The number of US dairy farms dropped from 200,000 in 1990 to 78,000 in 2005, while the average herd size increased from 50 to 90 head. A better regional distribution system enables large dairy farmers to attain economies of scale in milk production unavailable to local farmers.
Many dairy product manufacturers have grown rapidly in the last several years by buying local dairies and creating more efficient production and distribution systems. Dean Foods, the largest company in the industry, grew through 43 acquisitions. In many cases, acquiring companies are really buying customers instead of production facilities, and may cut capacity or shift production to more-efficient plants.
More raw milk is being processed into cheese. Currently, about 50 percent of raw milk is processed into cheese, versus 30 percent 20 years ago. Cheese production requires 10 pounds of raw milk per pound of cheese.
Profitability can be increased by more efficient production and distribution operations, or by creating products with higher profit margins. Large milk producers like Dean Foods have become the most efficient operators in the commodity segment of the industry, mainly because of their distribution system. Other producers have concentrated on making premium products, like gourmet Italian cheeses, or new products, such as “lite" and low-fat versions. Dreyer's doesn't produce the low-cost ice creams that grocers frequently produce themselves, but only "premium" and "super premium" frozen desserts, and newer products like Starbucks and M&M ice creams. New ice cream products include baked inclusions, no-sugar-added varieties, and sundae cups.
Organic dairy product revenue has expanded by 20 percent since 1990 and is now the fastest-growing segment of the organic food industry. A substantial market has emerged in the US for organic milk products made from cow milk that hasn't been treated with antibiotics or hormones, and has been fed with corn or other feeds grown without synthetic fertilizers or pesticides. Organic dairy products are more expensive to produce, but command higher retail prices. Consumers are willing to pay a premium for organic foods, making the segment a very profitable part of the industry.
Cultured Product Trends
Cultured dairy products are becoming a value-added trendy food, rather than a commodity. The segment, which includes cottage cheese, dips, sour cream, and yogurt, has revived its dollar and volume sales due to innovative packaging, promotion, processing, and ingredients. Americans are buying cultured dairy beverages, such as drinkable yogurt.
Selling to Kids
Market research indicates children aged six to 12 represent 20 percent of total milk beverage consumption. Significant changes, such as more colorful packaging, plastic single-serve containers, more flavor varieties, and more kid-focused promotions have helped drive the increases. Dairy checkoff marketing efforts try to position milk as “hip” and “cool” to appeal to kids.
Because they often provide mainly commodity products, dairy producers can readily supply grocers with private-label products, which provide a dependable (though not highly profitable) volume of business. In addition to milk, basic products like yogurt, ice cream, sour cream, and cottage cheese are frequently produced under private labels.
The aging US population is more aware of the health benefits of dairy products. In particular, post-menopausal women, a segment of the population that will increase rapidly during the next decade, are more likely to increase milk consumption to avoid the possibility of developing osteoporosis.
Extended Shelf Life Using New Bottling Technique
A new bottling technique performed under sterile conditions extends the shelf life of milk, allows it to be stored and shipped at room temperature, eliminates the need for refrigeration, and expands distribution possibilities. The aseptic bottling technique extends shelf life of milk to 180 days, and allows it to be homogenized and pasteurized without preservatives and additives.
Consumer Milk Consumption Flat
Total consumption of fluid milk in the US has been flat for the past 10 years. Milk consumption per person decreased 20 percent, while consumption of some other dairy products increased. Each year, the average American consumer drinks 23 gallons of milk, compared to 50 gallons of soft drinks and 26 gallons of coffee.
Government Controls Raw Milk Prices
Because of state and federal support of dairy farmers, the price of raw milk is regulated, though not fixed. Regulation raises prices for consumers and reduces the incentive for dairy product manufacturers to control their major raw material cost by, for example, entering into fixed-price supply contracts. Manufacturers can't always pass along price
Other Business Challenges
Competition from Big Customers
Large grocery chains use a large enough volume of dairy products to justify their own manufacturing facilities, buying raw milk directly from farmers. Kroger, one of the largest US grocery chains, operates dairies, ice cream plants, and cheese plants. While large customers may not get all their needs supplied from captive manufacturing operations, they often take a large share of the market in major cities.
Economies of Distribution Favor Large Manufacturers
The economics of distribution favor large dairy companies. Although small dairies can readily compete with larger ones in production economics, they can't match the efficiencies larger companies achieve in distribution, especially because larger companies can deliver a broader range of products. In a business with low profit margins, distribution costs can be significant.
Consolidation in the grocery industry has produced several very large chains that can exercise considerable buying power over dairy product manufacturers. Consolidation reduces the number of potential customers, and favors large producers that can supply product to all a customer's outlets.
Competition from Soy Milk
The dairy industry is experiencing competition from the soy milk industry. Sales of soy milk are still relatively small at about $1 billion per year but have increased steadily in recent years, while milk sales remained flat. Some school districts now offer soy milk as a milk substitute in school cafeterias.