Dean Foods' earnings disappoint as grocery wars take toll
- Dean Foods' gross profits, net income and diluted earnings per share are way down compared with a year ago, according to the company's latest earnings report. Gross profits are at $467 million — about a 5% drop from last year — while net income is down 45% to $18 million and diluted earnings per share fell to 19 cents from 36 cents a year ago.
- CEO Ralph Scozzafava said in the report that the dairy giant faced a "challenging and rapidly evolving retail environment" with volume pressures that impacted performance in the most recent quarter. Total volumes were down 2.7% — a rate pretty close to the volume decrease posted by the U.S. Department of Agriculture of 2.9%.
- "We are not satisfied with our performance and are determined to improve our execution," Scozzafava said in the earnings report. "We are accelerating and expanding an aggressive set of commercial and cost productivity initiatives to address volume and mix. We expect these actions will better position our company for the future."
As the plant-based foods movement continues to gain momentum and deep discounting becomes the grocery industry's most trusted weapon, the dairy industry has been feeling the impact. Dean Foods is suffering the consequences of market changes all around, as evidenced by its lackluster earnings.
To begin with, grocery stores are going an extra 10 miles to win over customers — and that's often harming traditional suppliers in the process. Retail chains like Kroger are using low milk prices to bring in shoppers, which they can get through doubling down on investments in private label suppliers. While Dean Foods' branded varieties still sit in the dairy case next to the store brands, analysts have found that items like the company's Dairy Pure milk can be 40% more expensive.
Plant-based dairy alternatives are also becoming more popular. According to Mintel, U.S. non-dairy milk sales grew 9% in 2015, while dairy milk sales declined 7% over the same period. Many companies are driving sales by advertising the superior nutrition of almond, cashew or pea milk to traditional dairy milk. At least one traditional dairy company has even traded in its cows to produce nut milks, joining the industry that helped put them out of business. Meanwhile, the plant-based industry group Good Food Institute is pushing the Food and Drug Administration to clarify once and for all that soy-based beverages can indeed be labeled "soy milk."
Dean Foods has made changes to deal with these industrywide shifts. In May, the company acquired a minority stake in Good Karma Foods, which makes non-dairy milk and yogurt. This helps diversify the company's portfolio, which will be especially important if current trends hold and more consumers abandon traditional dairy products.
As for private label dairy at retailers, it's unclear how much longer this trend will last. Deflation throughout the food industry has plagued grocery stores, which operate on razor-thin margins. While signs show deflation may be easing, this could mean under normal circumstances that prices could be primed to inch upward. However, these are not normal circumstances. With new discounters Aldi and Lidl rapidly becoming bigger players in the grocery landscape, stores are pulling out all the stops to attract every customer they can. According to a report in the Cincinnati Business Courier, retailers like Kroger are even selling private label milk at a loss to get more customers in the doors.
As the grocery wars escalate, companies like Dean Foods might do best if they invest in innovating new products that aren't yet copied by private label brands and could bring them a competitive advantage.
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