years 1999-2003

MARKET POSITION

The UK

Table 6: Index of UK Spending on Food and on Milk and Dairy Products at Current Prices and Expenditure on Milk and Dairy Products as % of Total Expenditure on Food (index 1999=100 and %), 1999-2003e

Overseas

2. Market Size

THE TOTAL MARKET

Table 7: The Total UK Milk and Dairy Products Market by Value at Current Prices (£m at rsp), 1999-2003

BY MARKET SECTOR

Liquid Milk

Table 8: The UK Liquid Milk Sector by Value at Current Prices (£m at rsp and %), 1999-2003

Cheese

Table 9: The UK Cheese Sector by Value at Current Prices (£m at rsp and %), 1999-2003

Table 10: Cheese Production in the UK by Type (%), 2002

Yogurts and Chilled Desserts

Table 11: The UK Yogurts and Chilled Desserts Sector by Value at Current Prices (£m at rsp and %), 1999-2003

Yellow Fats

Table 12: The UK Yellow Fats Sector by Value at Current Prices (£m at rsp and %), 1999-2003

Cream

Table 13: The UK Cream Sector by Value at Current Prices (£m at rsp), 1999-2003

OVERSEAS TRADE

Imports

Table 14: UK Imports of Selected Dairy Products by Type by Value (£000), 2002 and 2003

Exports

Table 15: UK Exports of Selected Dairy Products by Type by Value (£000), 2002 and 2003

3. Industry Background

RECENT HISTORY

NUMBER OF COMPANIES

Table 16: Number of UK VAT-Based Enterprises Engaged in Food Manufacture by Turnover Sizeband (£000 and %), 2003

EMPLOYMENT

Table 17: Number of UK VAT-Based Local Units Engaged in Food Manufacture by Employment Sizeband (number of employees and %), 2003

REGIONAL VARIATIONS IN THE MARKETPLACE

DISTRIBUTION

Table 18: Retail Distribution of Milk and Dairy Products by Type of Outlet (%), 2003

HOW ROBUST IS THE MARKET?

LEGISLATION

KEY TRADE ASSOCIATIONS

Dairy Industries Federation

The Scottish Dairy Association

4. Competitor Analysis

THE MARKETPLACE

MARKET LEADERS

Arla Foods UK PLC

Company Structure