Shares in Dean Foods, the largest dairy processor in the US, curdled yesterday (10 May) after the company admitted it was facing tough trading conditions – and could not see an end in sight.
Dean Foods’ stock closed down a whopping 28.4% after a day in which the company revealed its regional milk brands were being hit by consumers continuing to trade down and by retailers pursuing a price war in the category.
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Dean Foods president and CEO Gregg Engles had warned back in February that the company was facing pressure from private label but, worryingly for investors, that trend is showing little sign of abating.
That concern was compounded by Dean Foods admitting it could not be certain when trading conditions in milk would improve and deciding to pull its full-year profit guidance.
As well as hitting the company’s shares, Dean Foods’ problems in milk have also affected jobs. In a bid to prop up margins, Engles said the company would look to axe up to another 400 jobs – on top of the 100 posts already cut this year.
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To assuage investors, Engles insisted cutting costs was the company’s “single most important area of focus” but the uncertainty surrounding the processor’s profits soured its shares.
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By GlobalDataFluid milk, and, more broadly, Dean Foods’ Fresh Dairy Direct-Morningstar division, generated almost three times the operating income than that earned by its value-added business, WhiteWave-Alpro, in the first quarter of 2010. And that is in a quarter when Fresh Dairy Direct-Morningstar’s profits had taken a battering.
Not unreasonably, Engles pointed to the continued profit growth achieved by WhiteWave-Alpro and said there were signs that consumers were turning again to “value-added” products.
However, consumer confidence remains fragile and any substantial return to such brands will take time. Convincing consumers to pay for a “value-added” premium also takes time and investment in marketing.
All the while, wary shoppers are turning to private-label milk to save money, a trend that, given the importance of Fresh Dairy Direct-Morningstar to group profits, is having a significant impact on Dean Foods.
And it seems that all Dean Foods can do is sit out these challenging trading conditions, trim costs and wait for the market to improve.
As Engles told analysts yesterday: “Our ability to directly impact this erosion in the short term is limited, as neither of our choices is attractive. We can reduce the price gap, by lowering our branded pricing – thereby reducing our branded margins. Or we can hold price and continue to lose branded share into private label.”
With Dean Foods as the largest dairy group in the US, all in the sector will be watching how it reacts with keen interest.
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