Three men in suits – a prime minister, supermarket supremo and the MD of a dairy processor – stood drinking glasses of frothy cold milk on the steps of the first MG Co-op factory dedicated to supplying fresh Devondale-branded and private label milk to Coles. Beneath the froth, however, doubt among the very dairy farmers sponsoring the opening celebrations continues to simmer and bubble.
Ever since the Coles deal was announced, there have been skeptics. Plenty question whether it is possible to make money supplying milk that retails at a dollar a litre and the concept alone that milk could be priced cheaper than water offends many dairy farmers.
The speculation and anger reached new heights this week, however, after a scathing opinion piece in the Australian Financial Review that says MG managing director, “Helou ‘in a hurry’ has a reputation at MG, as he did at SunRice, for being hell bent on revenue over margins.”
The AFR also writes, “MG’s margins are non-existent and its deal has locked the whole industry into $1 milk for a whole, punishing decade, structurally squeezing the profit pool.”
All that gloom follows the journalist’s derisory comments about the Sydney factory being at least one month late, $30 million over budget and the trigger for contractual penalties that can only be imagined. And, yes, when the deal was announced, MG’s farmer shareholders were promised the factories would cost “just” $120 million. MG now puts that figure at $160 million, hinting at a cost blow-out of staggering proportions.
To top it all off, Coles ads pimping our cherished, premium Devondale-branded milk at just 75 cents per litre sent shockwaves through the Australian dairy community on Twitter yesterday.
So, I sent a list of questions off to MG’s executive general manager shareholder relations, Robert Poole, who to his great credit offered these explanations:
Q. What are the actual costs of the two factories?
A. Following our initial cost estimates for the two factories we decided to invest in additional capability and capacity to maximise efficiencies through automation and layout. This brought the total investment in our Melbourne and Sydney facilities to approximately $160 million. This provided for future operational cost savings.
Q. Has MG been unable to supply milk to Coles on time?
A. We have had some shortfalls, however contingency plans were promptly enacted . Laverton is ramping up towards its full capacity and at the moment is servicing Coles requirements in Victoria plus the Devondale Brand both in Victoria and NSW. Our NSW plant remains scheduled to commence production in early August, at which time MG expects to be able to be supplying all of Coles requirements in Victoria and NSW
Q. If so, what are the penalties?
A. This is a contractual matter between MG and Coles.
Q. Does MG have adequate raw milk supply for the Sydney factory now?
A. In New South Wales, we have already sourced more than 180 million litres of milk. This is more than enough to cover our initial requirements of approximately 100 million litres per annum in this market and allows for future growth.
Q. When do you expect the Sydney facility to be supplying milk Coles with its full requirement of milk?
A. The site is being commissioned through July with production scheduled to commence early August, reaching full capacity by the end of August.
Q. When will the investment break even?
A. Both sites are forecast to add positively to MG’s farmgate price from year 1.
If the Murray Goulburn deal with Coles can withstand a 33% cost-overrun and Coles’ penalties while adding to the milk price from year one, this must be an extraordinarily lucrative contract indeed. Who would have thought the Down, Down, Down folks could be so generous?
While you’re chewing that over, take a minute to look at the new Devondale ads via my fellow dairy blogger Lynne Strong, who tells me her post discussing the commercials has gone viral attracting around 1500 views in 24 hours. MG cannot be accused of being boring!