Dean Foods, the largest milk producer in the U.S., may increase its stake in plant-based products maker Good Karma Foods, according to Bloomberg. The dairy processor will decide during the next few months whether to increase its minority position to a majority one.
Colorado-based Good Karma Foods makes dairy-free milk, drinkable yogurt and regular yogurt from flax seeds. Dean took a minority stake in the company in 2017, but details weren't publicly disclosed about how much it invested at that time.
"It’s a really, really cool brand, and it’s growing — it grew pretty dramatically last year. Over the next few months, we’ll make that decision," Ralph Scozzafava, CEO of Dean Foods, told Bloomberg.
It's not surprising that the troubled dairy producer may up its stake in the fast-growing plant-based sector. In its latest financial report, Dean showed a drop in net sales and a posted a loss for the first quarter of this year. The milk company has been struggling with an oversupply of raw milk, a decrease in fluid milk consumption and competition from Walmart and other grocers that are taking over more of their own production of the beverage.
At the same time, non-dairy milk sales in the U.S. have increased 61% during the past five years and were forecast to reach $2.11 billion last year. This growth contrasts sharply with sales in the dairy milk category that have dropped about 15% since 2012, falling to an estimated $16.12 billion in 2017.
Even though Dean and other dairy producers are diversifying through dairy-based products such as cheese, yogurt, butter and ice cream, the smarter long-term strategy may be to look outside the sector for both growth and stability. According to BevNET, CEO Ralph Scozzafava signaled as much on a February 2017 earnings call with analysts just before Dean took the Good Karma minority stake.
"We’re looking at categories that are adjacent to dairy," Dean Foods CEO Ralph Scozzafava told analysts. "We’re looking at one particular that would be, what I’d say, a good balance to the commodity seasonality that we see, the cyclicality we see with Class I milk. That would also be, I think, a good addition to the portfolio as we talk about being more and more Class I commodity resistant."
Dean is no stranger to the non-dairy space. Along with its investment in Good Karma, in 2013 the Dallas-based company spun off its WhiteWave Foods unit — the producer of Silk and So Delicious products made from plants. That same year, Dean sold its Morningstar division — a maker of both dairy and non-dairy products — for $1.45 billion to Canadian firm Saputo, Inc. WhiteWave is now part of Danone.
Dean may be regretting those earlier deals now that consumers are flocking to those very same plant-based products. Taking majority control of Good Karma, and potentially buying it in the future, could be a way to really get back into the space.
The Colorado company is performing very well, according to CEO Doug Radi. He told Food Business News last year that Good Karma had nearly tripled its growth from 2014 to 2017 as its products win consumers by offering better taste and nutrition. Suja and Manitoba Milling Co. have recently introduced flaxseed beverage products, but they have a long way to go before taking sizable market share from Good Karma's well-established lineup.
More funding from its minority partner would help to elevate Good Karma's marketing and production even more and potentially bring new plant-based products to store shelves, while Dean could further diversify away from dairy and realize new growth instead of relying on cutting costs to bolster profits. If Dean Foods decides to take a bigger stake, it may turn out to be a good deal for both companies.