Dean Foods' fourth-quarter 2017 net sales slipped to $1.93 billion versus $2.01 billion for the same period in 2016, according to a company release. Total volume was down 6% for the quarter. Net income rose to $52.3 million, compared to $32.8 million for the year-ago period, reflecting a one-time $43.7-million net income tax benefit following the recent corporate tax cut.
The Dallas, Texas-based food and dairy company said that it would be "right-sizing" its manufacturing capacity this year to match volume and adjust for expected changes. This will involve consolidating its plant network starting this year, with completion expected in 2019.
"We are making important choices in 2018 and taking aggressive but necessary steps to drive our strategic plan, reset our company to make Dean Foods more competitive, and enable us to deliver solid and consistent earnings and cash flow over the long term," CEO Ralph Scozzafava said in the release. "We must dramatically reduce our cost structure to match our smart volume today, creating the right network and cost base with an eye toward the future."
It's been a tough year for Dean Foods with shares of the dairy giant dropping close to 50%. Besides the "right-sizing" initiative, Dean expects to continue reduction of its general and administrative costs that began this past quarter. It expects to realize $150 million in annualized savings by 2020 through a company-wide productivity plan.
While the company didn't directly say so, its plan "to consolidate its plant network" is more than likely to involve reducing its workforce. In an earnings call transcript posted by Seeking Alpha, Scozzafava didn't address any plant closures or contemplated job cuts, but he indicated there was room in the system for productivity improvement. He said that Dean needs to "readjust the footprint."
The U.S. dairy industry has been in a slump in recent years as consumers are drawn to plant-based products. Non-dairy milk sales in the U.S. have increased 61% during the past five years and were estimated to reach $2.11 billion in 2017. Meanwhile, overall sales in the dairy milk category have dropped about 15% since 2012, falling to an estimated $16.12 billion in 2017.
Adding to Dean Foods' problems is the fact that some of its dairy products are relatively higher-quality and have commanded premium prices in an already price-sensitive and competitive market. So when grocers such as Kroger and Walmart cut retail milk prices in order to compete with each other, it's a blow to companies like Dean. The ongoing U.S. milk surplus has been a drag on the overall situation, particularly for smaller and independent dairies. It also will hurt the company's bottom line when Walmart opens its own dairy plant this year in Indiana, reducing the amount of milk it previously sourced from Dean Foods.
Meanwhile, Dean has been looking to diversify by acquiring other companies outside the dairy segment. The company bought a minority stake in Good Karma Foods, a maker of non-dairy milk and yogurt, in May 2017, and, in June of last year, it purchased Uncle Matt's Organic, which manufactures probiotic-infused juices and fruit-infused waters. However, those two investments haven't yet made much of an impact.
Dean Foods has clearly realized that demand for its products isn't as robust as initially thought, and the move to right-size the company's facilities and cut costs looks like a prudent one that should help the firm going forward. It's not clear exactly what the main problem is — whether it's cheaper milk, competition from grocers, or the rise of plant-based drinks — but Dean's business is under attack. The company would be wise to continue streamlining its business while looking for ways to gain a deeper foothold in the market for plant-based drinks now dominated by DanoneWave, Califia, Campbell Soup and others.
Dean Foods is an example of a legacy business up against increasing market constraints and perhaps it has moved more slowly than it should have to turn things around. It does have some popular brands and is diversifying and innovating where it can, but that may not be enough when the dairy business faces some strong negative forces and changing customer tastes. And while its leadership seems to know what to do, the question is whether they will have enough time to do it before an activist investor or deal-hungry competitor comes calling.