Walmart Moves Into The Dairy Business As Milk Consumption Drops

Walmart announced its intent to build a dairy processing plant to supply its own store brand milks back in March 2016; as a result Dean Foods stock dropped 12 percent.

August 9, 2017

Originally published on Forbes.com

Walmart announced its intent to build a dairy processing plant to supply its own store brand milks back in March 2016; as a result Dean Foods stock dropped 12 percent. Earlier yesterday, on the reports that the Walmart plant, which is estimated to serve 600 stores (out of its 4,100+ stores in the US) will open soon, their stock price had another hit and declined a bit over 20%. Dean Foods’ woes are not unique; every dairy throughout the country has been faced with two issues: Americans’ consumption of fluid milk since the 1970s continues to decline – down to 18 gallons a year per capita (in the 70s it topped 30 gallons) and non-cow milk alternatives continue to gain market share and steal cow-milk drinkers.

Is Walmart’s move into a declining business a good move? 

The retail landscape is changing rapidly with the likes of Aldi, Lidl and Kroger all ramping up price wars, and milk, even with a declining market share is still a big business with annual refrigerated fluid whole milk and skim/low fat milk sales of $8 billion in 2016. However to give you the sense of how steep the decline has been, according to USDA and the Economic Research Service, in 1975 per capita availability was 247 pounds (the measurement used by the USDA) and as of June 2017 declined to 155 pounds almost a 38% difference. So we have to wonder why Walmart is entering this business and what is the impact of losing business from the largest grocer on companies like Dean Foods.

There actually has been a lot of innovation in cow’s milk, which may be able to turn around the category’s decline. A2 Milk is cow's milk that contains predominantly the A2 type of beta-casein protein rather than the more common A1 protein commonly found in regular milk. The company uses genetic tests to determine which cows have which type. The difference is that one of the 209 amino acids are different causing the digestive enzyme to interact with the beta-casein and the enzymes are processed differently. Topline is that for people that have digestive issues, this milk can ease their pain. Fairlife, distributed by Coca-Cola, is now available in most stores in the US, pioneered a filtration process that produces milk that has more protein, more calcium, less sugar and is lactose free. And then there are the Silicon Valley start ups like Perfect Day that is producing milk made from real milk proteins that are combined with plant-based sugar, healthy fats, vitamins and minerals – basically cow’s milk made without the cow. 

Walmart’s dairy operation will only serve about 15% of its stores and still leaves a significant business for their current suppliers. What these suppliers must be wondering is if Walmart will continue to build additional facilities to serve its other stores; or if this is plant is just leverage and a negotiation tool to insure that they receive the lowest prices for milk.

 

 

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