Bega Cheese is facing a revenue hole of more than $100 million after Coles ditched the dairy company to supply its private-label cheeses.
Bega's shares dived as much as 12.6 per cent on Monday after Coles announced it had awarded its private-label cheese contract to Murray Goulburn. The five-year deal will begin next January and sent units in Murray Goulburn's listed trust soaring as high as 5.8 per cent.
This market is unforgiving and you can't have anything go wrong or have announcements that can be viewed as potentially negative.
The co-operative said the Coles contract was worth $130 million in additional sales and would allow it to invest in more higher-value-added products.
The value of Bega's deal with Coles is not known but it is understood it was worth a similar amount.
Bega executive chairman Barry Irvin said losing the contract would free up about $60 million in cheese inventory and allow the company to divert that milk supply into more higher-value-added products such as infant formula.
Bega's share price had surged more than 32 per cent after it launched a partnership with Blackmores in October to produce infant formula.
"Bega had been re-rates on the back of the Blackmores joint venture and was trading on a huge [price-earnings] multiple," said Morgans analyst Belinda Moore.
"This market is unforgiving and you can't have anything go wrong or have announcements that can be viewed as potentially negative."
But Bega chief executive Aidan Coleman said demand for the Blackmores range of infant formula, which hit the market last month, had been encouraging and had the potential to offset private-label contract losses.
"We have been very encouraged and very pleased with the level of uptake … in fact we even had to reprogram parts of our production at [Bega's infant formula factory in] Tatura to cope with the increase in demand," Mr Coleman said.
"Those nutritional products, by nature with the technology behind them, generate substantially higher margins and value-add so we can see those compensating for other things we might lose in the meantime."
In the past two years supermarkets have been signing longer private-label contract deals with dairy to supply milk and cheeses. While these contracts are typically low margin, they're longer length, ranging from five to 10 years, and give processors a foundation to invest in more higher-value-added parts of the business.
Mr Coleman said in the past five years Bega had held Coles' cheese contract, it has been doing just that.
"We unquestionably drive our business into more higher-value-added products."
Murray Goulburn managing director Gary Helou said the cheese contract, which followed the co-operative securing a 10-year deal with Coles in 2014 to supply the supermarket chain with fresh milk, was part of a greater push into the domestic dairy foods market.
He said becoming a bigger player locally would fuel Murray Goulburn's global expansion, particularly into Asia.
"You need to build critical mass in your domestic market to be able to play a bigger role regionally and internationally," Mr Helou said.
"This long-term deal with Coles gives us that critical mass and allows us to get capacity, efficiency and capability to win bigger and deeper markets."
Murray Goulburn is investing up to $145 million at its cheese factory at Cobram in northern Victoria to improve cutting and wrapping capability, which will help lower production costs.
"[The investment will] deliver world-leading technology for processing and packaging a range of consumer and food service cheese products including block, slices, snacking and shred," Mr Helou said.
"Ultimately, these investments are being made to support our drive to deliver sustainably higher and more-stable farmgate prices and returns over the long term."
A Coles spokeswoman said the company would continue to stock Bega-branded cheeses.
"We look forward to continuing our good relationship with Bega Cheese and remain committed to stocking branded products produced by Bega Cheese," the spokeswoman said.
"This year we will continue to source Coles Brand cheese from Bega Cheese and stock around 20 Bega-branded products in our supermarkets."
