Dive Brief:
- Following a second-quarter $64.5 million net loss and a 5.5% sales drop to $1.84 billion, shares of Dean Foods fell by a third, according to MarketWatch. It put the Dallas-based company on track to post the largest one-day percentage loss since May 2010.
- CFO Jody Macedonio noted on an earnings call raw milk costs jumped 12% compared to the year-ago quarter, and the company's costs were expected to increase 19% during the third quarter. The beleaguered milk processor blamed the situation on retailers offering discounts to attract shoppers, as well as on consumer trends toward more water products and plant-based beverages.
- Macedonio called the retailer margins "unsustainable" and said Dean believes the scenario will alleviate over time. Meanwhile, she said the company plans to explore product mix opportunities to "further mitigate inflationary pressure."
Dive Insight:
Bad news keeps on coming for Dean as it struggles with higher costs stemming from raw milk price increases. Behind that is lower milk output caused by more dairies shrinking herds or going out of business, according to Bloomberg. While that benefits remaining dairy suppliers, it hit the company hard and probably won't moderate anytime soon.
Dean's ice cream business was also hurt during the second quarter by colder weather in the spring and first part of the summer, which might have otherwise been a boom period for that segment, Bloomberg noted.
It's difficult to tell whether Dean will see any demonstrable improvement in the near term, although brand-new President and CEO Eric Beringause expressed optimism in a release accompanying the most recent earnings report.
Beringause has 30 years of experience in the industry and was previously CEO of Gehl Foods, a Wisconsin-based producer of dairy-based beverages, as well as sauces, puddings and tortilla chips. He will need all his leadership skills to turn things around at Dean, which, in addition to its current dismal sales and profit picture, is carrying a net debt of about $968 million.
The problem is bigger than just Dean, though, as the U.S. dairy industry continues to struggle. Consumers have been drinking less milk for years, and with myriad other beverages to tempt them, the trend is clear. Non-dairy milk sales jumped 61% from 2013 to 2017, according to Mintel, while sales of dairy milk dropped 15% from about $18.9 billion in 2012 to $16.12 billion in 2017.
Moving forward, Dean may only be able to sustain another year or two of losses before some serious decisions must be made. The company said in February it was considering strategic alternatives including a sale, a joint venture or merger, spinning off assets or possibly other actions to boost shareholder value. However, not enough action was taken to stave off further losses.
Dean has already cinched in its collective belt by cutting costs, closing seven milk processing plants and eliminating jobs. It's difficult to imagine what other revenue-enhancing moves it might pursue without changing its business model in some significant ways.
The company has diversified in the past three years by purchasing a minority stake and then a majority position in Good Karma Foods, which sells non-dairy milk and yogurt. Dean also bought Uncle Matt's Organic, a maker of probiotic-infused juices and fruit-infused waters, and acquired the manufacturing and retail business of Friendly's Ice Cream.
Should the company decide to phase out its milk-processing business and focus more on non-dairy items, things could conceivably pick up, but it would probably have to embark on such a big shift immediately and hope it isn't too late.
Another option might be for Dean to pare down and concentrate only on its core business, as Borden has done. But that assumes the company can find the resources and has the time to wait until herds build back up, the milk supply increases and prices moderate.
Dairy isn't exactly a growth industry today, and some observers say there's no room to make many mistakes and expect to thrive. Still, there could be some hope if the company can pivot quickly.
"There are plenty of problems for fluid milk, but it remains an area of opportunity," Tom Bailey, senior dairy analyst for food and agricultural lender Rabobank, recently told Food Dive. "It's just a matter of proper positioning, and getting the alignment right with what consumers want, and nailing it on social media."
