DALLAS — To understand the core challenge facing the Dean Foods Co. requires looking at the market for fluid milk. Volumes are declining, and as the market continues to erode the company must seek productivity savings and new opportunities elsewhere.
For the nine months ended Sept. 30, Dean Foods saw its volume fall 6.6% to 608 million gallons. The industry itself is challenged as fluid milk sales data published by the U.S. Department of Agriculture through August shows a quarterly category decline of 2.2% on a year-over-year basis, while Information Resources, Inc., Chicago, reported a 2.8% decline in third-quarter fluid milk sales versus the year ago period, said Ralph P. Scozzafava, chief executive officer of Dean Foods.
|Ralph Scozzafava, c.e.o. of Dean Foods|
“As a result of our volume performance, Dean Foods’ share of the fluid milk category decreased 50 basis points versus Q2,” he said during a conference call with financial analysts on Nov. 7 to discuss third-quarter earnings.
The volume pressure on the company will only become greater once Wal-Mart Stores, Inc. opens its milk processing plant in Indiana next year.
“We’ve got a major reset to our cost structure that we’re going to be taking here,” Mr. Scozzafava said. “The objective of that is going to be to offset things like Wal-Mart and other pressures on our business. That’s our objective.”
For the quarter, the company’s net income was $1,382,000, equal to 2c per share on the common stock and a steep decline from the same period of the previous year when the company earned $14,526,000, or 16c per share.
Sales for the quarter fell to $1,937,620,000 from $1,964,601,000 in fiscal 2016.
The focus on “smart volume” by management is intended to drive Dean Foods’ top line and build margin, and Mr. Scozzafava said the company has had some “wins” during the quarter that will be reflected in 2018 results.
“As we manage our private label products and analyze new volume opportunities or evaluate existing volume profitability, we want to ensure that we’re producing and selling volume at appropriate margins,” he said. “We have a disciplined revenue management approach and task ourselves with both the pursuit of new business and the retention of existing volume at acceptable margins.
“We know we’re not going to secure every bit nor should we. To be clear, we don’t believe it’s prudent to chase volume to the floor and we won’t. This is part of why we are focused on resetting our cost structure to a lower level to allow us to compete more effectively.”
On the productivity front, a focus on logistics is a key part of cost savings. Dean Foods has a large fleet of vehicles used to pick up and deliver fluid milk and other products. Taking waste out of the system has been a priority.
“Year-to-date, we’ve reduced over 12,000 deliveries and as a result, have driven reductions in both headcount and assets on the road. Incremental productivity delivered through reduced customer returns. Milk case spend and fuel gallon usage also contributed to our overall productivity target of $80 million to $100 million in 2017, which we expect to deliver through year-end.”
Points of differentiation
Management is also striving to diversify Dean Foods’ business. The company has a number of plants capable of handling a variety of beverages.
“…We have a large infrastructure, as you know,” Mr. Scozzafava said. “We have lots of trucks on the road, lots of plants, expertise in making things that are — (go) into dairy, refrigerated and frozen. I think that those all become fair game for us as we start thinking about products that we can put into the portfolio.”
Examples of such diversification include the company’s investments in Uncle Matt’s Organic juices and fruit-infused waters, and Good Karma Foods, a manufacturer of dairy alternatives featuring flaxseed, this year. In late 2016, the company also entered into a joint venture with the Cooperative of Regions Organic Producer Pools to process and deliver its Organic Valley branded products to retailers.
Dean Foods also is looking beyond fluid milk and seeking opportunities in adjacent categories. The company’s DairyPure branded sour cream gained both volume and dollar share in the sour cream category during the third quarter, the company said.
“While still relatively small versus the category, our volume and A.C.V. distribution continues to grow,” Mr. Scozzafava said.
The company is also in the process of introducing a single-serve cottage cheese product.“Our new product line called DairyPure Mix-ins is made with our award-winning clean label cottage cheese and features great tasting fruit and nut recipes that deliver 15 to 17 grams of protein in each serving,” Mr. Scozzafava said. “DairyPure Mix-ins were very high in consumer testing hence receiving strong customers response through our initial selling process, which is currently under way.”