Dean Foods, the largest dairy processor in the US, painted a bleak picture of the market for fluid milk today (10 May) after pulling the company’s forecast for annual profits, sending its shares to a ten-year low.
Gregg Engles, Dean Foods’ president and CEO, said operating income from the group’s Fresh Dairy Direct-Morningstar division tumbled by 41% during the three months to the end of March.
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Speaking to analysts, Engles said profits had been hit by “volume softness” in non-milk dairy products but said the state of the company’s fluid milk business was the “biggest issue”.
Fluid milk, Engles revealed, had accounted for “two-thirds” of the fall in gross profits from Fresh Dairy Direct-Morningstar, which slid 11% during the quarter.
Engles said US consumers were continuing to trade down to private-label milk, hitting Dean Foods’ regional brands, as retailers pressed ahead with selling store brands “in many cases, at or below cost”.
The price “war” among US retailers had hit margins from Dean Foods’ fluid-milk business, Engles said. He warned that, although Dean Foods “believed” the category would return to “normal” private-label milk margins, the company was unsure when that would happen.
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By GlobalDataThe uncertainty within Dean Foods’ Fresh Dairy Direct-Morningstar business has prompted the company to cut more jobs within the division and, crucially for investors, led the group to withdraw its earnings guidance for the year.
The absence of a profit forecast drove down Dean Foods’ shares to a ten-year low. At 15:03 ET this afternoon, the company’s stock stood at $10.60, a fall of 27%. The shares had dropped as low $10.53 during the day.
Unfortunately for the dairy processor’s investors, Engles’ uncertainty over when trading conditions would improve was compounded by the lack of viable short-term options to bolster its fluid-milk business.
“Trading down and private-label share gains have accelerated. Not surprisingly, our most profitable brands, with the largest price premiums have suffered the most,” Engles said. “While total volumes have been largely unaffected, this mix shift from brands into private label is eroding our gross margin.”
He added: “Our ability to directly impact this erosion in the short term is limited, as neither of our choices is attractive. We can reduce the price gap, by lowering our branded pricing – thereby reducing our branded margins. Or we can hold price and continue to lose branded share into private label.”
Fresh Dairy Direct-Morningstar generated more than three times the operating income of Dean Food’s second division, WhiteWave-Alpro division. The problems within Fresh Dairy Direct-Morningstar cast a shadow over WhiteWave-Alpro, which houses Dean Foods’ “value-added” portfolio.
The “story” at WhiteWave-Alpro was “quite different”, Engles said, with the division continuing to grow profits thanks to rising volumes, boosted by last year’s Alpro acquisition.
“Consumers appear to be cautiously returning to value-added brands and we are benefiting from this trend,” Engles said.
