Retail Distribution of Dairy

Products
Bob Cropp
Dairy Marketing and Policy Specialist
University of Wisconsin-Madison
April 2001
 U.S. Milk Production & Commercial
Disappearance, 1980 to 2000
180

170 Milk Production

Billion Pounds of Milk

160 Commercial
disappearance
150

140

130

120

110
1984
1985

1990
1991

1994
1980
1981
1982
1983

1986
1987
1988
1989

1992
1993

1995
1996
1997
1998
1999
2000
 BFP or Class III Milk Price versus the Support Price,
1970-2000
$19

$17 Support price

Dollars Per Hundredweight

BFP/Class III price

$15

$13

$11

$9

$7

$5

$3
Ja J J Ja J Ja Ja J Ja Ja Ja J J Ja J Ja
n- an- an- n- an- n- n- an- n- n- n- an- an- n- an- n-
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00
 Utilization of U.S. Milk Production

Product: 1990 2000

Fluid milk 32% 28%
Cheese 41% 47%
Butter 6% 6%
Frozen products 8% 8%
Nonfat dry milk 3% 4%
Other* 10% 8%

* Milk proteins, lactose, nutritional beverages, etc.

 Per capita Fluid Milk Sales, 1990 – 2000
Pounds
Year Plain Reduced Nonfat Flavored Total
Whole lowfat
1990 85.6 98.3 22.9 9.4 219.7

1995 71.3 92.4 31.9 10.0 208.5

1999 68.3 87.1 33.2 11.9 201.9

 Per capita consumption of manufactured
dairy products, 1980 – 1999 Pounds
Year Butter Amer. Other Nonfat Ice Lowfat
Cheese Cheese dry cream ice
milk cream
1980 4.5 9.6 7.9 3.0 17.5 7.1

1990 4.4 11.1 13.5 2.9 15.8 7.7

1999 4.8 13.0 16.8 3.0 16.8 7.9

U.S. Dairy Cooperatives and Their Share of Farm
Milk Marketings
Year Number of Market Share
Cooperatives
1950 2,072 53%

1970 971 61%

1990 264 82%

1997 226 88%

1999 220 89%

 Cooperatives' share of U.S. farm marketings
100
88 89
90
1982
Percent of U.S. cash receipts

80 77
1997
70 1999

60
50
43
38
40 36 36
34
29 30 29
30 27
20 19
18
20
13
11 12
10
0
Milk Cotton Grain Fruit & Livestock Total
veg
 Dairy Cooperatives marketed most of farm
milk to others as raw milk.
• 61 % sold as raw milk and 39% processed and
manufactured in co-op’s milk plant.

• Dairy cooperatives are moving towards more

value added activities.

• Dairy cooperatives are entering into joint ventures

with other cooperatives and public corporations.
Dairy Cooperative Share of Manufactured
Dairy Products, 1997
Dairy Product Market Share
Butter 61%
Dry milk powder 81%
Cheddar cheese 70%
Other American cheese 43%
Mozzarella cheese 26%
Other Italian cheese 18%
Other cheese 9%
Total natural cheese 40%
Packaged (beverage) milk 14%
Share of Dairy Products Sold Through
Retail Stores
• Fluid Milk 74%

• Ice Cream 45%

• Butter 36%

• Cheese 40%
 Fluid Milk

• Factors that have changed fluid milk

distribution:
1) Glass bottle late 1800’s
2) Paper carton 1940’s
3) Plastic containers 1980’s
• These changes forced small bottlers out of
business
- 10,000 bottlers in 1940
- Less than 300 today
 Distribution Method of Fluid Milk
Products, 1983 – 1997
Distribution method: 1983 1997
Home delivered 2% 1%
Wholesale: 98% 99%
Supermarkets 50% 58%
Dairy/convenience 10% 10%
Military 1% 1%
Schools 7% 6%
Other 30% 24%
Distribution of Fluid Milk By Type of Container,
1973 - 1997

Type of container 1973 1985 1997

Glass 4% Less than Less than

0.5% 0.5%
Paper 71% 34% 21%

Plastic 25% 65% 79%

Total 100% 100% 100%

 Fluid Milk Distribution By Size of
Container
Size of container 1973 1985 1997
Gallon 37% 60% 66%
Half gallon 38% 22% 18%
Quart 5% 5% 4%
Pint 1% 2% 2%
Half-Pint 10% 9% 9%
Bulk – Over 5 5% 2% 1%
Qts.
Total 100% 100% 100%
Since 1960’s, the balance of power for fluid milk
has shifted from milk processors (dealers) to food
retailers, primarily large supermarkets.
• This is forcing bottlers to get bigger
• Deans Foods and Suiza Foods have been active with
acquisitions

• Deans Foods (13% of market) and Suiza Foods (17% of

market) on April 5 announced intent to merge.

• Dairy cooperatives have entered into milk supply

arrangements with major fluid companies.
- Dairy Farmers of America with Suiza Foods
- Land O’ Lakes with Deans Foods
 Top U.S. Foodservice Distributors, 1999

Company 1999 Sales (Bil. $s) 1999 Market Share

Sysco Foods 17.4 13.3

Wal Mart 14.1 10.7

U.S. Food/Ahold 8.0 6.1

Alliant 6.1 4.6

XPEDX 2.9 2.2

Total 48.3 37.0

 Top U.S. Supermarkets

Company 2000 Sales 2000 1993

(B $) Market Market
Share Share
Wal Mart 57.2 11.1 0.00
Kroger 49.2 9.6 6.0
Albertson’s 36.4 7.1 3.0
Safeway 33.2 6.4 4.0
Ahold USA 27.5 5.3 0.0
Total 203.5 40.0 13.0
Private label dominates the fluid milk
business.

• Percent Private Label

White Milk 70.1%

Flavored Milk 23.3%

 Natural Cheese

• Cheese pricing relies on the Chicago Mercantile Exchange

(CME)
• CME operates 5 business days a week

• CME prices change due to

- A SALE at a different price
- A BID at a higher price
- AN OFFER at a lower price
• About 2% of cheese actually sold on CME
 Number of U.S. Cheese Plants & Cheese
Plant Capacity
Year Total Total Total Processed
American Italian Natural Cheese
Cheese
1980:
Plants 483 187 737 62
Capacity 4,918,750 5,255,000 27,640,200
1999:
Plants 197 153 376 52
Capacity 18,155,100 20,540,000 46,705,300
Capacity is annual pounds of cheese per plant
 Distribution of Cheese
Retail
Food Service
Food Processing
17%
40%

43%
Unlike fluid milk, branded cheese dominates retail
sales.

• About 68% is brand cheese and 32% private label.

• Kraft brand has 45% retail market share
• Cooperatives not major brand sellers, but Land
O’ Lakes brand is significant in delli sales.
• In Food service, Leprino’s is world largest
manufacture of mozzarella
• Schreiber is major player in processed cheese--
more than 50% sold to fast food chains, some to
retail as private and brand.
 Butter:
• The butter/powder industry that existed in the
1950’s and 1960’s no longer exists.
• 50% of the butter produced in Wisconsin and
California
• 1975, 366 butter plants, today less than 100
• 36 dairy cooperatives make butter, 61% share.

• Butter pricing like cheese is based off of the

Chicago Mercantile Exchange.
 Retail accounts for about a 36% of
butter sales
• Some strong brand

• Land O’Lakes maintains a 31% market

share at retail.
 Ingredient Markets;

• Nonfat dry milk

- Very little retail sales

- About 60% is used in other dairy and food

products

- A surplus dairy product

• Dry whey:

- Dry whey and whey protein concentrates.

- Used in dairy and food products

- Competitive on the export market

Summary of Private Label Dairy Products
in Supermarkets, 1999
Product Volume share that is
private label
Cheese 35.2%
Cottage cheese 44.8%
White milk 70.1%
Flavored milk 23.3%
Dips 15.7%
Sour cream 37.0%
Yogurt 20.8%
Ice cream 33.2%
Frozen novelties 26.7%
Concern over farm-retail price spread:

Fluid Milk:
• Farm value and retail value move together over time.
• Margin has increased , retail margin is about 25%
- Not used as loss leader as much
- Reduced competition at both wholesale and retail

• Inverse relationship between change in Class I price and

margin--when Class I increases both wholesale and retail
margins decrease and vice versa.
Butter:
• Retail margin has widened, but highly variable.
- Retail margin is about 20%

• In 1980’s butter price stable due to federal price

support. But support price reduced and since 1993
wholesale butter prices well above support.

• Changes in farm value of milk and retail margins

inversely related.
Cheese:
• Retail cheese prices and farm value of milk have
been less closely related.
- Reduced federal support price
- Also time required for raw milk to be transformed into
cheese and eventually sold at retail.
- A lot of value-added---640 pound cheddar blocks need to
to cut and wrapped for consumer sales.

• Changes in farm value of milk and changes in

retail margin inversely related.
• Retail margin about 36%
Ice Cream:

• Farm value of milk and retail price not closely

related.

• Retail price has increased significantly past 5

years (up 40%)
General comments on Retail Margins:
Retail margins have increased due to:
• Increased labor cost
- However, output per employee in fluid plants increase
more than 140% since 1970 and 150 % in dairy
manufacturing firms.
• Increased packaging costs
• Increased fuel/energy cost
• Changes in product packaging, composition--
consumers demand convenience
Continuation on changes in retail margin:

• New product development

• Reduced competition
• Retailers have changed pricing strategy--now look
to more profit from dairy case.
Changes in farm-retail spread and farmer’s
share of retail dollar:
• Farm-retail spread increased 117.7% between
1982-84 and 2000.

• Farmer’s share of retail dollar:

- all dairy products: 36.0% in 1986
29.5% in 2000
- 1/2 gallon of milk 39%
- Cheddar cheese 32%
 Summary Comments:
• Wholesale and retail prices respond more quickly
to farm level price increases than decreases.
• Farm to retail spreads will likely widen due to
more value added activities.
• Retail concentration is putting pressure on
wholesalers that serve them--need to get bigger in
order to have market clout.
• Retail food business is a low margin and high
volume business.
 Retail Food and Beverage Firms
Consolidating:

• 1972 218,300 firms

1997 110,900 firms

• Market share of top 4 firms:

1972 = 16.2%
1997 = 18.3%
What do these large food customers
want?
 On time delivery
 100% fill rate
 Competitive price
 Safe/insured food
 Undamaged products
 More convenience products
 New leading edge products
 More & more fresh products
 Product information
 Marketing tools
 Knowledgeable sales people
U.S. consumer will influence the structure of the
U.S. food system from farm to consumer.

• Moving to partnering relationships

- seemless system
- supply chain driven
• Retail consolidation is resulting in lower returns
to food manufacturers & marketers
- manufacturers and marketers need to get more
efficient, lower costs
- need to get bigger
Cooperatives wishing to compete in this
rapidly changing food system must:
• Get better, more efficient, cut cost

• Be a reliable supplier

• Have sufficient volume to have market clout

• Consider strategic alliances with other

cooperatives, with IOFs
Summary continued:

• Retail prices of dairy products have increased less

than retail prices for all food.
1982-84 = 100 retail price index
For 2000:
All food = 167.8
Dairy products = 160.7