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Supermarkets and dairy farmers: Both need each other right now

Calvin Covington for Progressive Dairyman Published on 19 July 2017
Supermarkets and dairy farmers need each other

Two recent articles about supermarkets caught my attention. The first was from the USDA’s Economic Research Service (ERS). ERS reports retail food prices in 2016 were 1.3 percent lower than the previous year.

The article points out, during the past 50 years, retail food prices increased every year at a rate of about 4 percent annually. Until this past year, 1967 was the last year retail food prices were lower than the previous year. Looking specifically at dairy, Bureau of Labor Statistics data shows the average retail price of a gallon of whole milk was $3.20 in 2016 compared to $3.42 in 2015, a decline of almost 7 percent.

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Cheddar cheese dropped about 3 percent from $5.38 per pound in 2015 to $5.23 per pound in 2016.

The second article, “Grocery Price War,” appeared in the March 20, 2017, issue of USA Today. This article expounded on lower prices in grocery stores and explained how lower prices were increasing competition among retail grocers.

According to this article, lower retail prices require supermarkets to increase volume to maintain the revenue needed to cover their fixed costs. (It sounds similar to dairy farms dealing with low milk prices. Produce more milk to maintain revenue to cover costs.) The article went on to say in order for a grocer to increase volume, more customers must be attracted to their existing stores and new stores built.

In northwest North Carolina, where we reside, we are experiencing firsthand the impact of increased supermarket competition. Supermarket chains from other parts of the country are expanding to our area.

Stores that have been here for many years are updating, remodeling and adding additional departments and services. At last count 11, and soon to be 12, different supermarket chain stores (not convenience stores) are within an easy travel distance for my wife to shop at.

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Plus, all are continually pushing their lower prices. When I ask corporate supermarket management about competition in their industry, they tell me it is a growing challenge.

Dairy is no small player for a supermarket when it comes to generating sales. It is a major contributor. According to the Food Marketing Institute, dairy generates the third-largest gross dollars in sales for the average supermarket. Meat, poultry and fish are No. 1 and produce No. 2.

Likewise, supermarkets are significantly important to dairy farmers. They market an overwhelming portion of dairy farmers’ milk production, be it directly through fluid milk, cheese, yogurt or butter, or indirectly as an ingredient in a vast number of products from ice cream to bakery to nutrition supplements.

As a former dairy cooperative CEO, I dealt with supermarkets on a regular basis. Supermarkets with their own dairy plants were a customer for the cooperative’s raw milk. Those without plants were a buyer of processed milk from the cooperative’s fluid milk plants.

In both cases, supermarkets impacted a dairy farmer’s milk check. In addition, supermarkets influenced the decision of the cooperative to market only milk from cows not treated with rBST and to start on-farm audits of member farms. Today, I see increased supermarket competition creating both challenges and opportunities for dairy farmers.

Challenges

Let me begin with the challenges. The obvious one is price. If supermarkets are facing price pressure, common sense tells us they will look to their suppliers for some price relief. This is already being seen in declining over-order premiums. Currently, the nation’s No. 2 (Kroger), No. 4 (Safeway) and No. 5 (Publix) retail grocers, ranked by gross sales, have their own fluid milk processing plants.

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The nation’s No. 1 grocer, Walmart, has a fluid plant under construction. A reason for Walmart opening its own plant, no doubt, is because it sees an opportunity to lower its fluid milk costs. Due to total fluid milk sales declining, a new fluid plant coming online puts pressure on existing plants to have the volume needed to stay in operation. If Walmart were to expand further in fluid processing, or other grocers do likewise, even more pressure will be on existing fluid milk plants.

Over the past couple of years, the inquiries I receive from those involved in dairy purchasing at supermarkets regarding milk pricing has increased. These dairy buyers are questioning milk prices and how they are determined more and more.

As supermarkets expand their marketing area and face increased competition from stores located in other areas, dairy buyers are digging further into federal order pricing. They are seeking to understand why the cost of raw milk, utilized in fluid, is different at different locations. Why two supermarkets competing in the same geographical location may have 10-cents-per- gallon-or-greater difference in their raw milk cost.

These are good and probing questions. Going forward, the industry needs to prepare to address these questions. Supermarket expansion and competition makes fluid milk marketing and pricing more and more national rather than local or regional. The dairy industry must keep pace.

Opportunities

With supermarkets needing to increase sales, there is increased promotion of products in the dairy case. Hopefully, this results in increased dairy demand. It is sure tempting to take home the extra package of ice cream or butter when the store offers buy one, get one free.

Increased competition is making dairy buyers more receptive to new dairy products, especially those that create new sales and do not cannibalize existing dairy product sales. Compare a typical dairy case today to what it was like one or two years ago. Most contain more and new products.

Supermarkets are looking to the dairy industry for new innovations, especially as their margins are squeezed and revenues decline. They want ways to lower their costs while at the same time increase sales revenue and provide the customer with nutrition, convenience, taste and value.

Some may see this as a challenge, but I see it as an opportunity. Consider re-sealable cheese packages and yogurt (Greek) with more protein. Granted, these innovations may increase the retail price to consumers, but the consumer receives additional value and hopefully increasing dairy sales. Plus they generate revenue for the supermarket.

Unfortunately, compared to manufactured dairy products, fluid has not been as innovative. The majority of fluid milk is still sold today the same as it was 25 years ago, in white gallon jugs delivered to stores in returnable cases. The good news is: We are beginning to see more innovation with fluid milk.

There is now widespread distribution of high-protein milk processed via ultrafiltration, not by adding protein. Fluid milk that carries only the A2 protein, which many believe is more easily digested, is gaining distribution. Milk in a redesigned gallon jug is now delivered to stores on large pallets, not in cases, which requires less handling by the stores, and no trucks returning with empty milk cases.

The point I make is: When an industry needs to grow sales, and becomes more and more competitive within the industry, opportunities are created. The industry is more open to new products and innovation. Hopefully, the dairy industry is taking and will continue to take full advantage of this opportunity to sell more dairy products.  end mark

ILLUSTRATION: Illustration by Creative Services.

Calvin Covington
  • Calvin Covington

  • Retired Dairy Co-op Executive
  • Email Calvin Covington

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