By Jacob Bunge and Jaewon Kang
Americans' thirst for cheap milk -- and grocers' rush to provide
it -- are remaking the centuries-old dairy industry.
When supermarket shoppers reach for white gallon jugs these
days, most of the time they grab a low-priced store brand. To
expand those offerings, major grocery retailers, including Kroger
Co., Walmart Inc. and Albertsons Cos., have built their own
milk-bottling plants.
Grocers' move into the bottling business is threatening some of
the biggest operators in the $40 billion U.S. milk industry, the
purveyors of national brands. Dean Foods Co., which until last year
was the largest U.S. milk processor by sales, and Borden Dairy Co.,
another big producer, were sold this year after filing for
bankruptcy in November and January. Executives of both had blamed
some of their struggles on grocers' focus on cheap milk, often used
as a loss leader.
"There are retailers who prefer to have really aggressively low
prices on milk because it's a great way to get people in the
stores," said Tony Sarsam, Borden's former chief executive.
Private-equity firm KKR & Co. and Capitol Peak Partners LLC, an
investment firm headed by former dairy executives, bought Borden
out of bankruptcy this month.
Adding to the industry's pressures, milk's luster has been
slowly fading for years in an increasingly crowded beverage market.
Many consumers have switched to bottled water and juice, or dairy
alternatives made from almonds or oats; breakfast cereal has fallen
out of favor.
At the farmer level, about 3,300 dairy-cow herds disappeared in
2019, according to the U.S. Department of Agriculture, following
low milk prices, tensions with export customers and
processing-plant closures across the country. Wisconsin alone lost
about 600 herds over the 12 months up to June 1, the cows typically
either sold to another farmer or sent to slaughter. The state led
the nation in farm bankruptcies last year.
Although overall dairy demand, factoring in products such as
yogurt, butter and cheese, continues to grow, annual per capita
U.S. milk consumption has dropped about 40% over four decades.
Faced with the coronavirus and stay-at-home orders,
pantry-stocking consumers this spring pushed up milk sales at
retail for the first time in a decade. Overall demand dropped as
restaurants and hotels closed, according to agricultural lender
Rabobank.
For the supermarket chains, milk still has much appeal. They
know that shoppers who come for a jug of milk tend to stay and buy
a few other items.
Milk still regularly ranks among the top 10 purchases at
Walmart's stores, according to people familiar with operations of
the biggest U.S. food retailer.
Dean Foods was one of Walmart's biggest milk suppliers for
decades. Executives of the mega-retailer known for its low prices
regularly pushed Dean to squeeze down milk costs.
A Dean milk-processing plant in Louisville, Ky., tweaked
equipment to make plastic bottles that weighed 57 grams instead of
60, saving about half a cent on each gallon, said plant workers and
labor-union officials.
The Louisville plant was processing as much as 1.2 million
gallons of milk a week, 70% of it going to 130 Walmart stores in
four states. If hit with a problem such as a big snowstorm, the
plant would supply Walmart before other customers. "We did whatever
we had to do to make sure we kept them," said Scott James, who
worked as a maintenance technician at Louisville.
Around 2012, Walmart suggested that Dean run a separate bottling
plant to produce milk for the chain's store brand, called Great
Value, according to people involved in the discussions. The
companies didn't reach an agreement.
When U.S. milk prices broadly declined in early 2015, Walmart
expected Dean to lower its own prices so that Walmart could make
more profit on dairy, as often happens with commodity-based
products, according to a person close to the discussions.
Dean declined. Gregg Tanner, its chief executive at the time,
was preparing to unite Dean's regional milk brands, such as
Garelick Farms and Mayfield Dairy, under a new national label,
DairyPure. Dean said it intended to hold the prices of its branded
milk where they were.
Walmart dairy managers were skeptical of Dean's strategy. They
believed their customers were differentiating less and less among
milk brands -- between store brands and premium milks that could
cost up to twice as much.
At one point, the price gap slowed sales of Dean's branded milk
so much that Walmart dropped it from some stores. Dean put up
billboard ads near Walmarts, hoping shoppers would go in and ask
for Dean's brands, former Dean employees say.
All the while, the dairy farms and milk cooperatives that supply
milk to the processors were getting bigger and more professional.
By 2017, the eight largest dairy cooperatives were marketing 54% of
the country's milk. To Walmart, buying milk directly from them,
then processing and bottling the milk itself, started to look like
a feasible cost-saving move.
Walmart announced in March 2016 it would build a milk-processing
plant of its own in Fort Wayne, Ind., to supply more than 600
Walmart and Sam's Club stores in the eastern Midwest.
Dean executives figured the move would siphon away about 100
million of the 2.6 billion gallons a year it sold. Mr. Tanner told
investors that Dean's financial performance wouldn't be hurt by
Walmart's move into bottling.
Workers at the Dean plant in Louisville took a darker view. "We
knew it was the death knell" for the plant, said John Stovall,
president of Teamsters Local 783.
At the end of that year, Mr. Tanner stepped down as Dean's CEO,
and operations chief Ralph Scozzafava took over. The new boss paid
several visits to Walmart executives. One argument he made was that
running a bottling plant wasn't a good use of the retailer's
resources.
Mr. Scozzafava didn't respond to requests for comment. Mr.
Tanner died last year.
Walmart pushed ahead to finish the plant, and Dean girded for
the impact by planning cost cuts. In the middle of 2017, with the
volume of its DairyPure milk sold down by an estimated 7.5% over a
year, Dean closed a bottling plant in Virginia.
Joe Kelsay, a sixth-generation Indiana farmer whose cows had
supplied milk to Dean's Louisville plant for a quarter-century,
opened a letter from Dean in March 2018. It said that Dean was
terminating his contract, forcing him to find a new buyer for the
milk from his 500 dairy cows.
"It was a bit of a gut punch," Mr. Kelsay said.
Food Lion, which has more than 1,000 stores on the East Coast,
ended its contract with Dean in early 2018 after disagreements over
pricing, people familiar with their negotiations said. That cost
Dean sales that analysts estimated at another 50 million gallons of
milk a year.
Food Lion started purchasing milk from a rival grocery retailer,
Kroger, that owned its own milk-processing plants. Kroger, which
was early to move into the bottling business, processes roughly 90%
of the milk its stores sell.
Dean made plans to close milk-processing plants in Pennsylvania,
Massachusetts, Minnesota, Michigan, Illinois and Georgia. Workers
at Dean's decades-old processing plant in Louisville circulated
Google Earth images of the Walmart plant under construction in
Indiana and joked grimly about how long it was to doomsday, said
Mr. James, the maintenance technician.
Before the month was out, Mr. James's manager gathered workers
to tell them the Louisville plant would be winding down.
A few weeks later, Walmart opened its bottling plant in Fort
Wayne, adding hundreds of jobs and boosting Indiana dairy farmers
who secured supply deals with it.
"This work is an example of how we are always finding
efficiencies within the supply chain to deliver on our commitments
to everyday low prices and high quality groceries," said a Walmart
spokeswoman, Delia Garcia.
By operating its own plant, Walmart is reducing costs and
passing down lower prices to customers, Ms. Garcia said. She added
that the retailer's technology and logistics system cuts delivery
time to stores and extends milk's shelf life.
Mr. Kelsay, the Indiana farmer, and his brother Russ debated
what to do with their cows' milk. Although Walmart's new facility
would buy milk directly from local farmers and cooperatives, farmer
contracts had already been signed.
Mr. Kelsay didn't want to be the one to take his family out of
dairy farming after more than 180 years. He hit the phones looking
for a milk buyer. One problem was that other farmers who had lost
their business with Dean were also looking.
More than a dozen potential milk buyers turned Mr. Kelsay down.
Only one offered to buy his milk, and at a price a fifth lower than
Dean had paid.
"The glimmer of hope continued to subside," he said.
In August 2018, Dean reported a quarterly net loss and reduced
its financial outlook. Its plant closures now were coming so fast
they created new problems. In Lynn, Mass., where the company was
winding down a processing plant, milk deliveries rerouted to
another Dean plant created logjams.
In February 2019, Dean's board, meeting before reporting another
quarterly loss, voted to explore options including a sale of the
company. It attracted offers for parts of its business but held out
for a full buyer.
In November, Dean filed for bankruptcy protection. It began sale
talks with Dairy Farmers of America, a large milk-producer
cooperative, which in February agreed to buy Dean. John Wilson, an
executive of the cooperative, said grocery chains that run their
own plants often also need milk from other suppliers, including
Dairy Farmers of America.
By then, prices of milk were higher, pushing up costs for dairy
processors. Supplies were down because thousands of dairy farmers
had quit.
Among them was Mr. Kelsay. After failing to find a new buyer for
the cows' milk, he and his brother sold their herd to another farm
in November 2018, followed the next spring by their remaining
calves and the last of their milking equipment.
Today, their 2,100-acre operation, called Kelsay Farms, grows
only crops such as corn, soybeans and wheat. They went from 12
full-time employees to one.
Mr. Kelsay said he lost part of his identity when his herd was
loaded onto trucks.
"We cried as we watched the cows," he said. "It was like a death
in the family. You had to choose to stop life support."
Write to Jacob Bunge at jacob.bunge@wsj.com and Jaewon Kang at
jaewon.kang@wsj.com
(END) Dow Jones Newswires
July 27, 2020 14:04 ET (18:04 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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