Two significant dairy companies went bankrupt in 2020. Was it because of the influence of plant-based milk or was it because the dairy industry needed some consolidation?
Dean Foods was founded in 1925 by Samuel E. Dean, Sr., who guided the growth and development of a basic dairy milk processing operation into something much bigger and more far-reaching.
Over time, Dean Foods moved to bottling its own brands, invested in research and product development, and alternative products, such as dry milk powder and coffee creamers, juice, teas, and other food offerings. This long-term growth strategy through the development of nutritious and tasty beverages and foods made Dean Foods one of the most recognized and respected names in its industry.
After being acquired by Suiza Foods Corporation in 2001, Dean Foods began to see real change – in its structure, and its approach to the market. Some processing plants were spun off, and an aggressive program of acquisitions and divestitures brought more and more brands and consumer offerings.
Dairy’s growing pains
Their growth was short-lived as in 2020, Dean Foods filed for bankruptcy because they were unable to meet their debt and pension obligations. Dairy Farmers of America ended up purchasing most of their assets.
By comparison, Borden Dairy also produced huge quantities of dairy milk for the retail market – more than 500 million gallons each year, from 12 plants across the country. This household name in dairy dates its origins back to 1857.
In addition to traditional milk, Borden’s family of dairy products includes lactose-free milks, flavored milks, high-protein milk, juices, creams, and dips. Similar to Dean Foods, Borden had a turbulent history of various food products, many of which were divested and sold off.
Yet, they also went bankrupt in 2020 and sold their assets to New Dairy Opco LLC owned by a former CEO of Dean Foods, Gregg Engles, and Kohlberg Kravis Roberts (KKR). They struggled with the rising cost of milk combined with their debt forced them in filing for bankruptcy.
Is a changing industry to blame?
Analyst reports show that the most commonly cited reason for the plight of Dean Foods rests in the fundamental changes that have been underway in the dairy sector for several decades. To many observers, both companies are simply victims of structural changes in the dairy industry that were just too big to overcome. Here are a few examples that come to mind:
- Fewer family dairy farmers. Dean Foods’ midwestern heritage helped shape a focus on buying milk from smaller dairy producers. However, the company couldn’t source enough whole milk at prices competitive with those offered by larger, more efficient operators.
- Changing milk processing patterns. As larger and more efficient dairy operations emerged, large processing and distribution centers began to change, as well. Many producers faced the cold reality of operating outside these new structural realities, adding to the cost-price disadvantage they faced.
- More competition from retailers. When huge companies such as Walmart and Kroger decided to aggressively market their own dairy labels, Dean Foods and other processors were put in the position of becoming not just suppliers to such companies, but competitors to them as well.
Or dairy’s changing consumer tastes?
But structural change was only part of the picture facing Dean Foods and the entire dairy industry. Changing dietary patterns and increasingly complex consumer demands also had to be considered.
Lower consumption of whole milk.
Fewer of us drink a glass of milk at dinner now. Evolving taste and health preferences, and changed lifestyle means U.S. households aren’t consuming as many whole milk products as in the past.
U.S. Department of Agriculture statistics show that per-capita consumption of dairy milk beverages fell by 14% between 2015 and 2021. If you look back at 1975 when everyone drank a glass of milk at breakfast, lunch, and dinner, the consumption in 2021 went to 134 pounds per person from 247 pounds…a precipitous drop of 46%.
Rise in demand for alternative dairy-free products.
Lately, consumers are showing a lot of love for a variety of alternative dairy milks: almond, walnut, oat, potato, hazelnut, flax, tiger nut, quinoa, chia seed, macadamia, soy, cashew, rice, pea, coconut, and even hemp.
Despite this growth, consumers only consume about 6 pounds per year. Also, there are other animals that produce milk for human consumption as well: goats, sheep, camel, and buffalo – all eating into the cow’s milk market share.
More and more consumers also have indicated a preference for companies that mirror their own desire to be “close to” nature and protective of the environment and its inhabitants. Companies conveying these desired values tend to connect better with consumers. They want to see the cow or the plant or the farm where their product came from.
Or does the company need changing?
For Dean Foods in particular, among the most contentious points raised in any analysis is the issue of “poor management” and “bad decision-making.” Hindsight and second-guessing follow business failure like kids chase ice cream trucks. But many critics point to several factors that may have contributed to the mess facing the company.
- Mistakes in managing the brand portfolio. For example, the company’s willingness to sell off some of its plant-based product alternatives and “healthy foods” units have been widely criticized. Such a strategy made it imperative for the company to maximize the operational efficiency of its traditional dairy businesses, which has proven to be a very daunting task, given the economic pressures facing the production industry.
- Failure to listen. The company has faced charges of not listening to the consumer and failing to recognize the fundamental changes in their expectations. Consumers want more choices that match health concerns and personal values. Reports by environmental groups citing the company’s alleged poor performance in dealing with water quality and other environmental protections can’t be ruled out as a contributing factor to the present situation.
The FDA recently issued a draft guidance on how to label non-dairy milks. They want to ensure that plant-based milks are sold as alternatives to milk and not to be misconstrued as milk. The agency’s recommendation is that plant-based beverages with “milk” in its product name show nutritional differences from cow’s milk on the carton’s label. For instance, does it have more or less Vitamin D, calcium, potassium, and vitamins A and B-12?
“Getting enough of the nutrients in milk and fortified soy beverages is especially important to help children grow and develop, and parents and caregivers should know that many plant-based alternatives do not have the same nutrients as milk.
‘Food labels are an important way to help support consumer behavior, so we encourage the use of the voluntary nutritional statements to better help customers make informed decisions.”
– Susan T. Mayne, Ph.D., director of the FDA’s Center for Food Safety and Applied Nutrition
Yet when one looks at overall milk demand and dairy cows – the numbers support that consumers still look to the cow for their dairy.
Total Milk Production in the U.S., in million pounds
Milk production has increased while the number of U.S. dairy cows has remained steady, at just over 9 million head. Milk volume has also increased worldwide by over 9% since 2015. Dairy cows today are much more efficient due to more sophisticated feed and genetics. The average U.S. dairy cow produces 24,262 pounds per year versus ten years ago when it was 21,722 pounds a year. Cows that eat just grass give about 50 glasses of milk a day. But cows that eat a mixture of corn, vitamins, grass, and hay can double their volume to about 100 glasses of milk a day.
But if consumers are not drinking as much milk, then why did milk production increase? It is all about the cheese. Between pizza, charcuterie boards, macaroni and cheese, and everything else about cheese, the milk volume has increased by 12%.
The FDA has just provided a draft guidance in to ensure the consumer is not confused about the nutritional difference between cow’s milk and plant-based milk. The dairy industry fought against the word ‘milk’ when it was linked to a tree, a nut, or grain because it doesn’t have the same levels of calcium, vitamin D, and other nutrients. While plant-based milks are fortified, those nutrients are not necessarily all absorbed by the body.
The FDA requested that all alternative drinks, if they have the word ‘milk’ on the label, compare to cows milk. For instance, the label would say, ‘contains lower amounts of Vitamin D and calcium than milk.”
For the average consumer, the take-away from the Deans Food and Borden saga is fairly straight-forward. Despite the continuing difficulties facing the dairy industry, they will see ample supplies of reasonably priced dairy products and dairy alternatives. Consumers can expect to see the number and variety of dairy products continue to grow, and the relentless competitive forces at work across the industry hold prices down.
Dean Foods and Borden Dairy offer a case study of what can happen when business mistakes fundamental market changes for passing fads.
Potentially the more important lesson may involve other sectors of the food industry. Business strategy, structure and operations must be linked to the realities of the market. That includes adaptation to new market economics, and the structure and way of doing business that accommodates them.
The Bottom Line
Consumers are looking for a variety of choices to meet their dietary needs and tastes. Failure to recognize that change – and to adapt accordingly – can have profound consequences. Dean Foods and Borden learned those lessons, painfully. The question now is how well others across the dairy chain will adapt.