Shoppers’ zeal for healthier foods and beverages has turned the tables on a small soy-milk supplier and its former parent, America’s largest milk processor.
A little over a year ago, Dean Foods Co. DF -2.10% , a nearly 90-year-old dairy giant, spun off its Silk plant-based milks and Horizon-brand organic milk into a separate company, The WhiteWave Foods Co. WWAV -1.06% In the past 12 months, WhiteWave shares have jumped 62% while Dean’s are off 17%.
WhiteWave’s profit and sales are climbing as U.S. consumers embrace plant-based milks. Dean has churned out losses on falling domestic demand and higher costs for raw milk. Today, WhiteWave’s revenues are just a third of Dean’s, but its market value is more than three times its former parent.
Getting drinkers back in the barn won’t be easy. “It is going to be tough to buck the trend of declining consumption of [cow] milk in the U.S.,” says Ryan Oksenhendler, an analyst with Arlon Group LLC, a New York-based fund manager that owns WhiteWave shares. He says shoppers quitting cow milk and embracing soy, almond and coconut milks are feeding WhiteWave’s gains.
Dean executives aim to reverse its profit decline by cutting costs and expanding sales of flavored milks and higher-protein drinks, two niche products that are outperforming conventional, white milk. Dean shut eight of its roughly 80 plants last year and plans to close three more this year in an effort to navigate what its executives call the toughest industry conditions in memory.
“It’s uncharted waters,” Dean Chief Executive Gregg Tanner told analysts in May. Mr. Tanner declined to be interviewed for this article.
Dallas-based Dean won cheers from Wall Street in 2012 when it staged an initial public offering for WhiteWave to draw more value from investors for the fast-growing unit. Gregg Engles, who ran Dean for 18 years and built it through acquisitions, left to run the offshoot. Dean also sold its Morningstar Foods division, which made creamers, iced coffee and cottage cheese, to Canada’s Saputo Inc. SAP.T -0.44% in January 2013 for $1.45 billion, before completing the WhiteWave spinoff that May.
The revamp was designed to make Dean a smaller company with a tighter focus, lower debt, and the dominant supplier in the $20 billion-a-year U.S. fluid-milk industry. It succeeded on those points, cutting Dean’s total debt to $963 million as of March 31, from $1.8 billion a year earlier, and enabled Dean to return cash to shareholders, said Amit Sharma, an analyst with BMO Capital Markets. Dean today controls 36% of the U.S. fluid-milk business and hopes to boost its share further by being the lowest-cost producer, able to operate more efficiently than smaller competitors.
But it turned out to be a bad time to double down on dairy. Prices for raw milk in the past year have spiked, thanks to constrained supplies and surging demand overseas. That has crimped profits for Dean, which can’t easily pass on the cost without risking lower sales.
In May, the price of milk used in beverage products reached a record $24.47 a 100 pounds, more than a third higher than a year earlier, according to the U.S. Agriculture Department. The agency, which sets minimum dairy pricing, pegged the price at $23.02 a 100 pounds for July.
Demand for milk powder, cheese and other dairy products in China and other Asian markets has soared. U.S. dairy exports for the first five months of this year jumped 29% in value over a year earlier, according to data from the U.S. Dairy Export Council. But Dean’s sales are almost entirely in the U.S.
Global milk production fell in recent years after a 2009 drop in prices that forced out some smaller U.S. dairy farms and on droughts in the U.S. in 2012 and in New Zealand and Australia last year. European and U.S. output is expected to increase this year, easing costs for Dean.
But milk processors also face a longer-term challenge: U.S. milk consumption per person has dwindled for decades as consumers switched to flavored waters, juices, sodas and alternative dairy drinks.
Last year, U.S. retail sales volumes for skim and low-fat cow’s milk, the biggest conventional-milk drinks, declined 4%, while dollar sales slumped 2.4%, says IRI, a Chicago-based market-research firm. The 2013 volume decline was worse than in each of the previous three years.
WhiteWave and other plant-based dairy suppliers including Blue Diamond Growers continue to nip at Dean’s heels. WhiteWave’s net income rose more than one-third over a year earlier to $32 million in its first quarter. Almond-milk sales have been especially hot.
The faster-growing products also yield higher margins. The Broomfield, Colo., company’s gross profit margin reached 36% last year, compared with 21% at Dean.
Halsey Associates Inc., a New Haven, Conn.-based firm that owns about 355,000 WhiteWave shares, scooped up the stock shortly after WhiteWave was spun out. “We would not have looked at it as part of Dean Foods, just because the commoditized dairy business dominated the company’s financial condition,” said James Zoldy, the firm’s chairman.
Dairy companies hope to rejuvenate milk sales by capitalizing on rising U.S. consumer demand for protein-rich foods. The national Milk Processor Education Program, which promotes milk products for Dean and others, dropped “Got Milk?” as its main advertising campaign earlier this year in favor of “Milk Life,” emphasizing 8 ounces of milk has 8 grams of protein. The campaign will be backed by $50 million in advertising and social-media spending this year.
Dean this year intends to expand nationwide its TruMoo Protein Plus drink, a version of its TruMoo flavored milk with 25 grams of protein per 14 ounces. TruMoo, launched in 2011, has been a success for Dean, growing to $650 million in annual retail and school sales last year.
TruMoo accounts for less than 8% of Dean’s $9 billion in annual sales, making it critical to improve results elsewhere.
“You are talking about a large conventional milk business that is in decline,” said Deutsche Bank DBK.XE -1.61% analyst Eric Katzman. “It is hard to quickly offset that.”
Source: Wall Street Journal
