Dean Foods net income drops 91% as dairy challenges mount
- Dairy producer Dean Foods reported a drop in profits for the third fiscal quarter of 2017, according to a company release. Net income for the period fell to $1.38 million, a sharp drop from $14.53 million in the year-ago period. Net sales slipped to $1.94 billion compared to $1.96 billion last year. Revenue and adjusted earnings per share also were below analyst expectations.
- Total volumes fell 6.6% from the year-ago period, a sharper rate than the volume decrease posted by the U.S. Department of Agriculture of 2.2%. The company lowered its earnings outlook for fiscal 2017 to a range of $0.80 to $0.90 per share from a range of $0.80 to $0.95 per share.
- "Our overall performance in the third quarter came in-line with our internal expectations," Ralph Scozzafava, Dean Foods' CEO, said in the earnings report. "I want to emphasize that we are prudently navigating the macro environment in our industry with a solid strategy that will enable us to be successful."
The dairy industry is struggling to defend its turf as the plant-based milk market grows. Grocers also are putting pressure on the category, as large retailers such as Kroger and Albertsons invest in their own milk processing and bottling facilities. Walmart plans to open a dairy plant in Indiana next year, which will reduce the milk supply it currently sources from Dean Foods by an estimated 100 million gallons.
Dean will still supply Walmart stores outside of the five Midwest states that the Indiana facility will serve, but this development could further sour its disappointing financial performance. Milk prices continue to slide, and many grocers are selling milk at a loss, driving more retailers to produce their own product as they battle competitors on price.
Dean Foods' products could benefit from stronger brand recognition and trust in comparison to a retailer's private label varieties, but it will be hard pressed to win on cost — Dean's Dairy Pure milk can be 40% more expensive than store brands. The challenges facing Dean have battered its stock price, which is down more than 50% this year.
The company has been expanding into non-dairy segments to try to drive growth. In May, Dean purchased a minority stake in Good Karma Foods, a maker of non-dairy milk and yogurt. It also bought Uncle Matt's Organic, a producer of probiotic-infused juices and fruit-infused waters, in June. In addition, Dean is looking to develop new products within its dairy portfolio.
"Our initiatives to build strong brands and diversify our portfolio will build brand equity on DairyPure through new product innovation and enhanced consumer marketing," Scozzafa said in the earnings report.
Still, so far these initiatives do not appear to be enough to offset the challenges it is facing in its core dairy business. It will be interesting to see how Dean plans to enhance its dairy offerings, and if new product launches could be enough to lure consumers in the future. It may be wise to explore different value adds that could make traditional products more enticing. For example, last month Arla Foods launched a fat-free milk product made with 20 grams of protein per serving — delivering on two of the biggest benefits consumers associate with plant-based alternatives. Varieties like this could give Dean a competitive edge against both dairy and non-dairy rivals.
Of course, retailers could introduce varieties like this as well, and for lower prices. It's unclear how powerful the private label dairy trend will become, but as long as deflation, thin margins and discounters such as Aldi and Lidl loom, grocers will continue to reduce costs — in dairy and beyond.
To survive this hostile environment, dairy producers such as Dean will need to innovate across dairy and plant-based portfolios. But even if they do, it's uncertain whether this will be enough to ensure their success.
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