Dairy markets on 'brink of change'
The prospects for any major growth in the domestic dairy market do not look promising nor are a majority of the dairy companies in the United States ready to dive into export markets.
That was the message to attendees at the International Dairy Foods Association's (IDFA) Dairy Forum 2016 from two partners in the McKinsey & Company market research firm in a program titled 'Growth in an Evolving Dairy Market: Strategies for U.S. Dairy Companies.'
Program moderator Greg Tanner, who is chief executive officer of Dean Foods, set the tone for the session by remarking that the current outlook for growth of the dairy sector in the United States shows no better than 'a flat projection' during at least the next few years and that supplying emerging markets is a potential viable alternative.
McKinsey partners Paul Carbonneau and Ludovic Meilhac reported the results of a survey of 33 dairy sector executives, 61 dairy companies, and 10 of the company's dairy and retail market specialists. Although the direction is not clear, Carbonneau was confident that the country's dairy sector is 'on the brink of change.'
Cloudburst of words
To set the stage for what the changes might be, Carbonneau cited the words and phrases that were used most often by the parties included in the survey. In order of frequency, they were food safety, price volatility, organic, animal welfare, global markets, non-dairy alternatives, sustainability, and several others.
How the dairy industry will sort through such concerns as it seeks a new direction isn't certain, Carbonneau observed. But he suggested it could be approached through the perspectives of global growth, changing one's business model by going beyond traditional practices, and relying on insight driven innovations.
With the growth of the dairy sector in the United States not likely to surpass the .8 percent annual increase in population, the prospects look much brighter with the 6.6 percent increase (through 2014) in China and 5.1 percent in India, Carbonneau indicated. He noted that the dairy sector growth in China was closely linked to wealthy consumers while the increase in India has been more balanced.
Although the export volume increase for dairy products by the United States during the past 10 years has been impressive, reaching the equivalent of 14 to 15 percent of milk production on a milkfat basis, and that the volume now exceeds the exports by the European Union, there is not an industry wide commitment to exporting, Carbonneau commented. 'There are some companies that are aggressive.'
The McKinsey survey found that 60 percent of the dairy plants in United States don't plan to become any more involved in the export market, in part because they regard the world market as being too complex, Carbonneau remarked. But there are 40 percent which hope to expand their exports for reasons which include 'a necessity to protect our farmers,' he pointed out.
Of those 40 percent, 25 percent have a production plant outside of the United States and 68 percent of them intend to add production within the next five years, Carbonneau stated. In terms of economics, he said the United States dairy holds an advantage over the European Union, which already has close to a 50/50 balance on domestic consumption and the exporting of its dairy products.
Domestic consumption continues as the base market for the dairy industry in this country with most companies counting on it for 85 to 95 percent of their sales, Carbonneau indicated. He pointed out that the 52 IDFA members are exporting an average of 15 percent of their production.
Hindrances to exports
During McKinsey's survey, 74 percent of the respondents indicated that the federal milk marketing orders (FMMOs) hinder the development of exporting practices and suggested that they be replaced with a market-based mechanism although there was no general agreement on what that should be, Carbonneau observed. He said it is appropriate to ask if the FMMOs fit in a world market.
Carbonneau also mentioned the use of financial tools by dairy plants, finding that many of them don't adequately protect their risks. He noted that 66 percent of them don't use more than one of the available tools while 34 percent use two or more.
The use of futures markets by the dairy sector pales in comparison to the percentages for soybeans and corn, Carbonneau pointed out. He noted that only 5.2 percent of the Class III milk production is involved in futures contracts on the Chicago Mercantile Exchange.
Carbonneau posed four questions for the dairy industry, starting with how to boost knowledge about consumption and supply trends. A second point is whether sufficient resources and top talent would be committed to international markets, he noted.
Another consideration is whether to approach export markets alone or with partners, Carbonneau continued. His fourth question was how to cope with managing commodity risks and currency volatility.
Dairy businesses need to deal with the fact that 'milk is no longer seen as the perfect food,' McKinsey partner Ludovic Meilhac emphasized. Weighing against that once widely held perception are concerns about animal welfare, sustainability, and alternative plant-based beverages, he said.
Promise of ingredients
What's promising for the dairy industry is the demand for protein and the many possibilities for use of ingredients, Meilhac stated. He cited the greatly expanded utilization of whey rather than treating it as merely a byproduct.
Reacting to the .4 percent dip in sales of cola beverages from 2010 to 2014, the soft drink industry has added juices, sports drinks, and bottled water to its product lineup, Meilhac pointed out. Some dairy companies have acted similarly by adding organics, new flavors, and even non-dairy alternatives to their business, he observed.
Meilhac considers putting an emphasis on 'a health and wellness lifestyle' provided by its products to be a good change for the dairy industry. This will require redefining the business model, shedding history, and using existing advantages with a backing of capital and other resources, he explained.
'Be driven by innovation and customer insights,' Meilhac advised. He mentioned the marketing successes with hot beverages and products with alcohol and chocolate. In the dairy sector, he cited the renewed popularity of butter and sales increases for soft cheeses.
New product trends
Of the 1098 products that the food sector introduced in 2010, genuinely new items represented 51 percent of the total but that dropped to 23 percent of the 1,464 introduced during 2014, Mailhec reported. The changes shifted to packaging (32 percent) and line item extensions (35 percent) in 2014, he observed.
The McKinsey survey also revealed differences in company sizes with regard to an emphasis on innovation, Meilhac noted. Companies should 'not expect a product to last forever' and should not hesitate to drop brand names that are performing poorly in the market, he stressed.
In the United States, the top five food retailers accounted for 21 percent of the sales in 1990 but that has jumped to nearly 50 percent today, Meilhac reported. The top five food retailers in the United Kingdom hold 75 percent of the market, he noted.
Private label preferences
Another factor tracked in food retailing surveys is the preference by 65 percent of consumers for the lower priced private label items instead of brand names and a declaration by another 22 percent that they will not switch to brand names due to price, Meilhac stated. 'Companies need to fail fast and learn quickly.'
On another point about surveys, Meilhac said they are not necessary in all cases because of the ready availability of analytics to quickly anticipate consumer trends. He also challenged companies to 'measure the return on investment of innovation dollars.'
Carbonneau would like to see the dairy industry 'grow the pie' rather than trying to grab more slices of it. To achieve that, he called for better collaboration between producers and processors in finding new customers and expanding the export market.
During the question period at the session, Mailhec said there's an underlying problem of having many companies wishing for changes but not agreeing on what the changes should be. Carbonneau suggested rebranding in the context of nutrient density and consumer health.
Follow the money and proceed with a capitalist attitude, Carbonneau advised. He urged companies to decide if they are 'a cheese or ice cream company or something more.'
Mailhec predicted that sometime in the next decade the demand for dairy products could exceed the supply. To take advantage of global markets, he urges companies invest in plants in other countries.
To a question of how to grow the dairy industry overall, Carbonneau replied 'that's a real challenge.' He again referred to the FMMOs as being a hindrance, noting that 'Europe is ahead on that point. We need to create opportunities for the whole industry.'
During another session at the Dairy Forum 2016, the IDFA's senior counsel and vice-president Clay Hough decried the efforts of activists who are advocating changes in the dairy industry. 'We have been outmessaged,' he admitted.
But the calls for more regulations and other changes will result in 'making food more expensive,' thereby stalling innovation and 'hurting poor people instead,' Hough warned. 'That would be an indulgence for rich people and not worth the life of one starved kid.'
Also at that session, IDFA president and chief executive officer Connie Tipton promised that 'trust and transparency' would serve the dairy industry very well. She called on members to expect a new era of food safety, to be aware of the power social media for 'the accelerated communication of misinformation,' and to become politically engaged not only on the selection of the next President but also members of Congress and on all issues that pertain to the industry.
After praising Congress for approving a new trade promotion authority, a tax credit for research and innovation, and long-term funding for transportation, Tipton announced that she is retiring at the end of 2016 from the position she has held since January of 2004.
As a parting thought to IDFA members, Tipton quoted the warning by Will Rogers that 'even if you are on the right track you will be run over if you just sit there.'