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
170
Milk Production
160
Commercial
disappearance
150
140
130
120
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
110
1980
Billion Pounds of Milk
180
BFP or Class III Milk Price versus the Support Price,
1970-2000
$19
Dollars Per Hundredweight
$17
$15
$13
$11
$9
$7
$5
$3
Support price
BFP/Class III price
Utilization of U.S. Milk Production
Product:
Fluid milk
Cheese
Butter
Frozen products
Nonfat dry milk
Other*
1990
2000
32%
41%
6%
8%
3%
10%
28%
47%
6%
8%
4%
8%
* Milk proteins, lactose, nutritional beverages, etc.
Per capita Fluid Milk Sales, 1990 – 2000
Pounds
Year
Plain Reduced Nonfat Flavored Total
Whole lowfat
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. Other Nonfat
Ice Lowfat
Cheese Cheese dry
cream
ice
milk
cream
9.6
7.9
3.0
17.5
7.1
1980
4.5
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
Market Share
1950
Number of
Cooperatives
2,072
1970
971
61%
1990
264
82%
1997
226
88%
1999
220
89%
53%
Cooperatives' share of U.S. farm marketings
100
88 89
Percent of U.S. cash receipts
90
80
1982
1997
1999
77
70
60
50
43
40
36
38
36
34
30 29
29
30
27
20 19
18
20
13
11 12
10
0
Milk
Cotton
Grain
Fruit &
veg
Livestock
Total
Dairy Cooperatives marketed most of farm
milk to others as raw milk.
• 61 % sold as raw milk and 39% processed and
manufactured in co-op’s 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
Butter
Dry milk powder
Cheddar cheese
Other American cheese
Mozzarella cheese
Other Italian cheese
Other cheese
Total natural cheese
Packaged (beverage) milk
Market Share
61%
81%
70%
43%
26%
18%
9%
40%
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 1800’s
2) Paper carton 1940’s
3) Plastic containers 1980’s
• 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:
Home delivered
Wholesale:
Supermarkets
Dairy/convenience
Military
Schools
Other
1983
2%
98%
50%
10%
1%
7%
30%
1997
1%
99%
58%
10%
1%
6%
24%
Distribution of Fluid Milk By Type of Container,
1973 - 1997
Type of container
1973
1985
1997
Glass
4%
Paper
71%
Less than
0.5%
34%
Less than
0.5%
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
5%
2%
1%
Qts.
Total
100% 100% 100%
Since 1960’s, 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
Wal Mart
2000 Sales 2000
(B $)
Market
Share
57.2
11.1
1993
Market
Share
0.00
Kroger
49.2
9.6
6.0
Albertson’s
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
1980:
Plants
Capacity
1999:
Plants
Capacity
Total
American
Total
Italian
Total
Natural
Cheese
Processed
Cheese
483
4,918,750
187
5,255,000
737
62
27,640,200
197
153
376
18,155,100 20,540,000
52
46,705,300
Capacity is annual pounds of cheese per plant
Distribution of Cheese
Retail
Food Service
Food Processing
17%
40%
43%
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, Leprino’s 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
1950’s and 1960’s 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 O’Lakes maintains a 31% market
share at retail.
Ingredient 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
Cheese
Cottage cheese
White milk
Flavored milk
Dips
Sour cream
Yogurt
Ice cream
Frozen novelties
Volume share that is
private label
35.2%
44.8%
70.1%
23.3%
15.7%
37.0%
20.8%
33.2%
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
• Inverse 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 1980’s 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%
Ice 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 farmer’s
share of retail dollar:
• Farm-retail spread increased 117.7% between
1982-84 and 2000.
• Farmer’s 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
1997
218,300 firms
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