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Milk processing can also be an invisible business. With annual sales of over $13 billion, more than Heinz and equal to Kellogg’s, Dean Foods must be the least well known of the world’s big packaged goods companies. Their anonymity is due to two factors: firstly, very little of what they sell is branded Dean’s, and secondly: Dean Foods has become the dominant force in the cut-throat but near-anonymous world of America’s dairy chiller cabinets.
Origins
As a colossus of the grocery store back wall, the current Dean Foods dates from December 2000, when Suiza Foods, a company only in existence since 1993, bought the long-established Dean Foods and assumed its name. The two companies had become the top two dairy companies in America by following similar strategies. It made sense to come together.
Dean Foods was founded in 1925 by Sam Dean Senior, who worked in a brokerage company trading evaporated milk in Chicago until he started up his own evaporated milk company. Once Dean moved into fresh milk processing in the 1930s, his first field of interest, well, it just evaporated. Nevertheless, Sam Dean had become one of thousands of localised American milk bottlers in the period up to the Second World War. In this tough business, Sam Dean was a relatively small middleman, squeezed between price-conscious retailers always looking for cheaper milk - the price of retail milk was a key driver of ‘store footfall’ for the rapidly growing grocery chains - and farming cooperatives who were always looking to drive up the price of milk. He realised that there were three ways he could improve his own position: building brands of milk would increase his leverage against retailers; developing alternatives to dairy would decrease his reliance on cooperatives; and increasing the scale of his business would enable investment in greater efficiency, by lowering costs, winning more business and increasing profits.
Building the Business
Developing a product range that went beyond liquid milk was the easy part. As early as 1943 Sam had his own R&D lab and their first tangible output was a non-dairy powdered coffee creamer. Four years later he got himself into the ice cream business. Building strong brands and increasing scale was harder. Milk was, and is, a local industry. Being around 87% water and with extremely limited shelf-life, it makes no sense - from transportation costs and product quality reasons - for milk processing to be heavily concentrated in a few vast plants hundreds of miles away from retail customers. Milk processing has thus a much less concentrated industry than, for example, meat packing, or corn milling or soybean processing.
Sam realised that the answer was to go on an acquisition spree. A nationwide milk business could be done; both Kroger and Safeway Inc. had their own national private label operations, Another company, Borden, had approached being national in scope before getting mired in an unproductive series of diversifications. Sam took a more nuanced approach, buying up healthy dairies across the country, which had developed strong local brands for their fresh milk. Dean took costs out by removing supply overlaps, infusing capital to improve processing efficiencies and by having superior marketing, management and R&D expertise that each acquired dairy could utilise.
It was a winning formula. Operating margins almost invariably improved within a year or two of Dean ownership. So popular was the model that for the majority of Dean purchases, it was the dairy owners themselves who made the approach to sell. The acquisitions also brought capabilities into Dean Foods that helped it diversify and build brands. Reiter Dairy in Ohio came with cottage cheese-making facilities while Ryan Milk in Kentucky had aseptic production facilities that enabled life production of long life UHT products. The ice cream unit boomed, supplying over 400 Baskin-Robbins stores. In 1986 Dean diversified into frozen and canned vegetables when it merged with the Larsen Company, third largest in America behind Green Giant and Del Monte.
The acquisition momentum kept on increasing: more dairies and vegetable companies were absorbed. By 1991 Dean’s annual sales exceeded $2 billion, around 70% of which was dairy, making Dean Foods a close number two in the national market behind the soon-to-be-floundering Borden. From their 21 dairy processing plants across the country, cost and innovation synergies continued to flow; and the company was able to roll out lines such as frozen yoghurt and lactose-free milk across its dairies much faster than more local players could manage. Alongside the booming dairy business, the vegetable side expanded further with the acquisition of Bird's Eye in 1994.
While the Dean Foods model was proving to be very successful, the dairy industry remained very fragmented: Dean only had 6% of total American milk sales and around the same percentage of the country’s dairy plants, so there was plenty of room in the market. This point was noted by Ted Beshears, Chairman of the Milk Industry Foundation and a former manager of milk plants for Southland Corporation (owners of and supplier of milk to 7-11), and entrepreneur, Glenn L. Engles. Beshears and Engles had joined forces in 1988 in the packaged ice business (which was similarly fragmented) to pursue a strategy of gaining scale through acquisition and leveraging economies of scale to improve margin.
In 1993 they switched their attention to the milk market, buying a Puerto Rican dairy, Suiza Dairy. The twist in Beshears and Engles’ strategy was the realisation that the critical success factor was the speed in which the company could find, execute, integrate and improve the cost efficiency of dairy acquisitions. While Dean Foods concentrated much of their efforts on building their higher margin vegetable business, Suiza Foods focussed on acquiring as many of the country’s best dairies as fast as possible: their sole goal was to win the consolidation battle.
Suiza’s need for speed also came from the recognition that industry dynamics were becoming increasingly unfavourable to the milk processor. Per capita milk consumption was in a long-term slow decline, from 29 gallons per person in 1977 to 24 gallons twenty years later. A rising US population alone kept overall market volume stable. Simultaneously, consolidation within the American grocery-retailing industry was reducing the number of potential customers, all vying to increase their share of a static milk market. The inevitable outcomes were a greater downward pressure on the price retailers were willing to pay for fresh milk and an ever increasing demand for private, or own-brand label, which accounted for around two-thirds of total milk sales.
Dean Foods, with their past emphasis on buying strong local milk brands, had a 50/50 split in their sales between branded and private label, but faced the same pressures. At the same time, there was over-capacity within the dairy producing industry. This reduced the leverage of even the big companies such as Dean and Borden, as less efficient independent operators would undercut on price just to stay in business. Suiza’s strategy was to approach the better-run dairies and make a similar offer each time: 5 to 7 times EBITDA and insisting that local management stay in place to run the dairy. Once a dairy was bought in a new part of the country, Souza would immediately seek nearby acquisitions to consolidate manufacturing and distribution; the best plants and delivery set-ups would be modernised and inefficient ones closed down. Suiza also aimed to ensure secure sources of fresh milk from the farming industry by forming an alliance with the nation’s largest dairy cooperative, Dairy Farmers of America, who took a 33% ownership of Souza and provided capital to help fund the increasingly large acquisitions.
In 1995, after just two years of operation, Suiza had sales of over $1 billion, and they needed all the capital they could get in 1997, making eight acquisitions in the year. Their crowning glory was a $960 million acquisition of Morningstar Group Inc., a move that took Suiza ahead of Dean Foods and also brought nationally recognised dairy and dairy-substitute brands into their portfolio. These included International Delight and Mocha Mix coffee creamers, Second Nature egg substitute and the Lactaid range of lactose-free and lactose-reduced products. By 1999, Suiza had made forty acquisitions; achieved annual sales of nearly $4.5 billion; doubled their share price in four years; and were investing nearly $200 million a year into upgrading facilities and equipment. In 2000, Suiza upped the pace again, buying Southern
Foods Group, the country’s third-largest milk processor, which operated in eleven states and owned a roster of strong dairy brands, including the liquid dairy arm of the once-mighty Borden. Suiza were now clearly the number one dairy processor and distributor in the country: adding 30 plants, and 5,500 employees, which took their total to over 18,000. Five other acquisitions that year fuelled top line sales to grow by $1.3 billion. Sales of Morningstar brands surged ahead 17% during the acquisition year. Suiza now had the capability to sell and deliver virtually every product in the dairy chiller cabinet to any customer in the United States.
With national scale and scope, Suiza were now an attractive option for other companies to license their brands. In September 2000, they formed a partnership with Hershey to manufacture and sell Hershey-branded dairy products nationally. Suiza also expanded laterally: into the newly emerging soy beverages category by launching their brand Sun Soy. The phenomenal success of Suiza Foods, reaching market leadership with sales approaching $6 billion in only eight years of operation, was recognised when the company was included in the Forbes 2000 Platinum List of the finest companies in America and in Fortune magazine’s 2000 list of America’s Most Admired Companies. In May 2001, Suiza signed up another major national brand into its licensed brand programme with a deal to launch, manufacture and market P&G’s Folger’s Jakada, a low fat chilled coffee drink.
While Suiza Foods had been revolutionising the American dairy business, Dean Foods had continued its own acquisition strategy at a more sedate pace and concentrated upon the vegetables side of their business. However, innovation continued on the dairy side when Mayfield Dairy Farms, their Tennessee division, developed a single-serve milk plastic bottle, ideal for sale in school-vending machines, an innovation that was quickly propagated across their other regional companies under the name of Milk Chugs. Dean also focussed on building up a best-in-class Direct Store Delivery (DSD) network for their milk operations, offering retailers a fresher product and allowing their own drivers/salesmen to replenish and merchandise the dairy fixture.
2001 would end with Suiza’s biggest deal to date: the acquisition of Dean Foods itself, for $1.5 billion. This created a dairy colossus with more than 90 plants, 30,000 employees, over 6,000 refrigerated delivery routes servicing 150,000 retail customers. This gave the company, which adopted the better-known name of Dean Foods, over 30% of the US liquid milk market. Two-thirds of the combined Suiza/Dean product range was branded - either their own local and regional brands, or well-known national brands licensed from packaged goods companies - and one third of the range was private label. The merged company resolved its arrangement with Dairy Farmers of America by handing over $165 million and six plants where Dean and Suiza had overlapped. The new Dean Foods was now so big it would not struggle to find milk suppliers to supply them.
It now seemed that the mutual dream of Sam Dean, Ted Beshears, and Glenn L. Engles (Chairman and CEO of the newly merged company) had come to fruition. There are very few industries where the middleman is able to even stay in business, let alone build a prominent presence in the value chain between producer and consumer. Taking in tankers of liquid milk at one end of the building and sending out plastic bottles from the other is not much of a value add. However, like the banana industry where branding is located with the middleman, the value add is in collecting, handling and distributing a very time-sensitive product so that it hits stores on a daily basis in optimal condition. Through unprecedented size and scale, the new Dean Foods was now able to do this better and cheaper than anyone else. With such an expensive and efficient milk processing and delivery infrastructure in place, the logic of adding on higher margin, value-added lines, licensed brands and expanding into adjacent categories was unassailable.
Indeed, the strategy of the new company made this logic clear:
· To be their customers’ supplier of choice through the widest range of the freshest products delivered direct to store
· To use the mega-merger to further cut costs, with annual cost saving of $120 million targeted by the end of 2004
· To innovate in and drive growth through the added-value branded offerings, such as International Delight coffee creamers, soy and lactose-free products across the dairy fixture, and their licensed brands
Milk was not the only category enhanced by the merger. The combined ice cream operation was the third-largest in the country; with annual sales revenues of nearly $1 billion (a growth of 25% during the previous three years). 2001 also saw an extension for their Baskin-Robbins agreement to be near national in supply. Suiza’s Morningstar Foods was also combined with the non-dairy components of Dean Foods - these included their highly successful range of Marie’s and Dean’s refrigerated dips – to make the largest producer of this category in the country. Dean’s vegetable business was set up in a separate operating division, to be hived off as soon as possible.
The management’s finely-honed expertise in quickly assimilating acquisitions and getting at the cost synergies was behind an excellent first operational year for this company uniting the two largest dairy operations in the country. Savings were well ahead of target. This enabled significant investment in growth initiatives, the most significant of which was the May 2002 purchase of White Wave, makers of the leading brand in the soy beverage and food sectors, Silk (Dean Foods had held a minority stake in it prior to the merger). The soy category was the darling of the chiller cabinet, increasing by over 30% in the year to $440 million, of which Silk had an overwhelming 80% market share. Further good news on Silk came in the summer when it was listed nationwide by Starbucks as their sole soy beverage.
Also during 2002, licensing rights across all dairy products for another strong brand, Land O’Lakes, was acquired. The company spent $130 million promoting its added-value brands in the year and was rewarded by a 25% volume increase. They promised to increase that spend to $190 million the following year, together with an additional $30 million to promote the by now vast range of regional dairy brands. The Hershey’s range of flavoured drinks reached $100 million in annual sales and International Delight sales increased 13%. Total company sales for the year fell just shy of $9 billion, making Dean Foods one of America’s largest food companies. It had been a textbook acquisition, so much so that the company was able to keep on making acquisitions into 2003. The logic of continuing to consolidate the milk processing industry still held good, with more dairies being added. In addition, new branded products in adjacent categories were sough. The biggest purchase was the country’s leading brand of organic dairy foods, Horizon Organic, in January 2004 - just a month after acquiring the Cremora brand of coffee creamers. The strategic growth brands powered ahead another 27 % in 2003, with Silk growing by more than 40% as it benefited from Dean’s advantaged route to market and strong retailer relationships. But Dean was still primarily a fresh milk business. Sales in this category were over $7 billion, spread across forty regional brands and some large private label contracts. The challenge for the company - now their growth by acquisition phase was largely played out - would be to show they had the expertise to grow their share of the chiller cabinet while also growing their sales of milk.
What Have They Been Doing in Recent Years?
2004
2004 was the first year in the new reality of Dean Foods, and it was one in which acquisitions did not play a transformative role in performance. Just one U.S. dairy was bought in the year, and this development was counterbalanced by the company closing eight dairies. The top-line sales increased to over $10 billion with just under $0.7 coming from acquisitions and nearly $1 billion from favourable changes to pricing, volume and mix. Unlike most big companies, increases in reported top-line sales are not necessarily correlated with sales success. By and large, Dean’s selling price of fresh milk moves in lockstep with the price of raw milk from the farms. So while the Dean’s Dairy Group division saw an increase in net sales of approximately 10%, like-for-like volume was up only 1%, the other 9% being price incr
eases of raw milk passed on by Dean. However, the 1% increase came against a background of a 1% decrease in total market volume, so the company had gained market share.
More encouragingly, the range of branded products had an excellent year, increasing by a total 13% to $1.2 billion, with the company nearly doubling its operating margin in this segment. Silk sales grew 33% on the year, helped by new product variants: Very Vanilla, Enhanced, Unsweetened, Silk Kids and Silk Live. The brand employed a clever segmentation strategy to occupy more shelf space and also make life harder for any aspiring market entrants attracted by the growth rates in this category of goods. Horizon Organic’s dairy products sales increased by 24%, helped by the introduction of a range of smoothies, and the Land O’Lakes range did even better, growing by 34%. Organisationally, the company combined all its branded products into one management structure and also prepared to spin off its Speciality Foods Group (which was largely the old Dean vegetable business) to its own shareholders.
2005
The trends of 2004 continued into 2005. The company made only minor changes to its collection of dairies, yet gained more market share in fresh milk and cream – volumes up 2.5% in a flat market. There was another double-digit sales increase in its branded lines - now collectively known as WhiteWave Foods – which was driven by: Silk, up over 20% to a record $337 million; Horizon Organic, up over 44% to a now impressive $273 million; and International Delight, up over 13% to $241 million. The company continued its strategy of bringing in top packaged-goods industry talent with the recruitment of Joe Scalzo to head up the booming WhiteWave Foods segment. Joe had previously been Gillette’s Group President, Personal Care and Global Value Chain. WhiteWave’s recent consolidation and rapid growth had necessitated a simplification of both the SKU portfolio (reduced by 25% in the year) and the somewhat complicated supply-chain infrastructure. The Speciality Foods Group was successfully spun off, reincarnated as TreeHouse Foods and the Dean Foods Company also divested itself of the Marie’s and Dean’s dressings and dips brands.