The dairy industry has faced a barrage of disruption in recent years. One threat that’s been looming large for some time now is the increasing trend toward in-house milk bottling by supermarkets. This in turn has made large grocers even bigger forces in the milk industry.
The trend really started drawing more worried attention around 2018 when Walmart opened its own milk processing and bottling operation in Fort Wayne, Indiana. Production from that plant meant that Dean Foods would lose out on around 100 million gallons in milk sales to its largest customer a year. Overall, in-house bottling operations that are also operated by Kroger, Albertson’s, Publix and others reduce how much milk is being purchased from suppliers like Dean’s and Borden which filed for bankruptcy in November and January, respectively.
The milk industry operates on razor-thin margins but large retailers aren’t always in the bottling business to make money from it directly. Some grocers readily admit that they use low milk prices to lure in customers, also known as a “loss leader.” To them, it’s worth it because milk remains one of the most frequently purchased items in grocery stores. Kroger’s group Vice President for marketing, Erin Sharp, told the Wall Street Journal late last year, “Virtually every basket that goes through has milk.”
The Wall Street Journal recently ran another interesting story about the struggles in the dairy industry and revisited some of Dean’s history with Walmart. According to people the Journal spoke with, Walmart floated the idea of Dean starting a separate operation for its Great Value brand back in 2012, but they never reached a deal. Then in 2015 when milk prices sharply declined, Dean reportedly refused to lower its wholesale price to Walmart. In 2016, Walmart announced it was building its own milk-processing plant, convinced that customers didn’t have as much loyalty to premium brands as some in the industry believed.
Because retailers can sell their own products for less, they have been able to undercut private labels. Analysts have found that in-store brands can sell for as much as -40% less than premium brands sitting right next to them in the dairy aisle. That price differential led to such a severe slowdown ins sales for some of Dean’s products at one point that Walmart dropped them from some of its stores, according the Journal. Maybe even more alarming, grocer Food Lion in 2018 ended its contract with Dean, instead opting to buy its milk from fellow supermarket competitor Kroger. The full story is available HERE.
Grocers argue that having their own operations makes them more flexible and efficient. Walmart in 2018 reported that its new plant helped reduce dairy costs, led to more efficient delivery times, and longer shelf life results. They touted the results as an example of how they are always looking for ways to deliver lower prices to customers. What’s more, retailers can make other products such as juice and iced tea when milk demand or prices slump.
Milk demand, in general, has been under pressure from changing consumer tastes as well as the slew of alternative “fake milk” products coming to market. Annual per capita U.S. milk consumption has dropped nearly -40% since 1975 and that falling demand was already driving milk prices down, having a crushing effect on America’s dairy farmers. In its bankruptcy filing in January, Borden said 2,730 U.S. dairy farms had gone out of business over the previous 18 months. With the upheaval in the restaurant and foodservice industry, the road ahead is expected to remain a struggle.
Rabobank in its second-quarter dairy outlook said that dairy prices have seen a rebound in the northern hemisphere but much of the price support has been driven by government aid that will slow in the coming months. They note that many markets are also still dealing with imbalances from demand destruction due to government lockdowns. The bank also warns that the probability of a slower economy is likely to keep a lid on demand growth.
The report, released in late-June, forecast a return to a “more normal balance” as heightened retail sales and lower foodservice sales were expected to converge. Meaningless spending at grocery stores and more spending through foodservice sales like restaurants and cafeterias. Analysts did stress that it would take time and could be limited by outside complications. Factors to watch for the dairy industry include the impact on markets of elevated dairy inventories, the potential resurgence of the virus, shifts in global trade, and the potential for larger-than-normal stimulus and aid packages in the U.S. in the lead up the election in November. Rabobank’s full report, “Waiting for the Dust to Settle,” is available HERE.