DAllas — Economies of scale can be a double-edge sword. For a company with an efficient, optimized manufacturing base and supply chain, it can generate substantial benefits. For a company with a less-than-efficient infrastructure, it can be a drag. The management team at Dean Foods finds itself in the latter position and is working to streamline operations to improve performance.
Several issues are driving the company’s efforts. Most notably, Walmart, Inc. will be opening a new fluid milk processing plant in Indiana that is going to start operations in May. In addition, the market for fluid milk is weak, and Dean Foods’ efforts to diversify into such categories as ice cream, cottage cheese, sour cream and juices show promise, but are still in the early days of development and execution.
“We consider 2018 to be an important year, a year of transition and transformation as we reset our cost structure to better position us for the future,” said Ralph P. Scozzafava, chief executive officer, Feb. 26 during a conference call to discuss the company’s fiscal 2017 results. “In short, we’re making important choices in 2018 and taking aggressive but necessary steps to drive our strategic plan, reset our company to make Dean Foods more competitive and enable us to deliver solid and consistent earnings and cash flow over the long term.”
Net income for the year ended Dec. 31, 2017, fell to $61,588,000, equal to 68c per share on the common stock, down from $119,929,000, or $1.32 per share, during fiscal 2016.
Sales for the year rose slightly to $7,795,025,000 from $7,710,226,000 during fiscal 2016.
“In 2017, we navigated a rapidly changing industry and landscape in a dynamic retail environment,” Mr. Scozzafava said. “Within private label fluid milk, competition for volume increased significantly in the first half of the year, and we lost volume at higher levels than we planned. As a result, we experienced increased levels of costly leverage that put pressure on our operating income. We also saw an increased level of retailer investment in private label products at many customers, and this created a mix shift, which pressured margins.”
Mr. Scozzafava added that an oversized cost structure sensitive to small percentage declines in volume added pressure to the company’s results. In the fourth quarter, Dean Foods experienced a volume decline of 6% year-over-year.
Streamlining the cost structure is central to Dean Foods remaining competitive in bidding for private label fluid milk contracts and maintaining a favorable margin in branded product sales. Management has committed to generating $150 million in savings by 2020. Mr. Scozzafava said he expects to achieve one-third of the savings this year and the remaining two-thirds in 2019.
“We expect to consolidate our supply chain by a meaningful amount over the next 18 to 24 months while also making sure that we deliver the same great quality, value and service that our customers have come to expect from us,” Mr. Scozzafava said. “For this important reason, we’ll implement our supply chain changes in phases with targeted completion in 2019.”
Details about the cost saving strategy were scant, but Mr. Scozzafava emphasized that Dean Foods was built through the acquisition of many smaller dairies, and that effort has left its supply chain fragmented and decentralized.
“We’re designing a flatter, leaner and more agile organizational structure to enhance our decision-making and help build functional competencies that will increase our effectiveness with our customers and our suppliers,” he said.