News
Disruption in the dairy aisle
As dairy players across the value chain scramble to keep pace with powerful trends in the industry and global economy—and some seek relief in bankruptcy—a handful of companies are finding new growth and building competitive advantages. Based on our research, we believe that while overall growth in dairy will likely remain low, sales will rise sharply in some product categories and in new domestic and international markets, and that winning in a changing marketplace requires new ways of thinking.
Powerful trends are changing the landscape. Dairy prices have risen globally, up 1.7 percent in November 2019 alone, even as trade disputes and rising tariffs in the US, Europe, and China have put pressure on milk prices, shifted market access, and fueled uncertainty. The USDA reports that the value of US dairy exports rose from $5.5 to $5.9 billion in 2019. Other bright spots include the continuous imports from China (664,000 million tons of WMP, 29 percent more than 2018 and the second-best year on record) and the signing of a phase 1 deal with the US; the US-Japanese trade agreement, which has opened doors for US cheese exports to Japan and shifted competitive dynamics in the region as the US benefits now from same access to Japan as New Zealand, Australia, and Canada; the newly signed USMCA, which is opening doors for the US into the Canadian dairy market, and the elimination of Canadian class 7, used for exports out of Canada.
Over half of dairy executives we surveyed in 2019 believe that trade disputes will have a lasting impact on the US dairy market. Despite these concerns, 35 percent of them believe dairy sales volume growth will increase in the next three years.
Challenges will arise, however. As in every other consumer industry, shoppers’ preferences and behaviors are changing. Generation Z, for example, is gaining influence with alternative tastes and demands, including less affinity for traditional dairy products and more interest in health and sustainability. Winning over these new consumers will become more important as they become the largest group globally in 2020, especially because they tend to consume less dairy than millennials or the average American. Americans in general are thinking more about sustainability; the share of consumers who cite it as a major reason for switching products increased from 19 to 24 percent from 2016 to 2019.
For many traditional players, these and other trends have been devastating. In Wisconsin, for example, “America’s Dairyland,” more than a thousand dairy farms have stopped milking cows in the last two years, and more than 200 have disappeared. Dean Foods, the largest dairy producer in the US, filed for bankruptcy in November, and Borden followed suit in January. Both companies are more than 90 years old. But despite serious challenges in the market overall, some players are growing share, volume and earnings.
Tough times in the consumer world—and clouds on the horizon
Globally, consumer confidence has reached its highest levels since 2001, but consumer industry revenues grew only 2.5 percent in 2019—while dairy retail volume shrank by about 2 percent and revenues rose by about 0.5 percent, driven by pricing and mix. Retailers still recognize the importance of dairy, but many are now relying on the pricing of private label brands to help drive competitive traffic, which has created mix and pricing pressures.
Growth varies across categories. Volume in traditional fluid milk declined from –2 to –4 percent from 2016 to 2019, but revenues have been increasing since 2018. Cheese has been rising since 2017, now at about 3 percent. While overall dairy volume is down in retail, pricing and mix are favorable, particularly in categories such as cheese and yogurt.
Would you like to learn more about our Agriculture Practice?
In this shifting environment, new challenges may be on the horizon. The next economic downturn appears “overdue,” for example. In the US, about half of business executives report worsening economic conditions in the last six months; globally, 23 percent expect a recession or depression in the next six months.
Leaders should be thinking now about how to weather the next downturn, which we believe is likely to be different from those in the past. The sources of capital are shifting, for example. Private equity has been moving even more to the food industry. Since 2007, interest rates have declined by about three points, and central bank liability in the US and Europe has quadrupled. Two-thirds of consumer company CEOs believe that additional cost-cutting efforts will be difficult,2 since most of the low-hanging fruit has already been taken. Meanwhile, populism is on the rise, raising uncertainty in markets around the globe, and real incomes are stagnant.
The impact of plant-based dairy alternatives on traditional dairy growth
Milk alternatives continued to grow in 2019, even though the overall category, including dairy and plant-based alternatives, is declining in retail.
While some observers credit plant-based dairy alternatives for volumes decline in fluid milk, the forces at work are complex. In fact, changes in consumer patterns, and other beverages like water and tea are responsible for roughly 90 percent of the total traditional dairy decline, while dairy alternatives actually increase the size of the overall category and have only a marginal effect on product transference.
To understand the real impact of milk alternatives—whether they are growing the category, cannibalizing or side-stepping sales of traditional dairy products—we conducted an incremental growth analysis. While dairy volume fell by 290 million gallons from 2015 – 2019 and the volume of plant-based alternatives rose by 50 million, the impact on traditional dairy is less stark. About 56 percent of plant-based sales might be attributed to dairy sales volume decline; the data suggest these overlapping sales were in lieu of dairy purchases. About 44 percent of plant-based sales, or 22 million gallons from 2015 to 2019, were incremental, representing overall beverage category expansion.
The higher sales volume of almond and soy fluids suggests their larger role in cannibalization and incremental growth. Roughly 90 percent of the rest of the decline can be attributed to other beverages, with bottled water contributing to about half of the decline in milk consumption. This analysis reveals that a move into plant-based alternatives won’t necessarily cannibalize fluid milk sales—and could support margin and category growth.
Other pockets of growth have appeared in the last three years, such as in premium high-fat and high-protein products. Premium butter retail revenue grew 5 percent, for example, exceeding butter’s overall growth by two percentage points, while select yogurt brands grew more than 50 percent. Despite trade disputes, sales of high-protein products have grown: export volumes of whey protein isolate were up 7 percent and milk protein concentrate by 5 percent in volume in 2019. These examples illustrate the favorable impacts of pricing and mix on dairy sales growth, and are corroborated by consumer trends. Roughly a quarter of US consumers across generations reported buying more cheese in 2019.
The outperformers in dairy share three crucial traits
Among the 16 dairy companies we studied, the top five in terms of EBITA margin started higher and grew much faster than their average peers, as shown in Exhibit 1. The outperformers vary in terms of size, geography, and business model, but they all tend to excel in three areas: product differentiation, mergers & acquisitions, and resource allocation.
CATEGORIES
LATEST NEWS
CONTACT US
Mobile：+86-18612182039
Tel：+86-029-85274126
Whatsapp：+8618612182039
Email：info@watarbio.com
Add：No. 12, Hongzhuan South Road, Yanta District, Xi’an 710061, China