Bottom Line: Milking the dairy brands

'I AM morally entitled to it,' said Christopher Haskins, chairman of Northern Foods, when asked why he was so confident that customers would accept an increase in milk prices in the new year. Whether Tesco and Sainsbury will feel such an obligation is another question.

Northern Foods' ability to hold out against attempts to embroil it in the price war says much about the strength of brands like Ski and Fox's, and its relationship with its four main retail customers. But it has still been unable to pass on its cost increases, as demonstrated by the drop in group margins from 8.4 to 8.1 per cent.

The price wars have only just begun in earnest and Mr Haskins' warnings about jeopardising investment and undermining quality are unlikely to cut much ice with supermarkets.

Price wars have already hit two of its lines of defence: corner shops are suffering as discounters open on the high streets and the majors slash their prices; and home deliveries of milk fell 11 per cent because of supermarket competition.

Fortunately, awareness of price is not universal: sales to Marks & Spencer - hardly the cheapest place for the weekly shop - have been powering ahead, as have Fox's upmarket biscuits. But that failed to calm investors, who have pushed the shares down 30 per cent against the market over the past year, and they fell a further 4p to 225p yesterday. On forecasts of about pounds 160m for the year, that puts the shares on a multiple of 10.9 and a yield, given a 6 per cent dividend increase, of 4.9 per cent. That may look attractive, but worries over price wars and milk reforms mean a re-rating could be some way off.