State of the industry: Dairy

by Donna Berry
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State of the industry: Dairy, ice cream
Retail ice cream sales reached $6.6 billion in 2016, up 3.4% from 2015.
 

CHICAGO — The refrigerated retail dairy case continues to fatten up while the frozen cabinet embraces protein and snacking trends. These changes are taking place with clean label and local sourcing top of mind. And for as much traction that plant-based alternatives are gaining in the marketplace, dairy foods are holding ground through innovation efforts aimed at making everything from butter to yogurt relevant to today’s consumers who crave flavor adventure, value authenticity and seek out natural nutrition.

The fluid milk category is surprising many. Even though total retail sales for the first half of the year are down 2.6%, according to data from Information Resources, Inc., a Chicago-based market research firm, a slightly more accelerated loss compared to the same period in 2016, the decline in the second quarter moderated to down 2%.

It’s no surprise, the volume leader, white gallon milk, is the driver of the decline. This is where the plant-based alternatives are hitting the dairy industry the hardest. While non-dairy alternative beverages continue to grow, they are doing so at a more moderate pace (up 1.7% year-to-date) than years past, according to the I.R.I. data. Almond and coconut are the growth engines.

State of the industry: Dairy, almond milk and coconut milk
Almond and coconut milks are driving growth in the non-dairy alternative segment.
 

“Analysts have been touting the growth of plant-based beverages, but their consumption as a percentage of total dairy case sales has never been more than about 6% of the category,” said Cindy Sorensen, senior vice-president of business development at the Midwest Dairy Association, Minneapolis. “They experienced several years of double-digit growth, but this was due to new product introductions, gaining distribution and building on a very small base of sales. Now that every ‘plant du jour’ has been tapped into for beverage-making purposes, we have seen the leveling off of consumption with only a single-digit increase. Consumers are learning these products are highly processed, not nearly as healthy as marketing claims would indicate, and are not sustainable in their production practices.”

There is news in the milk category worth talking about, Ms. Sorensen said.

“Most industry analysts talk about the declining consumption of the milk category,” she said. “This is true when we look at the category as a whole, but when you dig into the numbers, and look at the growth of specific segments within the category, there are definitely bright spots. These are products that appeal to the needs of consumers. There is also growth from segments positioning themselves to be considered as part of the competitive beverage set and are providing value-added benefits to the consumer.”

State of the industry: Dairy, grass-fed milk
Grass-fed milk has seen 66% volume growth.
 

All segments outside of the white gallon have seen volume growth. This includes: flavored milk (4.2%), lactose-free (11.5%), omega-3 (6.4%), glass bottle (2.7%), grass-fed (66%) and refuel (21.9%).

“We’re also seeing continued growth in whole-fat white milk, which is in its fourth year of increases (3.5% for the first half of 2017),” Ms. Sorensen said. “In fact, whole milk is getting very close to surpassing reduced-fat milk as the leader in the category. The whole-fat trend links both to a growing body of research indicating that whole fat may be beneficial to health as well as consumers’ desire for more natural foods.”

She explained how fat-free, 1% and 2% white milk gallons are no longer relevant products, package types or sizes to today’s on-the-go, smaller household consumers. These are consumers who also are besieged with beverage options.

State of the industry: Dairy, whole-fat white milk
Whole-fat white milk is in its fourth year of increases.
 

“The plastic gallon is a package and size that is efficient for milk processors to make,” she said. “Processors are allowing efficiencies of production to drive their business model, rather than embracing the needs of the consumer and innovating, developing and producing a product that consumers want.”

A successful model of the future might be less reliant on commodity volume. Success may come from higher-priced, higher-margin, value-added products. This model is successful in everything from coffee to juices to water. Why not milk?

The whole milk, as well as the higher-priced, value-added phenomenon, also is playing out in the yogurt category, which needs some help. Retail sales remained depressed (down 5%) in the first half of 2017. This early 2017 decline in yogurt sales was observed quite broadly across regions, channels and segments of yogurt.

State of the industry: Dairy, yogurt drinks
Yogurt drinks volume sales were up 18.8% over the first half of 2016.
 

There were bright spots in a few yogurt segments, with whole-fat yogurt standing out prominently. In fact, whole-fat yogurt volume was up 24.9% during the first half of the year, lifting its share of the category to 13.4%. While low-fat yogurt and fat-free yogurt have 47.4% and 38.6% volume share, respectively, both experienced sales declines (down 7% and 10%, respectively).

Another bright spot is yogurt drinks, which include kefir and yogurt fruit smoothies. Volume sales were up 18.8% over the first half of 2016.

“In addition, very strong growth continued for Australian- and Islandic-style yogurts, although these products are still niche in nature,” Ms. Sorensen said. “Together, they accounted for 2.2% of total yogurt volume.”

State of the industry: Dairy, cheese
The average American consumes more than 34 lbs of cheese annually.
 

Cheese continues to be a solid business, with the average American consuming more than 34 lbs of cheese annually, according to U.S. Department of Agriculture data. This is a 43% increase over the past 25 years. In addition to innovative applications and recipes — beyond burgers, pizza and tacos — new forms and flavors are driving this consumption.

Retail volume cheese sales increased in 2015 (2.1%) and 2016 (2.4%), compared to the previous years. However, 2017 is not looking as promising. In fact, true cheese sales were essentially flat (down 0.2%) during the first half of 2017, according to I.R.I. data.

What these data do not show is how volumes of cheese are being purchased in formats not registering as cheese sales. There are multiple placements of cheese around the perimeter of the supermarket, beyond the dairy and deli departments. This includes the many varied forms of protein snacks, where cheese gets paired with meat, dried fruit, nuts, hard boiled eggs, fresh fruit and even deli-made fanciful charcuterie trays. Creative merchandising keeps cheese relevant with today’s consumers, especially millennials and Gen X.

State of the industry: Dairy, ice cream novelties
Snacking opportunities are being embraced by ice cream and related frozen dairy desserts marketers.
 

Snacking opportunities also are being embraced by ice cream and related frozen dairy desserts marketers. The retail ice cream market has been relatively flat for the past two decades. That’s changing. Nielsen data show that retail ice cream sales reached $6.6 billion in 2016, up 3.4% from 2015. Conventional products are not the driver of this growth. It’s the better-for-you segment. Sales of products that fit within the Food and Drug Administration’s definition of “healthy” grew 85% in 2016. The category is experiencing a revitalization thanks to better-for-you formulations, such as high-protein, low-sugar varieties, often in single-serve packaging.

Lastly, butter is back. In fact, it’s been back for a while and continues to grow. Annual per capita butter consumption increased 1 lb in the past 10 years. In 2016, Americans ate 5.7 lbs of butter, compared to 4.7 lbs in 2006, according to the U.S.D.A. Butter complements consumers’ desire for foods that are closer-to-nature, delicious, authentic and flavorful.

These are the attributes that make dairy foods relevant. Marketers who communicate these attributes to shoppers have a better chance of making them customers.

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