Dean relies on three steps to deal with volume issues
NEW YORK – Gaining market share, reducing costs and using pricing tools will assist Dean Foods whenever consumption declines in the fluid milk category, said Gregg Tanner, chief executive officer, Nov. 19 at the Morgan Stanley Global Consumer & Retail Conference In New York.
Dean Foods has a 35% share nationally in fluid milk compared to single-digit shares for its next five competitors, Mr. Tanner said. The company gained share in fluid milk in 14 of 16 quarters between 2009 and 2012, he said.
“Our overall share has taken a step back this year as one of our major customers realigned some of its business to other providers,” Mr. Tanner said. “However, as we move past the impact of this change, we expect to return to our long-term history of gaining share through our low-cost, high-service model. In fact, we have already started the process of bending the curve with an addition of 60 million gallons of annual business that is coming on-line in the fourth quarter.”
Dean Foods is targeting $120 million in cost savings this year. The Dallas-based company began 2013 with 80 manufacturing facilities and is in the process of closing 10% to 15% of those facilities. The company already has announced eight plant closings.
“We continue to evaluate our network and expect additional realization in the coming months,” Mr. Tanner said. “This is reducing excess capacity in our network and driving asset utilization and efficiency higher.”
Dean Foods also uses pricing tools to pass through commodity inflation. Mr. Tanner said in the back half of 2012, raw milk prices rose 40% while Dean Foods’ gross margin per gallon improved.
Chris Bellairs, executive vice-president and chief financial officer, talked about cost discipline. He said the company built an algorithm that may achieve low to mid-single-digit EBIT growth even if volume is down slightly.
Mr. Tanner gave three reasons for declining milk consumption: the rise of alternative beverages, the demand for powder from China, and the trend of people eating breakfast on the go instead of sitting down at the kitchen table.
“So that breakfast unit is just not happening, and a fairly significant portion of our business of milk usage is actually with ready-to-eat cereal or cereals in the morning,” Mr. Tanner said. “So by the ready-to-eat cereal business declining, that obviously has an impact on our category and on our business and people just eating less cereal and drinking less milk.”