Dairy producers argue that stores should bring down their dairy prices to sell more. Retailers are going to make money where they can. But there is some hope for both sides to boost dairy profits.
We all know the story. The dairy producer’s share of the retail fluid milk price is just 30% (or less). And each time milk prices spike, retailers pass those prices on to consumers, demand falls and even less milk is consumed.
Worse, it’s happening again. According to USDA’s Nov. 12 Dairy Market News, total fluid milk sales are down 1.5% year-to-date through September. The one bright spot is that organic fluid sales have rebounded, up 9% so far this year. But because they comprise just 3.6% of total sales, their resurgence doesn’t help all that much.
Producers often blame retailers for quickly pushing through price increases from the farm gate but are slow to ratchet prices back when farm prices decline. Those are easy criticisms to make (and not without some foundation), but the picture is a whole lot more complicated than that.
Paul Weitzel, a managing partner of Willard Bishop, laid out some of the nuances of an incredibly complicated U.S. grocery marketing system that is still evolving. He spoke at Dairy Today’s Elite Producer Business Conference in Las Vegas two weeks ago.
Note: Willard Bishop provides cost and profit management consulting services to grocery, convenience, mass, drug and food-service channels in the U.S, Asia, Europe and South America. Weitzel’s expertise lies in the nitty-gritty of retail food sales.
Last year, traditional grocery stores’ dollar share of sales was less than 50% of total groceries sold. Non-traditional food retailers, such as wholesale clubs, supercenters, drug stores and others account for 37%, and convenience stores command another 15% of sales. By 2014, traditional grocery stores will sell an even smaller percentage, perhaps dipping below 45%, says Weitzel.
Who sells your milk, and how they sell it, is a mixed bag. They all want to make money, but they all approach customers differently. Superstores might sell on volume, but convenience stores and drug stores offer it as more of a high-margin, impulse buy than to move huge volumes. Weitzel adds that consumers in urban areas often shop five or more food retailers to buy groceries. They might buy the bulk of their staples from a traditional store, but they might buy their produce from a higher-end store that specializes in fresh vegetables. And they might pick up a gallon of milk when they buy gas at a convenience store or pick up a prescription at the drug store.
There’s also good/bad news in retailer profit margins. Dairy, in fact, is the second most profitable category in grocery sales. Dairy generates $15.71 in annual true profit per dollar of inventory tied up on the shelf. Only produce is higher, at $19.17. Liquor generates just $1.55, and bakery (-$3.97), seafood (-2.80) and health/beauty/cosmetics (-33¢) actually lose money.
On another measure, true dollars per base foot, dairy is a leader by far. For every $100 of profit dairy generates, produce brings in $38, groceries, $16, and health/beauty/cosmetics loses $2/ft.
Dairy producers will argue that stores should bring down their dairy prices to sell more. From the retailer’s perspective, that might generate more gross dollars but less profit. And when they’re making just a few percent on general groceries and actually losing money on items such bear claws, lobster and eye liner, they’re going to make money where they can.
But there is some hope, and this is where work done by Weitzel, Willard Bishop and the Innovation Center for U.S. Dairy comes in. This analysis shows that by adding 24’ of dairy case space, one store can increase its net profit $821 per week or nearly $43,000 per year. If a division of a chain of groceries has 125 stores, that’s a net of $5.3 million.
This won’t happen automatically, of course. In addition to adding more space, retailers will have to retool their dairy aisles, making them brighter, more inviting, more colorful. But there is a world of potential there for milk and cheese and yogurt sales. Working with retailers so they can have more profitable stores will translate into more dairy sales—for everyone. That’s a good thing.