Retail Distribution of Dairy Products

Bob Cropp Dairy Marketing and Policy Specialist University of Wisconsin-Madison April 2001

180 170 160 150 140 130 120 110 U.S. Milk Production & Commercial Disappearance, 1980 to 2000 Milk Production Commercial disappearance

$9 $7 $5 $3 $19 BFP or Class III Milk Price versus the Support Price, 1970-2000 $17 Support price BFP/Class III price $15 $13 $11

Utilization of U.S. Milk Production

Product: 1990 2000

Fluid milk 32% 28% Cheese 41% 47% Butter 6% 6% Frozen products 8% 8% Nonfat dry milk 3% 4% Other* 10% 8% * Milk proteins, lactose, nutritional beverages, etc.

Per capita Fluid Milk Sales, 1990 – 2000 Pounds Year 1990 Plain Whole 85.6

Reduced lowfat 98.3

Nonfat Flavored Total 22.9

9.4

219.7

1995 71.3

92.4

1999 68.3

87.1

31.9

33.2

10.0

11.9

208.5

201.9

Per capita consumption of manufactured dairy products, 1980 – 1999 Pounds

Year Butter Amer.

Cheese Other Cheese Nonfat dry milk Ice cream Lowfat ice cream 1980 4.5

9.6

7.9

3.0

17.5

7.1

1990 4.4

11.1

13.5

2.9

15.8

7.7

1999 4.8

13.0

16.8

3.0

16.8

7.9

U.S. Dairy Cooperatives and Their Share of Farm Milk Marketings

Year 1950 Number of Cooperatives 2,072 Market Share 53% 1970 1990 1997 1999 971 264 226 220 61% 82% 88% 89%

Cooperatives' share of U.S. farm marketings 100 90 80 70 60 50 40 30 20 10 0 77 88 89 Milk 36 38 29 Cotton 1982 1997 1999 36 43 34 Grain 20 19 18 11 12 13 Fruit & veg Livestock 30 29 27 Total

Dairy Cooperatives marketed most of farm milk to others as raw milk.

•

61 % sold as raw milk and 39% processed and manufactured in co-op’s milk plant.

•

Dairy cooperatives are moving towards more value added activities.

•

Dairy cooperatives are entering into joint ventures with other cooperatives and public corporations.

Dairy Cooperative Share of Manufactured Dairy Products, 1997

Dairy Product Butter Dry milk powder Cheddar cheese Other American cheese Mozzarella cheese Other Italian cheese Other cheese Total natural cheese Packaged (beverage) milk Market Share 61% 81% 70% 43% 26% 18% 9% 40% 14%

Share of Dairy Products Sold Through Retail Stores

•

Fluid Milk 74%

•

Ice Cream 45%

•

Butter 36%

•

Cheese 40%

Fluid Milk

•

•

Factors that have changed fluid milk distribution:

1) Glass bottle late 1800’s 2) Paper carton 1940’s 3) Plastic containers 1980’s

These changes forced small bottlers out of business

-

10,000 bottlers in 1940 - Less than 300 today

Distribution Method of Fluid Milk Products, 1983 – 1997

Distribution method: Home delivered Wholesale: Supermarkets Dairy/convenience Military Schools Other 1983 2% 98% 50% 10% 1% 7% 30% 1997 1% 99% 58% 10% 1% 6% 24%

Distribution of Fluid Milk By Type of Container, 1973 - 1997

Type of container 1973 1985 1997 Glass Paper Plastic Total 4% 71% 25% 100% Less than 0.5% 34% Less than 0.5% 21% 65% 79% 100% 100%

Fluid Milk Distribution By Size of Container

Size of container 1973 1985 1997 Gallon Half gallon Quart Pint Half-Pint Bulk – Over 5 Qts.

Total 37% 38% 5% 1% 10% 5% 100% 60% 22% 5% 2% 9% 2% 100% 66% 18% 4% 2% 9% 1% 100%

• •

Since 1960’s, the balance of power for fluid milk has shifted from milk processors (dealers) to food retailers, primarily large supermarkets.

This is forcing bottlers to get bigger Deans Foods and Suiza Foods have been active with acquisitions

•

Deans Foods (13% of market) and Suiza Foods (17% of market) on April 5 announced intent to merge.

•

Dairy cooperatives have entered into milk supply arrangements with major fluid companies.

- Dairy Farmers of America with Suiza Foods - Land O’ Lakes with Deans Foods

Top U.S. Foodservice Distributors, 1999

Company Sysco Foods Wal Mart U.S. Food/Ahold Alliant XPEDX Total 1999 Sales (Bil. $s) 17.4

14.1

8.0

6.1

2.9

48.3

1999 Market Share 13.3

10.7

6.1

4.6

2.2

37.0

Company Wal Mart Kroger Albertson’s Safeway Ahold USA Total

Top U.S. Supermarkets

2000 Sales (B $) 57.2

2000 Market Share 11.1

49.2

36.4

9.6

7.1

33.2

27.5

203.5

6.4

5.3

40.0

1993 Market Share 0.00

6.0

3.0

4.0

0.0

13.0

Private label dominates the fluid milk business.

•

Percent Private Label

White Milk 70.1% Flavored Milk 23.3%

Natural Cheese

• •

Cheese pricing relies on the Chicago Mercantile Exchange (CME) CME operates 5 business days a week

• •

CME prices change due to - A SALE at a different price - A BID at a higher price - AN OFFER at a lower price About 2% of cheese actually sold on CME

Number of U.S. Cheese Plants & Cheese Plant Capacity

Year Total American Total Italian Total Natural Cheese Processed Cheese 1980: Plants Capacity 1999: Plants Capacity 483 4,918,750 197 18,155,100 187 5,255,000 153 20,540,000 737 376 62 27,640,200 52 46,705,300

Capacity is annual pounds of cheese per plant

Distribution of Cheese

Retail Food Service Food Processing 17% 40% 43%

Unlike fluid milk, branded cheese dominates retail sales.

• • • • •

About 68% is brand cheese and 32% private label.

Kraft brand has 45% retail market share Cooperatives not major brand sellers, but Land O’ Lakes brand is significant in delli sales.

In Food service, Leprino’s is world largest manufacture of mozzarella Schreiber is major player in processed cheese- more than 50% sold to fast food chains, some to retail as private and brand.

Butter:

• • • •

The butter/powder industry that existed in the 1950’s and 1960’s no longer exists.

50% of the butter produced in Wisconsin and California 1975, 366 butter plants, today less than 100 36 dairy cooperatives make butter, 61% share.

•

Butter pricing like cheese is based off of the Chicago Mercantile Exchange.

Retail accounts for about a 36% of butter sales

•

Some strong brand

•

Land O’Lakes maintains a 31% market share at retail.

Ingredient Markets;

•

Nonfat dry milk

- Very little retail sales - About 60% is used in other dairy and food products - A surplus dairy product

•

Dry whey:

-

Dry whey and whey protein concentrates.

- Used in dairy and food products - Competitive on the export market

Summary of Private Label Dairy Products in Supermarkets, 1999

Product Cheese Cottage cheese Volume share that is private label 35.2% 44.8% White milk Flavored milk Dips Sour cream Yogurt Ice cream Frozen novelties 70.1% 23.3% 15.7% 37.0% 20.8% 33.2% 26.7%

Concern over farm-retail price spread:

• •

Fluid Milk:

Farm value and retail value move together over time Margin has increased , retail margin is about 25% .

- Not used as loss leader as much - Reduced competition at both wholesale and retail

•

Inverse relationship between change in Class I price and margin--when Class I increases both wholesale and retail margins decrease and vice versa.

Butter:

•

Retail margin has widened, but highly variable.

- Retail margin is about 20%

•

In 1980’s butter price stable due to federal price support. But support price reduced and since 1993 wholesale butter prices well above support.

•

Changes in farm value of milk and retail margins inversely related.

Cheese:

•

Retail cheese prices and farm value of milk have been less closely related.

- Reduced federal support price - Also time required for raw milk to be transformed into cheese and eventually sold at retail.

- A lot of value-added---640 pound cheddar blocks need to to cut and wrapped for consumer sales.

• •

Changes in farm value of milk and changes in retail margin inversely related.

Retail margin about 36%

Ice Cream:

•

Farm value of milk and retail price not closely related.

•

Retail price has increased significantly past 5 years (up 40%)

General comments on Retail Margins:

•

Retail margins have increased due to:

Increased labor cost

• • •

- However, output per employee in fluid plants increase more than 140% since 1970 and 150 % in dairy manufacturing firms.

Increased packaging costs Increased fuel/energy cost Changes in product packaging, composition- consumers demand convenience

Continuation on changes in retail margin:

• • •

New product development Reduced competition Retailers have changed pricing strategy--now look to more profit from dairy case.

•

Changes in farm-retail spread and farmer’s share of retail dollar:

Farm-retail spread increased 117.7% between 1982-84 and 2000.

•

Farmer’s share of retail dollar: - all dairy products: 36.0% in 1986 29.5% in 2000 - 1/2 gallon of milk 39% - Cheddar cheese 32%

Summary Comments:

• • • •

Wholesale and retail prices respond more quickly to farm level price increases than decreases.

Farm to retail spreads will likely widen due to more value added activities.

Retail concentration is putting pressure on wholesalers that serve them--need to get bigger in order to have market clout.

Retail food business is a low margin and high volume business.

Retail Food and Beverage Firms Consolidating:

• 1972 218,300 firms 1997 110,900 firms • Market share of top 4 firms: 1972 = 16.2% 1997 = 18.3%

What do these large food customers want?



On time delivery



100% fill rate



Competitive price



Safe/insured food



Undamaged products



More convenience products



New leading edge products



More & more fresh products



Product information



Marketing tools



Knowledgeable sales people

U.S. consumer will influence the structure of the U.S. food system from farm to consumer.

•

Moving to partnering relationships

•

- seemless system - supply chain driven Retail consolidation is resulting in lower returns to food manufacturers & marketers - manufacturers and marketers need to get more efficient, lower costs - need to get bigger

Cooperatives wishing to compete in this rapidly changing food system must:

•

Get better, more efficient, cut cost

•

Be a reliable supplier

•

Have sufficient volume to have market clout

•

Consider strategic alliances with other cooperatives, with IOFs

Summary continued:

•

Retail prices of dairy products have increased less than retail prices for all food.

1982-84 = 100 retail price index For 2000: All food = 167.8

Dairy products = 160.7