RaboResearch, a division of Rabobank, recently released an extensive report, “Dare Not to Dairy: What the Rise of Dairy-Free Means for Dairy … and How the Industry Can Respond.” Progressive Dairyman Editor Dave Natzke reached out to RaboResearch and the report’s lead author, senior analyst for dairy Tom Bailey, to dive deeper into the research and its implications.

Rabobank recently released a report, ‘Dare Not to Dairy.’ Can you lay out the premise in a couple of sentences?

BAILEY: The dairy alternative segment is expected to continue to grow at a faster rate than traditional dairy. The report explores what’s driving that growth and how dairy can respond.

While you’re a ‘dairy’ guy, you work for a global bank. This report treads on some pretty sacred dairy turf and could be perceived as throwing down the financial gauntlet to the dairy industry’s future. Explain your motives.

BAILEY: Dairy is pretty near and dear to me; my family still owns a farm. In contrast, I work in New York City and have been watching consumers trade in traditional milk for alternatives. RaboResearch aims to identify rising trends and their implications to the food and agriculture sectors.

Some vegan and anti-dairy groups have grabbed onto this report and say it is further proof the dairy industry is in demise. Is dairy dying or dead?

BAILEY: Globally, dairy is still a $600 billion industry and is growing very well in categories such as cheese, proteins and butter. To say it is dying, or even dead, would be pretty far from the truth. However, dairy does face a lot of strong misperceptions regarding health and sustainability it should strive to correct. The dairy sector may consider establishing new communication channels and powerful messages to curb those misperceptions. RaboResearch learned, while preparing this report, consumers are less impacted by facts and figures and more motivated by emotion.

You identify some headwinds for plant-based beverages. Maybe the FDA will get around to enforcing labeling and prohibit the use of ‘dairy’ terminology in marketing. High retail prices for non-dairy alternatives don’t seem to be an issue … yet. So far, it’s still an industry of ‘early adopters,’ who are seeing the highest economic benefits until other competitors join in the fray. Is the non-dairy beverage market a bubble or here to stay?

BAILEY: The subcategories come and go rather rapidly – soy was surpassed by almond, and now oat is on the rise. RaboResearch expects the margins for dairy alternatives to erode as competition increases and more private-label offerings push prices lower. Nevertheless, the non-dairy beverage category is here to stay. That’s a key reason why this report is relevant for the dairy sector.

As a bank, Rabobank’s financial perspective is broad; dairy’s view has a narrower focus, mostly confined to milk and dairy products. Can you draw any parallels with other industries having gone through the changing dynamics we’re seeing in the alternative beverage/fluid milk marketplace?

BAILEY: The animal protein industry is also experiencing a similar trend with the rise of alternative “meats.” They are responding with policy and legal-based positioning regarding terminology. Similar to dairy, leading animal protein players are diversifying their portfolio of products with some investments in the alternative category – for example, Tyson’s investment in Beyond Meat.

Your report projects the compound annual growth rate of dairy alternatives will slow to about 5 percent in the coming years, while global growth in traditional dairy continues chugging along at about 2.5 percent. So far, the two have been portrayed as competitors for the same market. Will that continue?

BAILEY: The competition between dairy and alternatives is primarily focused in the beverage category. Dairy alternatives are still a small fraction of the other dairy categories like cheese, yogurts and desserts. Some in the dairy sector tend to think of the market as “us versus them,” but the non-dairy beverages compete with one another, too, whether it’s almond, soy or the next new product.

If dairy companies manage to innovate and change the conversation about what’s healthy and sustainable, dairy milks will have a greater opportunity to keep consumers and potentially recover market share from the alternatives.

Dairy company mergers are commonplace, but we’re also seeing companies invest, buy or merge with non-dairy companies to enter this market. With just a few exceptions, most dairy co-ops are ‘dairy-only’ co-ops. Are you suggesting dairy co-ops have to take a more intense look at crossing the commodity line? Explain why or why not.

BAILEY: The key message to the dairy co-ops is: They should focus more on the consumer. The farm-to-fork model has flipped on its head: Trends are consumer-led. The industry needs to be more responsive to what the consumer wants rather than making a product and trying to explain why people should want it. As an industry, dairy has spent the last 20 years watching retail sales of milk decline without significant changes to the category.

You note that real dairy beverages routinely outperform non-dairy alternatives in taste tests, and in many cases non-dairy products aren’t even in the same zip code when it comes to the nutrition of dairy. So what do consumers want?

BAILEY: Consumers are increasingly making purchases based on emotion. They buy products that make them feel good based on their perceptions of what’s healthy, sustainable and contributing to a cause, such as animal welfare. Furthermore, consumers have stopped listening to “experts” and instead rely on the opinions of friends and online influencers.

The report suggests marketers of dairy alternatives have had more success connecting and communicating with consumers on an emotional level. How so?

BAILEY: Alternatives are pervasive on social media and pop culture references. This has driven perceptions “dairy-free is healthy,” and alternatives are more sustainable. For example, some consumers believe almond production is less land- and water-intensive than milk which, frankly, is not true. Alternatives have also captured consumer interest by being innovative and offering a new “milk” experience.

Today, the dairy industry comes across through expert channels rather than a more direct dialogue. Once dairy is actually communicating through the new channels, it will have the opportunity to leverage its core competencies. But it all starts with asking what is happening and why.

Instead of fighting emotion with facts, the report recommends implementing a new and blended strategy. What might that look like?

BAILEY: It could be as simple as a California dairy farm planting almond trees. Perhaps for larger players, acquiring an alternative dairy brand could hedge some of the risk of being solely in the dairy category. However, it may be possible to develop a hybrid beverage that leverages the attributes in both dairy and plant-based beverages, such as an oat-dairy blend used in specialty coffees.

In the report, you identify the concept of moving from ‘grass-to-glass’ to ‘glass-to-grass’? Explain what you mean by that.

BAILEY: With consumers increasingly interested in their food supply chain, they take a more active role in their selection criteria and are more critical. Instead of the food industry making a product, then trying to convince consumers to buy it, the food industry has to respond to consumer-driven trends.

The U.S. dairy industry is an aircraft carrier, not a speedboat. Is the industry built to do this?

BAILEY: My father used to fly jets off of aircraft carriers during his time in the Marine Corps. I recall that aircraft carriers are flanked by frigates and other support vessels. Similarly, big dairy players have support businesses which help mitigate risks. Many dairy companies have or are in the process of developing innovation and investment platforms which will enable them to more nimbly respond to trends.

Is this a case of abandoning your core and moving to ‘If you can’t beat ’em, join ’em’?

BAILEY: Not at all. The dairy industry can learn a lot from alternatives. You could compare it instead to the old adage, “Keep your friends close and your enemies closer.” Although I think alternative dairy is more of a potential partner than a true enemy – as there are synergies to be realized – it’s important to acknowledge soy, almond and oats are also natural agricultural products with many favorable attributes.

Dairy producers are currently stuck on a treadmill of limited processing capacity, expanding milk supply and tight margins. Dairy strategies, whether on the farm or in the co-op board room, tend to focus on reducing costs, being more efficient and conducting dairy-centric research and development. The report makes the following statement: ‘Hoping for the best and waiting for the tide to turn is not an advisable strategy for the dairy industry.’ Explain what you mean.

BAILEY: The loss of market share to dairy alternatives is unlikely to change dramatically for years to come. The dairy players that have made a conscious decision to invest in the dairy alternative space have realized return on capital employed 6 percent higher than for conventional dairy. They can bring greater value back to their members/shareholders than if they had not invested in alternatives.

Differentiate what you identify as value-adding strategies vs. volume-based strategies.

BAILEY: Volume-based strategies are more about reducing costs and driving toward economies of scale. Value-adding strategies do not drive for size but margin. They are more focused on investing in higher-margined opportunities.

Although dairy beverage and alternative beverage consumption trends are going in different directions, dairy beverage sales still dwarf alternative beverage sales, and per-capita dairy consumption (on a milk equivalent basis) continues to rise. Is this a case of the tail wagging the dog? (Are we worrying too much about fluid sales?)

BAILEY: In value terms, dairy alternatives account for 15 percent of “milk” retail sales as of 2017. In volume terms, this number is 8 percent and growing. Dairy is still going to grow in other categories, but the margins just may not be as high.

If you are content with dairy, stay in dairy. But someone else is going to make those investments in alternatives and capture the opportunity. If you want higher returns and want to hedge your bets, make a small investment and leverage your knowledge and existing assets.

In summary, what can the dairy sector learn from the alternative dairy industry?

BAILEY: It’s important to understand your consumer and follow consumer trends. Consumers want to know more about their food, and the food industry should seek to know more about its consumers.  

PHOTO: Illustration by Corey Lewis.