Retail Distribution of Dairy

Products
Bob Cropp
Dairy Marketing and Policy Specialist
University of Wisconsin-Madison
April 2001
U.S. Milk Production & Commercial
Disappearance, 1980 to 2000
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Milk Production
Commercial
disappearance
BFP or Class III Milk Price versus the Support Price,
1970-2000
$3
$5
$7
$9
$11
$13
$15
$17
$19
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Support price
BFP/Class III price
Utilization of U.S. Milk Production
Product: 1990 2000
Fluid milk 32% 28%
Cheese 41% 47%
Butter 6% 6%
Frozen products 8% 8%
Nonfat dry milk 3% 4%
Other* 10% 8%

* Milk proteins, lactose, nutritional beverages, etc.
Per capita Fluid Milk Sales, 1990 2000
Pounds
Year Plain
Whole
Reduced
lowfat
Nonfat Flavored Total
1990 85.6 98.3 22.9 9.4 219.7
1995 71.3 92.4 31.9 10.0 208.5
1999 68.3 87.1 33.2 11.9 201.9
Per capita consumption of manufactured
dairy products, 1980 1999 Pounds
Year Butter Amer.
Cheese
Other
Cheese
Nonfat
dry
milk
Ice
cream
Lowfat
ice
cream
1980 4.5 9.6 7.9 3.0 17.5 7.1
1990 4.4 11.1 13.5 2.9 15.8 7.7
1999 4.8 13.0 16.8 3.0 16.8 7.9
U.S. Dairy Cooperatives and Their Share of Farm
Milk Marketings
Year Number of
Cooperatives
Market Share
1950 2,072 53%
1970 971 61%
1990 264 82%
1997 226 88%
1999 220 89%
Cooperatives' share of U.S. farm marketings
77
36 36
20
11
30
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38
43
19
12
29
89
29
34
18
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Milk Cotton Grain Fruit &
veg
Livestock Total
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1982
1997
1999
Dairy Cooperatives marketed most of farm
milk to others as raw milk.
61 % sold as raw milk and 39% processed and
manufactured in co-ops milk plant.

Dairy cooperatives are moving towards more
value added activities.

Dairy cooperatives are entering into joint ventures
with other cooperatives and public corporations.
Dairy Cooperative Share of Manufactured
Dairy Products, 1997
Dairy Product Market Share
Butter 61%
Dry milk powder 81%
Cheddar cheese 70%
Other American cheese 43%
Mozzarella cheese 26%
Other Italian cheese 18%
Other cheese 9%
Total natural cheese 40%
Packaged (beverage) milk 14%
Share of Dairy Products Sold Through
Retail Stores
Fluid Milk 74%

Ice Cream 45%

Butter 36%

Cheese 40%
Fluid Milk
Factors that have changed fluid milk
distribution:
1) Glass bottle late 1800s
2) Paper carton 1940s
3) Plastic containers 1980s
These changes forced small bottlers out of
business
- 10,000 bottlers in 1940
- Less than 300 today
Distribution Method of Fluid Milk
Products, 1983 1997
Distribution method: 1983 1997
Home delivered 2% 1%
Wholesale: 98% 99%
Supermarkets 50% 58%
Dairy/convenience 10% 10%
Military 1% 1%
Schools 7% 6%
Other 30% 24%
Distribution of Fluid Milk By Type of Container,
1973 - 1997
Type of container 1973 1985 1997
Glass 4% Less than
0.5%
Less than
0.5%
Paper 71% 34% 21%
Plastic 25% 65% 79%
Total 100% 100% 100%
Fluid Milk Distribution By Size of
Container
Size of container 1973 1985 1997
Gallon 37% 60% 66%
Half gallon 38% 22% 18%
Quart 5% 5% 4%
Pint 1% 2% 2%
Half-Pint 10% 9% 9%
Bulk Over 5
Qts.
5% 2% 1%
Total 100% 100% 100%
Since 1960s, the balance of power for fluid milk
has shifted from milk processors (dealers) to food
retailers, primarily large supermarkets.
This is forcing bottlers to get bigger
Deans Foods and Suiza Foods have been active with
acquisitions

Deans Foods (13% of market) and Suiza Foods (17% of
market) on April 5 announced intent to merge.

Dairy cooperatives have entered into milk supply
arrangements with major fluid companies.
- Dairy Farmers of America with Suiza Foods
- Land O Lakes with Deans Foods
Top U.S. Foodservice Distributors, 1999
Company 1999 Sales ( Bil. $s) 1999 Market Share
Sysco Foods 17.4 13.3
Wal Mart 14.1 10.7
U.S. Food/ Ahold 8.0 6.1
Alliant 6.1 4.6
XPEDX 2.9 2.2
Total 48.3 37.0
Top U.S. Supermarkets
Company 2000 Sales
(B $)
2000
Market
Share
1993
Market
Share
Wal Mart 57.2 11.1 0.00
Kroger 49.2 9.6 6.0
Albertsons 36.4 7.1 3.0
Safeway 33.2 6.4 4.0
Ahold USA 27.5 5.3 0.0
Total 203.5 40.0 13.0
Private label dominates the fluid milk
business.
Percent Private Label

White Milk 70.1%

Flavored Milk 23.3%
Natural Cheese
Cheese pricing relies on the Chicago Mercantile Exchange
(CME)
CME operates 5 business days a week

CME prices change due to
- A SALE at a different price
- A BID at a higher price
- AN OFFER at a lower price
About 2% of cheese actually sold on CME
Number of U.S. Cheese Plants & Cheese
Plant Capacity
Year Total
American
Total
Italian
Total
Natural
Cheese
Processed
Cheese
1980:
Plants
Capacity
483
4,918,750
187
5,255,000
737 62
27,640,200
1999:
Plants
Capacity
197
18,155,100
153
20,540,000
376 52
46,705,300
Capacity is annual pounds of cheese per plant
Distribution of Cheese
40%
43%
17%
Retail
Food Service
Food Processing
Unlike fluid milk, branded cheese dominates retail
sales.
About 68% is brand cheese and 32% private label.
Kraft brand has 45% retail market share
Cooperatives not major brand sellers, but Land O
Lakes brand is significant in delli sales.
In Food service, Leprinos is world largest
manufacture of mozzarella
Schreiber is major player in processed cheese--
more than 50% sold to fast food chains, some to
retail as private and brand.
Butter:
The butter/powder industry that existed in the
1950s and 1960s no longer exists.
50% of the butter produced in Wisconsin and
California
1975, 366 butter plants, today less than 100
36 dairy cooperatives make butter, 61% share.

Butter pricing like cheese is based off of the
Chicago Mercantile Exchange.
Retail accounts for about a 36% of
butter sales
Some strong brand

Land OLakes maintains a 31% market
share at retail.
I ngredient Markets;
Nonfat dry milk
- Very little retail sales

- About 60% is used in other dairy and food
products

- A surplus dairy product
Dry whey:
- Dry whey and whey protein concentrates.

- Used in dairy and food products

- Competitive on the export market
Summary of Private Label Dairy Products
in Supermarkets, 1999
Product Volume share that is
private label
Cheese 35.2%
Cottage cheese 44.8%
White milk 70.1%
Flavored milk 23.3%
Dips 15.7%
Sour cream 37.0%
Yogurt 20.8%
Ice cream 33.2%
Frozen novelties 26.7%
Concern over farm-retail price spread:
Fluid Milk:
Farm value and retail value move together over time.
Margin has increased , retail margin is about 25%
- Not used as loss leader as much
- Reduced competition at both wholesale and retail

I nverse relationship between change in Class I price and
margin--when Class I increases both wholesale and retail
margins decrease and vice versa.
Butter:
Retail margin has widened, but highly variable.
- Retail margin is about 20%

In 1980s butter price stable due to federal price
support. But support price reduced and since 1993
wholesale butter prices well above support.

Changes in farm value of milk and retail margins
inversely related.
Cheese:
Retail cheese prices and farm value of milk have
been less closely related.
- Reduced federal support price
- Also time required for raw milk to be transformed into
cheese and eventually sold at retail.
- A lot of value-added---640 pound cheddar blocks need to
to cut and wrapped for consumer sales.

Changes in farm value of milk and changes in
retail margin inversely related.
Retail margin about 36%
I ce Cream:
Farm value of milk and retail price not closely
related.

Retail price has increased significantly past 5
years (up 40%)
General comments on Retail Margins:
Retail margins have increased due to:
Increased labor cost
- However, output per employee in fluid plants increase
more than 140% since 1970 and 150 % in dairy
manufacturing firms.
Increased packaging costs
Increased fuel/energy cost
Changes in product packaging, composition--
consumers demand convenience
Continuation on changes in retail margin:
New product development
Reduced competition
Retailers have changed pricing strategy--now look
to more profit from dairy case.
Changes in farm-retail spread and farmers
share of retail dollar:
Farm-retail spread increased 117.7% between
1982-84 and 2000.

Farmers share of retail dollar:
- all dairy products: 36.0% in 1986
29.5% in 2000
- 1/2 gallon of milk 39%
- Cheddar cheese 32%

Summary Comments:
Wholesale and retail prices respond more quickly
to farm level price increases than decreases.
Farm to retail spreads will likely widen due to
more value added activities.
Retail concentration is putting pressure on
wholesalers that serve them--need to get bigger in
order to have market clout.
Retail food business is a low margin and high
volume business.
Retail Food and Beverage Firms
Consolidating:
1972 218,300 firms
1997 110,900 firms

Market share of top 4 firms:
1972 = 16.2%
1997 = 18.3%
What do these large food customers
want?
On time delivery
100% fill rate
Competitive price
Safe/insured food
Undamaged products
More convenience products
New leading edge products
More & more fresh products
Product information
Marketing tools
Knowledgeable sales people
U.S. consumer will influence the structure of the
U.S. food system from farm to consumer.
Moving to partnering relationships
- seemless system
- supply chain driven
Retail consolidation is resulting in lower returns
to food manufacturers & marketers
- manufacturers and marketers need to get more
efficient, lower costs
- need to get bigger
Cooperatives wishing to compete in this
rapidly changing food system must:
Get better, more efficient, cut cost
Be a reliable supplier
Have sufficient volume to have market clout
Consider strategic alliances with other
cooperatives, with IOFs
Summary continued:
Retail prices of dairy products have increased less
than retail prices for all food.
1982-84 = 100 retail price index
For 2000:
All food = 167.8
Dairy products = 160.7