Q&A: Challenges, Opportunity for Dairy Category Amid Economic Uncertainty

SB: Give us some background on yourself and Minerva Dairy. What kinds of products does the company create for private label?

WATTS: Minerva Dairy produces both cheese and butter to the specifications of our customers. Cheese recipes are created to enhance the performance of cheese as an ingredient at customers’ food manufacturing facilities. Butter recipes are created for private label for the retail space.

SB: How would you describe the state of the dairy industry in 2022 with the continued growth of plant-based dairy products and rising production costs due to inflation?

WATTS: All food products will have the same inflation challenges, as food will be rising to the consumer in all segments. Non-dairy butters are not new to the marketplace, but are in a rebranding phase to capture the eroding market share of margarine. Dairy-based butter will always have an alternative on the shelf, it is now starting to take different forms.

SB: How is Minerva adapting to this changing environment?

WATTS: Customer education in both the business-to-business space and retail consumer space is our primary objective. Minerva Dairy places a high importance on research and development of cheese and butter, asking ourselves questions on types of performance and taste variants, and then testing and working those ideas. Looking for a cheese or butter to perform a certain way or taste a certain way? Chances are we have that recipe on file. Limited time offers show up on our website of our favorite flavor infused butters. We don’t keep all the good ones to ourselves. Butter is our love language.

SB: Finally, where do you see the dairy industry heading?

WATTS: The dairy industry is continuing to widen the gap in the marketplace between commodity dairy products and specialty, transparent and premium products. There is a consumer for both sectors, and dairy brands will continue to focus on one or the other. It will be harder for commodity products to mask themselves as premium and attempt to upcharge as transparency continues to become easier for the consumer to research.

Mid-year Report from IDDBA

The International Dairy Deli Bakery Association (IDDBA) hosted its annual trade show and industry event in Atlanta, Ga., from June 5-7. Retailers, manufacturers and more discussed the categories and new product advancements. Whitney Atkins, VP of Marketing at IDDBA, spoke with Store Brands and discussed the state of dairy and its impact on private label.

SB: How would you describe the state of the dairy industry in 2022
with the continued growth of plant-based dairy products and rising
production costs due to inflation?

ATKINS: Right now, soybean prices in the United States are close to record highs. Corn prices are historically high, and wheat prices have been volatile. The war in Ukraine has tightened the global supply of grains in general— wheat, oats, corn, soy. Ukraine and Russia account for 30% of world wheat, and Ukraine alone accounts for about 15% to 16% of world corn exports. We don’t know how much is going to get produced over the next year in Ukraine, so grain markets will remain volatile until more is known.

There are also questions about fertilizer availability. Russia is one of the major fertilizer suppliers in the world, and fertilizer prices have, in some cases, doubled since last fall. That also impacts grain production. If there’s a drought this year in the U.S., grain prices will go higher.

Until we see relief on the grain price side, we’re going to see a lot of upward price pressure on dairy and eggs because of the feed price environment. There’s another confounding factor—avian influenza. It has been found in several states and is spreading, so we’ve got a potential shortage coming in the egg market, and egg prices are rising.

Finally, the high price of oil is far-reaching. So we’ve got a high energy cost environment, and that’s driving up prices.

SB: How is the dairy industry adapting to this changing environment?
How has private label been impacted?

ATKINS: For fluid milk, higher prices result in a large drop off in sales. We’ve seen that in the first months of 2022 as inflation has increased. Fluid milk sales will continue to struggle this year, as they’re going to have a very high-priced environment. Cheese prices have been fairly subdued, but commodity prices for butter, buttermilk powder and whey products have shot up recently. I do think we’ll start seeing some upward price pressure on cheese at retail, if nothing else, because the cheese inside a package is just one thing.

The cost of everything else is up: packaging cost, transportation costs, labor costs. Inflation puts pressure across the whole supply chain. But there is a silver lining for retail dairy: As consumers tighten spending, it tends to do fairly well because they’re eating at home more.

Private label also does well in times like these. We’ve seen a longer-term trend of increasing private label penetration in many dairy categories over the past 20 to 25 years, as private label has improved to where the quality reaches parity or, for some consumers, is even preferable to branded products.

If inflation continues and we hit a recession, we’ll see more consumers shift out of the name brand to pay the lower price for the private label. Compared to fluid milk over the last couple years, we’ve seen relatively higher increases in sales of alternative beverages, such as almond-based and oat-based beverages. Part of that is  because these alternative beverages started from a small base, plant-based beverages are about 15% of the category now, so the same dollar amount increase in sales would be proportionally larger for alternative beverages than for dairy milk.

The increases can look very large, but the sky’s not the limit on these products. I think we’re going to see the non-dairy beverages continue to grow, but not as rapidly. They’ve got a fairly defined consumer base of people who are interested in their marketing claims of being better for you or sustainable and environmentally friendly.

When the products are new, they attract a lot of media attention, and people think they’re neat and novel. But as these brands get bigger, they start to attract negative attention, and people dig into the claims more.

SB: Where do you see the dairy industry heading moving forward?

ATKINS: In the near future, inflation could limit the appeal of plant-based products, which are usually priced higher than dairy products. You’re always going to have the more well-off people who can afford it no matter what. But outside of that consumer segment, the cost does start to become an issue.

CPG companies do not want to increase prices. That’s never popular with customers. There is a lot of pressure on food companies from retailers, as well, who don’t want to be blamed for food cost inflation. We’re going to see a tighter margin environment for CPG companies for a while, because there’s less of an ability to pass cost increases through.

There are a few different ways to delay price increases. Some stores are pulling back on promotions. Reformulation is an option for some products, but it’s more of a challenge in an overall inflationary environment. For example, replacing butter with vegetable fat won’t save much money when vegetable fat prices are through the roof.

There’s also package resizing. A gallon of milk is a gallon of milk, but other package sizes could change. When we went through high dairy prices in 2014, many yogurt packages went from 6 oz. to 5.3 oz. An 8 oz. bag of shredded cheese or 8 oz. chunk of cheese could go to 7 oz., or even 6 oz. for aged cheeses
with more value added.

Packaging changes are not a short-term solution. They take a while to implement because manufacturers have to work through existing stock, design and order new packaging.