Tesco has written to members of the Tesco Sustainable Dairy Group (TSDG), a group of 650 dairy farmers that supply milk directly to the retailer, to say it is launching a comprehensive and thorough review of how it buys milk direct from farmers.

In a letter to producers, Tesco said major industry changes, including the removal of EU milk quotas, world dairy market volatility and shrinking processor and producer numbers, have forced a rethink of how the company sources its milk supply.

TSDG was established in 2007, giving Tesco a direct milk supply from 650 British dairy farmers, providing for the retailer’s liquid milk, cheddar and cream needs.

Tesco pays these farmers a higher return than the average UK milk price of 24p/litre, with the price paid linked to the group’s average cost of production. The group’s milk price for the month of May was set at just over 30p/litre, making the direct supply scheme a very expensive way of sourcing milk for Tesco.

In his letter to farmers, Tesco’s commercial director for fresh food and commodities, Matt Simister, said the review would look at reducing transaction costs, add more value and manage risk better.

National Farmers Union (NFU) dairy chair, Rob Harrison, has called on dairy farmer members of TSDG to “fully engage” with the review, although he acknowledges the decision will cause worry and concern for producers.

In Ireland, Tesco has no such direct supply arrangement with dairy farmers, but it does purchase more than 42m litres of Irish milk every year.

The retailer acts as a significant route to the domestic market for many Irish dairy producers, while also buying 14% of all Irish dairy exports in 2014.

Review

It is no surprise that Tesco has chosen to review its costly milk supply scheme in the UK after the difficulties the business has endured over the recent past.

Last year, Tesco recorded annual losses of £6.4bn (€8.9bn) and the retailer is currently engaged in a bitter price war with UK rivals in a bid to regain market share from discount retailers.

Offloading assets

Since taking charge of Tesco last year, chief executive Dave Lewis has been looking at every option as he tries to turn the business around and clean up a balance sheet with debts of more than £21.7bn.

Assets that Lewis views as not being part of Tesco’s core business are all up for consideration, with the group’s broadband service and Blinkbox business – an online streaming service for movies, music and books – already sold in the past six months.

In April this year, the retailer put its customer analytics business, Dunnhumby, on the market, with up to 40 possible suitors, including private equity-led consortiums, showing an interest in the business.

Interestingly, it has emerged that the US tech giant Google, in partnership with a British private equity group, is on the verge of making a serious bid for Dunnhumby, a business valued up to £2bn (€2.8bn).

Tesco acquired Dunnhumby in 2004 and it has been hugely successful, gathering and analysing data from almost 1bn shoppers around the world.

The data is generated from Tesco’s Clubcard loyalty scheme and is hugely valuable, with major food and drinks companies like Coca-Cola, Unilever and Nestlé willing to pay a premium for access to the consumer data.

In the UK alone, there are a staggering 56m Clubcards in circulation – almost one for every person in the country.

Shopping centre

Tesco has also put one of its most successful Irish assets, Golden Island shopping centre in Athlone, up for sale this week, seeking more than €40m for the retail centre sitting on approximately 18 acres.

Golden Island generates an annual rental income of more than €3m, with an average weekly footfall of 65,000.

Offloading the property to a commercial investor that will seek to upgrade and expand the shopping centre will allow Tesco to refocus on its core retail business.