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Dairy industry still processing Walmart’s potential impact

Progressive Dairyman Editor Dave Natzke Published on 24 March 2016

More than a year away, Walmart’s planned entry into the milk processing business is already sending ripples through the dairy industry.

On March 18, Walmart announced plans for a milk processing facility near Fort Wayne, Indiana. Construction of the 250,000-square-foot facility will start this summer, with completion in the summer of 2017.

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The plant will produce Walmart’s Great Value and Member’s Mark white and chocolate milk, serving 600 Walmart and Sam’s Club stores in Indiana, Illinois, Ohio and northern Kentucky. Milk will be sourced from dairy farms in Indiana, Ohio and Michigan.

The impact on Dean Foods, which has milk supply contracts with Walmart, began when the news gathered more publicity on March 22. The value of Dean Foods’ stock fell about 12 percent, but recovered somewhat in early trading on March 23.

Despite the stock value decline, Dean downplayed the longer-term impact on its own milk sales.

In a statement filed with the U.S. Securities and Exchange Commission (SEC), Dean chief executive officer Gregg Tanner estimated Walmart’s move into milk processing would likely result in the loss of about 100 million gallons of “very low-margin private label milk volume beginning in late 2017.”

If realized, the loss of 100 million gallons of milk would represent about 4 percent of Dean’s total annual volume, according to market analysts.

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“It’s disappointing to learn of any potential loss of business, but we remain confident in our future and the strategic plan we recently put in place,” Tanner said. “We understand the fresh dairy space better than anyone and have proven that we can manage change and will navigate this development with the same determination as we have in the past.”

Evolving markets have already changed Dean’s business. Following the loss of another Walmart contract in 2013, Dean accelerated plans to close 10 percent to 15 percent of its processing facilities nationwide.

Dean’s focus has turned to its own branded products, away from low-margin private-label products. Dean launched TruMoo chocolate milk in 2011, and introduced DairyPure, a nationally branded white milk, in May 2015.

Tanner said the company did not believe Walmart’s sales of its own milk would negatively affect sales of TruMoo or DairyPure.

“We’ve been talking for the last several quarters about our increased focus on building and buying brands,” he said. “We have been actively working to change the mix of our business to increase the focus on branded products, and will continue with those efforts. We are very confident in the strength of our brands and their ability to compete on a national scale.

“With more than a year advance notice and the low-margin nature of the potential lost private-label milk volume, we expect to govern our business such that this will result in very little impact to our financials,” Tanner said.

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Reuters reported Dean would continue to supply milk to other Walmart supermarkets and Sam's Club membership-based wholesale stores. Walmart said it did not currently have any plans for additional milk processing plants.

According to Rick Smith, chief executive director of Dairy Farmers of America (DFA), the nation’s largest dairy cooperative, the impact of Walmart’s venture into dairy processing remains to be seen. DFA has multiple business partners in the region.

Any changes in Walmart’s business plan, from greater dairy industry vertical integration to moving beyond low-margin milk into value-added fluid milk or other dairy products could have a greater impact, Smith said.

The Walmart facility will increase milk-processing capacity in the area.

Indiana’s 184,000 milk cows produced about 3.9 billion pounds of milk in 2015. Despite its 21 dairy processing plants and 14 farmstead operations, Hoosier State dairy farmers “export” about 4 million pounds of milk per day to processors in nearby states, according to the Indiana State Department of Agriculture (ISDA).

“This is tremendous news for Indiana and not only affirms our dairy strategy is working, but also that our business climate and geographic location is conducive to economic development in the agriculture industry,” said Ted McKinney, ISDA director.  PD

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