The challenges facing US dairy giant Dean Foods, highlighted last week when the company posted a drop in earnings, announced job cuts and scrapped its profit forecast, have lessons for those in the dairy sector the world over.
Dean Foods continues to face pressure from private label, with US retailers continuing to look to liquid milk to drive traffic and with rival suppliers competing keenly on price.
Go deeper with GlobalData
The company highlighted the trend back in February but, worryingly for investors, there are few signs that the pressure is easing. That promises a challenging period for the group’s Fresh Dairy Direct-Morningstar division – which generates 84% of turnover, according to analysts at Sanford Bernstein.
Dean Foods does sell own-label milk of its own and the retail drive behind private label is shifting the mix of the company’s sales away from brands – denting its profits. When you consider that, in the first quarter of 2010, fluid milk, and, more broadly, Fresh Dairy Direct-Morningstar, generated almost three times the operating income than Dean Foods’ value-added business, WhiteWave-Alpro, it is clear to see why the challenges in fluid milk determines the performance of the entire business.
Dean Foods is stepping up its efforts to cut costs to protect margins and announced that up 400 more jobs could go. Such measures should be welcomed by investors.
However, cost cuts can only take a company so far. What Dean Foods needs to do is expand further into value-added dairy. The group does already have such a business – WhiteWave-Alpro – but it accounts for just 16% of turnover.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataUS fluid milk consumption is stagnant and long-term growth can be better achieved through moves into value-added dairy. A reliance on fluid milk is less than ideal, given the commoditised nature of the product. When the market for fluid milk is so challenging, so affected by consumer behaviour and so driven by price, such expansion becomes particularly critical.
However, given the leveraged nature of Dean Foods’ balance sheet, expansion into value-added dairy – at least in the short term – remains unlikely.
As such, the immediate options for Dean Foods look limited. It seems that all Dean Foods can do is sit out these challenging trading conditions, trim costs and wait for the market to improve.
On the other side of the world, in Australia, consumer demand for private-label milk has also grown as shoppers looked to manage their shopping bills. According to analysts at Euromonitor, that trend has been particularly apparent in fresh/pasteurised milk and has hit growth among branded products.
Murray Goulburn, which produces a third of Australia’s milk, has a limited presence in value-added categories. However, the dairy co-operative has decided to join forces with French food giant Danone in a venture that plans to sell a range of fresh dairy products in Australia from next year.
The venture should give Murray Goulburn a chance to gain a share of categories that are less exposed to the commoditised nature of the fluid milk sector and that, notwithstanding fragile consumer confidence, can command a premium from shoppers.
According to Euromonitor data published in February, yoghurt sales were expected to grow by 5% in 2009 to A$924m (US$805.8m). The provisional figures also suggested that the sales value of pro-/pre-biotic spoonable yoghurt would rise 7%.
Euromonitor said the downturn meant yoghurt sales would grow less quickly in 2009 but suggested the category is expected to see “marginal constant value CAGR over [the] forecast period to reach A$933m in 2014”.
“Pro-/pre-biotic spoonable yoghurt is expected to record the strongest growth at just over 1% constant value CAGR,” Euromonitor forecast.
Danone is certainly upbeat about the venture’s prospects, telling just-food today (17 May) that its “expertise” will help the company grow share in its first foray into Australia.
However, the company will face some strong brands, entrenched in the Australian market, including Fonterra’s Ski and Parmalat’s Pauls.
For all Danone’s nous in brand-building and marketing, the Activia and Actimel maker faces an uphill battle against the region’s better known products.
