by Greg Thain
However impressive WhiteWave sales were, structurally Dean Foods was still enormously dependent on its milk business, which brought in 85% of its $10.5 billion sales. Dean’s milk processing and delivery employed 25,000 people in 97 manufacturing facilities and 6,500 direct-store-delivery routes, sourcing their milk from more than 11,000 farms. Dean’s future success still rested on their being able to use their vast scale and low costs to grow share in a static market which was beset by raw material price fluctuations and increasingly demanding customers.
2006
Once again, the main trends remained the same: another 1% increase in share of the fresh milk/cream market, despite a falling price of raw milk which reduced top-line sales by 1.7%. Dean was now producing 3.3 billion gallons of milk products a year, generating top-line sales of $8.8 billion and an operating income of nearly $700 million. 55% of this business was under company-owned brand names, most now over half a century old, with the remainder retailing under private label brand names.
Despite taking $40 million in sales out of WhiteWave Foods through SKU rationalisation, sales in the group still increased by over 6%. This was led by Horizon Organic’s increase of 24% (giving it a 45% share of the U.S. organic dairy market) and price increases of around 4%. The company was pressing ahead to develop new line extensions such as Plus DHA, which was slated for launch in 2007. In the soymilk sector, Silk, which had lost several SKU’s in the cull, increased sales of its continuing lines by 12%; and elsewhere International Delight chipped in with another 7% increase.
With three successful years of Dean Foods’ post-acquisition strategy behind it, the company’s strategy was proving correct. The stock market concurred, as Dean shares, initially priced at $17 when launched as Suiza in 1992, were trading at $42 by the end of 2006. Things were looking good.
2007
Just when everything seemed peachy, the global economic crisis intervened. 2007 was an exceptionally tough year, despite Dean Foods’ top-line sales rocketing ahead by 17%. The problem was that the increase in sales was entirely driven by the rocketing price of raw milk which, in the second half of the year, was 80% higher than the year prior. One outcome of the financial turmoil was a strengthening in the dollar. This dramatically increased foreign demand for US dairy products, and so farmers’ cooperatives diverted raw milk supplies into their balancing plants to make as much milk powder and cheese as they could to sell on world markets. This in turn created a shortage of liquid milk, which thus drove up the price. While Dean had agreements in place with most of its customers to increase or decrease the price of their milk on a monthly basis, such were the scale and speed of the raw-material price increases that the company simply couldn’t get their own price increases through quickly enough. This knocked almost 4 percentage points off Dean Foods’ total gross profit margin for the year, resulting in a 9% drop in operating income.
Even worse, attracted by the growth rate and margins in the organic milk sector, many more farmers had come on-stream. This created a glut of organic milk which coincided with Horizon Organic’s competitors initiating a price war. Dean responded by dropping their own prices and increasing marketing investment. While sales volume was protected, in fact growing by 18% on the year, margins were now lower. Despite good years for Silk (up over 8%), International Delight (up over 11%) and Land O’Lakes (up over 13%), WhiteWave’s operating income fell by 11%, driven largely by the Horizon Organic issues. The fear was that these would persist.
2007 was a big wake-up call for Dean Foods. The years when consolidation alone would guarantee success were over (although Dean was still buying dairies with another three acquired in the year). In addition, the successes in WhiteWave Foods - which had largely come from increasing distribution - were either slowing down or hitting margins issues. Dean had to become as good at improving the efficiency of its existing milk operation as they had been at making and absorbing acquisitions. The company was clearly in a skills transition phase, which it set about testing both by testing, then exploring and internally realigning its business. It focussed DSD on branded fresh milk and ice cream, transferring most of their longer shelf-life products into WhiteWave Foods, whose products were delivered into customers’ warehouses. By design, the company was now aligned around routes to market
2008
The high prices of raw milk continued for the majority of 2008 before falling significantly in the last quarter, resulting in the average price for the year being close to the previous year. However, the increased volatility compared to previous years still caused significant profit pressures. Dean Foods’ DSD business experienced reduced margins in a market where the company was reliant on big customers. Thus WalMart accounted for 19% of company sales and each of the next four biggest customers contributed another 10%. Overall in the year Dean’s DSD liquid milk and ice cream sales increased by 4% to $9.8 billion on a flat volume. Overall, those efficiency measures enacted in 2007 helped to improve company margin by 20 base points.
In the organic milk sector, large increases in organic feed costs drove up the price of raw organic milk. These private label brands chose not to pass on to the consumer, thus constraining the ability of Dean to push up their own prices to fully reflect the cost increases. Despite the volatility in the milk business, further dairy acquisitions were made in the year for an aggregate $96 million, leading to the closure of three ice cream/dairy facilities. The WhiteWave-Morningstar part of the business fared well, increasing sales by a shade under 10% to $2.7 billion. The sales increase came from both volume gains and price increases: Silk sales grew by 10%, Horizon Organic 18% and International Delight by over 9%.
To accelerate the growth of their non-DSD business, the company ramped up its R&D spend to $7.8 million, nearly double the level of two years previously. They also signed a deal with the Hero Group to jointly develop Hero-branded chilled fruit-based beverages in North America.
2009
The hard work looked like it had paid off as the company delivered record profits in total and in each of its business segments. Further efficiencies, from closing four more plants, enabled the DSD arm, now called Fresh Dairy Direct, to grow its volume by 3%. Contradictorily, sales of Fresh Dairy Direct fell by $1.4 billion, but because raw milk prices had tumbled – on average by 36% - the operating profit increased by 9%.
Sales of organic milk were largely flat, which the company attributed to heightened consumer sensitivity to its price premium over regular milk. A range of new products in the year, including Horizon Organic Plus DHA, International Delight Coffeehouse Inspirations, Silk Pure Almond and the first output of the Hero partnership, Fruit2day, helped branded sales increase by 9%.
The company portfolio was now reflecting the drive in the previous few years to reduce the dependence on private label and regional branded milk. This was now down to 49% of annual sales. 12% of their business was extended shelf-life dairy products; 8% was accounted for by ice-cream and 6% by soy brands. Interestingly, 9% of sales now derived from two regional dairy brands, which had been extended nationally, and so was produced by all the regional dairies. TruMoo chocolate milk was guaranteed free from artificial growth hormones and high fructose corn syrup; and Swiss Premium iced tea was initially developed by their Wengert’s Dairy in Pennsylvania to use spare DSD capacity.
The International Dimension
Up to this point in their history, Dean Foods, and before that, the separate Suiza Foods and Dean Foods, had been almost entirely focused upon the USA. In 2000 Suiza had made their first international foray: acquiring a 75% stake in Leche Celta, one of Spain’s largest dairy companies, which they later increased to full ownership. The company’s Celta brand was the fourth largest in Spain, and also the second largest milk brand in Portugal. Volumes increased by 50% in the first four years of Suiza’s ownership, which prompted the company to invest in building a new processing plant in Portugal. A further Spanish acquisition, Tiger foods, followed in May 2004.
The acquisition of Ho
rizon Organic had brought with it Rachel’s Organic, a premium UK organic dairy company which held the number one position in organic milk and number two in organic yoghurt. In early 2005, Rachel’s was combined with Leche Celta into a new International division. This had a bumper first year, growing its sales by 38% to $69 million. In 2006, however, the Iberian companies were divested, being adjudged somewhat of a sideshow compared to the potential of Rachel’s in the much bigger UK dairy market. The company then made its biggest move to date in building an international presence by acquiring Alpro for $440 million. Alpro was the leading European branded company for soy and plant-based dairy equivalents: it had production facilities in Belgium, the Netherlands. France and the UK, Their product range consisted of two major brands: Alpro, a range of soy milks, margarines, yoghurts, creams and desserts, and Provamel, an organic soy range sold through specialist organic and health outlets.
Alpro had got into soy-based drinks in the 1970s when Philippe Vandemoortele had developed a unique, natural process for making soy milk. His original goal had been to use the drink to help alleviate Third World nutrition deficiencies and he had even begun building a processing plant in Madagascar. However, logistics proved beyond his small company and it was decided to focus on the European market. In 1989 Alpro built Europe’s largest UHT soymilk production plant in Belgium and in 1996 took over Sojinal along with its French factory. Alpro’s UK factory was built in 2000 and the company acquired the Dutch tofu producer, SoFine Foods, in 2006. Alpro became Dean Foods’ European priority, and so divested itself of the much smaller Rachel’s UK food service and private label operations. Alpro proved another smooth acquisition with Dean Foods enjoying 8% compound growth in its sales of plant-based products from 2009 to 2011.
2010
Alas, 2009 proved to be a false dawn in the fresh milk category. While oscillations in the price of raw milk were no longer as acute, Dean suffered from the new reality of consumer belt-tightening. As this impacted, Dean Foods’ grocery retail customers scrambled to keep up footfall in their stores. They believed a key weapon was the value offered in the milk chiller cabinet, which was primarily achieved via deep discounts on their private, or own-label, milk. Not only was this pain passed back up the supply chain to Dean, but the comparatively better value now offered on private label took share away from Dean’s regional brands. Engells believed, quite prudently, that this was the new reality and that Dean’s response had to be reducing costs in the milk business as never before. Consequently, 6 facilities, 500 delivery routes, 1,400 staff and $75 million in costs left the business, but not enough to prevent a 30% drop in annual operating income.
Dean Foods’ new austerity strategy contained a second part: not to allow the traumas of the milk category to impede the growth of the WhiteWave and Alpro brands. These therefore achieved another record year. The three parts of Dean Foods’ business operated very differently, and were at very different stages of their life cycles. Fresh Dairy Direct was commodity-driven with a huge private label component and all about cost reduction. Dean still promoted their local and national brands, supported by the benefit of the DSD system, which enabled them to get milk into stores fresher than most of their competitors. Morningstar Foods, which had been managed within Fresh Dairy Direct, was split out again as it focused mainly on long shelf life products: such as dairy and non-dairy creamers, whipping cream, aerosol cream, whipped toppings, half and half, sour cream and cottage cheese. Most of its sales went into the Foodservice channel or were private label. WhiteWave-Alpro remained brand driven, with the company offering minimal private label, and was all about innovation, investment and growth.
The dairy part of Dean Foods’ business had provided the means to buy and then the scope to build brands, but increasingly the future suggested separation. Dean’s had brought together three subscale, niche branded businesses. They had now formed them into WhiteWave-Alpro and nearly doubled their sales (up another 8% in 2010) by exploiting Dean Foods’ advantaged route to market and strong customer relationships.
2011
In 2011 sales topped $13 billion for the first time and some degree of stability returned to Dean’s Fresh Dairy Direct division as cost reductions kicked in. Nevertheless, milk volume declined 1% broadly in line with the market, and the trend in market share towards private label seemed permanent. However, sales in WhiteWave-Alpro grew a healthy 9% through both volume and price increases. All the main brands registered growth in the middle single digits, which was aided by new products such as International Delight multi-serve iced coffee and Silk Fruit & Protein.
In the year, 80% of American homes bought a Dean Foods branded product and, thanks to their foodservice operation, they were named McDonald’s 2001 US supplier of the year. After conducting a review of their joint venture with the Hero Group, Dean decided to pull out and wound down their involvement. By the end of the year, Dean had reduced their employee numbers to 24,066, down from a high of nearly 30,000 just after the Suiza-Dean deal. Plainly, efficiency measures were continuing full steam ahead.
2012
At the time of writing, Dean Foods have not published their 2012 results. However, a blockbuster piece of news was Dean’s IPO of 13% of the stock in WhiteWave-Alpro, with Dean increasing both the amount of stock offered and the price against market expectations. The offer was the first formal sign that WhiteWave-Alpro, long regarded as the most valuable part of the company, had a very different future from the milk side of the business. Two months later, Dean went a step further. Their Morningstar Foods division was sold to Canada’s Saputo Inc. for $1.45 billion. Morningstar had been purchased by Suiza fifteen years previously but now had little in common with the other two components of the business. It was predominantly dairy-based yet did not use the advantaged DSD route to market of Fresh Dairy Direct, and with a mostly food-service or private-label product range, it would not have sat comfortably within WhiteWave-Alpro. On the other hand, the crown jewel brand of the original Morningstar division, International Delight, was firmly part of the WhiteWave-Alrpo family.
The first three quarters of 2012 were exceptionally strong for WhiteWave-Alpro, with year-on-year sales increasing per quarter by 13%, 11% and 13% respectively. Growth was mostly driven by new coffee creamers and iced coffee lines under the International Delight brand, and the success of Silk Pure Almond. The Alpro sector also grew in the high single digits, aided by its launch of Alpro Almond Milk and Alpro hazelnut drink.
Fresh Dairy Direct had made no dairy acquisitions in the year and divested itself of a large Wisconsin plant in September 2011. This reduced overall volume by around 1.4%. On a like-for-like basis, the company gained market share but saw early volume gains turn to volume losses by the third quarter due to an accelerating decline in the total milk market (down by around 3% on the first three quarters). However, very strong cost controls gave the milk side of the business exceptionally good earnings increases.
Summary
In a world where the balance of power has shifted heavily towards the retailer, Dean Foods is a microcosm of the issues affecting all packaged goods companies. It is also a pointer for companies who come from a more traditional packaged goods background. The milk category is an exceptionally tough business with a commoditised product, a huge private label component and wildly fluctuating input costs. Against that background, Dean Foods became a giant via a well thought through and exceptionally well-executed acquisition strategy that gave it the critical mass to develop an advantaged route to market and low cost base for milk. The scale of their huge milk business, together with the strong customer links inherent in a private-label-dominated category, was then leveraged to expand into better branded sections of the chiller cabinet. Dean Foods demonstrate how very different skill-sets, such as acquisitions, customer relations and brand building, are now all required in order to thrive in today’s retail environment.
One thing about Dean Foods is that they don’t stand still for very long. The WhiteWave Foods IPO is cle
arly just the first step in spinning off the entire unit, most likely to Dean Food’s existing shareholders. Significantly, Dean’s long-time leader, Gregg Engels, has relinquished his CEO position at Dean Foods, and become Chairman and CEO of the now stand-alone WhiteWave Foods. The proceeds from both the IPO and the sale of Morningstar Foods are going to pay down debt. This substantially strengthens Dean Foods’ balance sheet, and gives them greater flexibility to make big moves in building Dean and WhiteWave. Dean Foods has shown the benefits of taking the initiative to create their own future. The chances are that they will continue to do so.
General Mills
Where Did They Come From?
There could no better example than General Mills of how understanding a company’s past can help illuminate its current challenges. General Mills, formed on 22nd June 1928, was one man’s far-sighted response to what market forces had inflicted on the four wheat milling companies who had been the company’s original component parts: Washburn Crosby in Minneapolis, the Sperry Flour Company based in San Francisco, the Kell group of mills in Oklahoma and Texas and the Larrowe Milling Company of Detroit. The man was Washburn Crosby’s James Ford Bell, who could see that his industry was facing irreversible change. He laid out the two main challenges facing in a confidential report to his fellow directors not too far short of a century ago. What he told them still has parallels today. Here is what he said.
