Retail Distribution of Dairy Products

Bob Cropp

Dairy Marketing and Policy Specialist

University of Wisconsin-Madison

April 2001

U.S. Milk Production & Commercial Disappearance, 1980 to 2000

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Milk Production

Commercialdisappearance

BFP or Class III Milk Price versus the Support Price, 1970-2000

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Support price

BFP/Class III price

Utilization of U.S. Milk Production

Product: 1990 2000Fluid 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 – 2000Pounds

Year PlainWhole

Reducedlowfat

Nonfat Flavored Total

1990 85.6 98.3 22.9 9.4 219.7

1995 71.3 92.4 31.9 10.0 208.5

1999 68.3 87.1 33.2 11.9 201.9

Per capita consumption of manufactureddairy products, 1980 – 1999 Pounds

Year Butter Amer.Cheese

OtherCheese

Nonfatdry

milk

Icecream

Lowfatice

cream1980 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 Number ofCooperatives

Market Share

1950 2,072 53%

1970 971 61%

1990 264 82%

1997 226 88%

1999 220 89%

Cooperatives' share of U.S. farm marketings

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Milk Cotton Grain Fruit &veg

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ts 19821997

1999

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 ManufacturedDairy Products, 1997

Dairy Product Market ShareButter 61%Dry milk powder 81%Cheddar cheese 70%Other American cheese 43%Mozzarella cheese 26%Other Italian cheese 18%Other cheese 9%Total natural cheese 40%Packaged (beverage) milk 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 MilkProducts, 1983 – 1997

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

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

Type of container 1973 1985 1997

Glass 4% Less than0.5%

Less than0.5%

Paper 71% 34% 21%

Plastic 25% 65% 79%

Total 100% 100% 100%

Fluid Milk Distribution By Size ofContainer

Size of container 1973 1985 1997Gallon 37% 60% 66%Half gallon 38% 22% 18%Quart 5% 5% 4%Pint 1% 2% 2%Half-Pint 10% 9% 9%Bulk – Over 5Qts.

5% 2% 1%

Total 100% 100% 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 1999 Sales (Bil. $s) 1999 Market Share

Sysco Foods 17.4 13.3

Wal Mart 14.1 10.7

U.S. Food/Ahold 8.0 6.1

Alliant 6.1 4.6

XPEDX 2.9 2.2

Total 48.3 37.0

Top U.S. Supermarkets

Company 2000 Sales(B $)

2000MarketShare

1993MarketShare

Wal Mart 57.2 11.1 0.00

Kroger 49.2 9.6 6.0

Albertson’s 36.4 7.1 3.0

Safeway 33.2 6.4 4.0

Ahold USA 27.5 5.3 0.0

Total 203.5 40.0 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 & CheesePlant Capacity

Year TotalAmerican

TotalItalian

TotalNaturalCheese

ProcessedCheese

1980:PlantsCapacity

4834,918,750

1875,255,000

737 6227,640,200

1999:PlantsCapacity

19718,155,100

15320,540,000

376 5246,705,300

Capacity is annual pounds of cheese per plant

Distribution of Cheese

40%

43%

17%

RetailFood ServiceFood Processing

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 Productsin Supermarkets, 1999

Product Volume share that isprivate label

Cheese 35.2%Cottage cheese 44.8%White milk 70.1%Flavored milk 23.3%Dips 15.7%Sour cream 37.0%Yogurt 20.8%Ice cream 33.2%Frozen novelties 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 customerswant?

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 theU.S. food system from farm to consumer.

• Moving to partnering relationships

- seemless system

- supply chain driven

• Retail consolidation is resulting in lower returnsto food manufacturers & marketers

- manufacturers and marketers need to get more efficient, lower costs

- need to get bigger

Cooperatives wishing to compete in thisrapidly 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 othercooperatives, 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