Dairy alternatives are on a rise as consumers are increasingly going dairy-free, particularly when it comes to fluid ‘milk’ used on things like cereal or in coffees.
The time is right, Rabobank said, for the dairy sector to reflect on the success of alternative dairy products and to consider applying those lessons to dairy.
Dairy alternative growth
Dairy alternatives have competed in the dairy space for decades, but competition has intensified as dairy alternatives broaden in types, styles, and categories of product. Global retail sales growth for dairy alternatives has soared at a rate of 8% annually over the last 10 years. With retail sales valued at $15.6bn, dairy-free ‘milk’ represented 12% of total fluid milk and alternative sales globally in 2017, according to Euromonitor.
While for some, nutrition, price, and flavor may favor dairy, changing consumer perceptions around health, lifestyle choices, curiosity, animal welfare and perceived sustainability are increasingly drawing more people to select ‘dairy-free’ products.
“Global demand for dairy is expected to grow by 2.5% for years to come, with demand for non-fluid categories offsetting weak fluid milk sales,” Tom Bailey, RaboResearch senior analyst – dairy, said.
“While it’s not essential to diversify into dairy alternatives, it would be wise for the dairy industry to at least learn one thing from the success of dairy alternatives, which may be putting the consumer first and trading in the old grass-to-glass model for glass-to-grass.”
Entering the plant-based space
The challenge for dairy lies mostly in fluid milk, where retail sales in western Europe ($18.6bn) and the US ($12.5bn) declined at an annual rate of 5% and 3%, respectively, in the five years to 2017, according to Euromonitor.
The results over the last five years have favored dairy players who have invested in milk alternatives across the supply chain – from planting almond trees to buying brands. The investments in dairy alternatives have shown returns above standalone dairy.
Possibly the most obvious example is Danone’s purchase of WhiteWave, however, other dairy companies have entered the dairy – and meat – alternative space, including Granarolo, Yili, Dean Foods, Valio and GreenSpace.
Soy still tops:
Soy beverages tops dairy alternatives’ sales at 39% in 2017
Soy growing at 3.2% since 2012; other dairy alternatives at 13.2%
Almond dairy alternatives 68% of non-dairy sales in 2017 in the US
Flexitarians flex their muscles
The report stated the largest segment of consumers choosing dairy-free beverages consists of millennials and Generation Z. It notes their perceptions of health and sustainability (including animal welfare and environmental footprint) are core motivators for their choice to limit dairy consumption.
It cites a study by Comax Flavors that explains rather than vegans, dairy-free sales are being boosted by the flexitarian trend. Flexitarians try to eat fewer animal products, but are also happy to sometimes consume animal products
It notes that in the US, up to 38% of Americans try to eat a meatless meal once a week; in Germany the number rises to 68%.
The report says the strong growth rate and improved margin opportunity for dairy alternatives have “caught the attention of food companies, start-ups, and investors alike, which has provided a ripe space for capital investment opportunities. Due to the consistent success of the category, the risk profile of dairy alternatives has decreased, making the decision to join the party easier for investors.”
This may also begin to bridge the gap in price that currently exists between dairy and non-dairy, the report argues. Currently, milk is cheaper than dairy alternatives, however, as the alternatives market continues to grow and attract new investment, dairy alternatives will become more cost-competitive.
And if soy’s share of the market is declining, and other nut dairy alternatives may potentially have allergen issues, as the report notes, there are plenty of dairy alternative alternatives that don’t fall into the nut/soy category. Hemp, oat, flax, pea, canary grass, quinoa and barley are all available, and some with associated health claims
However, the report continues that all is not lost for dairy, as it can still promote its nutritional values, point to the ‘fat is back’ trend, the clean label nature of dairy, and the current price difference.
Rabobank also estimates the annual CAGR demand growth for dairy alternatives will adjust lower, to near 5%, over the next decade, lower than the 8% experienced over the past 10 years.
However, the report notes a strategy of hoping for the best and waiting for the tide to turn is not a good idea for the dairy industry. It says jumping on board the alternatives train is one option, but dairy product innovation and value-added products also offer another route.
The report, however, concludes that, “Having ownership in both categories can diversify risk, deliver greater sustainability, and draw a stronger connection to consumers.”