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Dean Foods’ business strategies turn a profit

August 10, 2014
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Agropur Cooperative bought family-owned Davisco in late July, just as we were wrapping up the research for our list of the largest dairy companies. Earlier in the month, the Canadian-based dairy co-op purchased four milk and ice cream plants from Sobeys of Canada. That Agropur was on the prowl for acquisitions should have come as no surprise.

As I reported in April, Eric Brunelle, the president of Agropur’s St. Paul, Minn.-based Natrel division told me the cooperative’s goal is to be in the top 10 of the world’s most important dairies. Agropur ranks No. 8 among North American dairy processors in this year’s Dairy 100. The co-op reported 2013 revenues of $3.9 billion. Add to that No. 35 Davisco’s $990 million, and Agropur would jump to the No. 4 spot.

Combining the revenues of the two companies still puts Agropur at about half the size of its Canadian rival, the publicly owned Saputo Inc., which is No. 2 on our list. Agropur has a long way to go to break into the top 10 in the world. China’s Yili is No. 10 with sales of $7.6 billion on Rabobank’s list of the world’s largest dairies (see page 20). Of course, size does not necessarily mean “importance,” which is what Agropur is aiming for.

It would not surprise me to see more purchase activity from either Saputo or Agropur. In order to grow, these dairy processors from Canada have to look outside their borders because their country offers a relatively small market (about 10% the size of the United States).

Lessons to be learned

Turning from my crystal ball to the printed word, I thumbed through the annual report of Dean Foods Co. Because it is the largest dairy processor based in the United States, it is useful to look more closely at this company and the direction it is taking.

Dean Foods is diversified. It manufactures and markets milk (73% of sales of $9 billion), ice cream (9%), cultured dairy products (4%), creamers (6%), juices and teas (5%) and other products. Customers include retailers (accounting for 64% of sales), foodservice outlets (14%), schools and governmental entities (7%), convenience stores (6%) and distributors (5%). Dean’s brands are 48% of sales; private label is 52%.

Declining milk consumption in the United States affects all milk processors. Dean Food has taken a beating on earnings over the last several years. So to cut costs and overhead, it spun off businesses (Morningstar and WhiteWave) and closed plants. Dean Foods expects to close up to a dozen more dairy plants this year as part of its continuing efforts to cut costs. Safety improvements resulted in lower insurance rates and related claim costs. Cost-cutting hurts but it has resulted in improved financial performance. From a net loss of $1.5 billion in 2011, Dean Foods posted net profits of $158 million in 2012 and $813 million in 2013.

The dairy processor created a sales winner with its TruMoo chocolate milk, a national brand that has wider distribution than all of Deans’ regional white milk brands combined. The dairy processor says it sells 100 million units of TruMoo at retail annually, and 1.6 million units are served every day in schools. Dean Foods is investing in this product and developing line extensions. TruMoo is sold in seasonal flavors, and a higher-protein formula is available regionally. The company has rolled out nationally a shelf-stable TruMoo SKU.

In its 2013 annual report, the company writes: “In 2014, we will continue to emphasize price realization, volume performance, cost productivity and efficiency, and sound decision-making that is based on timely, reliable and actionable information in an effort to improve gross margin per gallon and drive operating income growth. Organizational changes have been made to reduce our total cost to serve and our selling and general and administrative costs, and we remain committed to sustaining strong positive cash flow and generating shareholder value.”

I bet any other CEO of a publicly held company and owners of privately held businesses are following similar strategies. You don’t have to run a top 100 firm to see the wisdom in being productive, efficient and mindful of financial resources.

In summary, this is what has worked for Dean:

  • Be diversified in the products you manufacture
  • Be diversified in your customer mix
  • Offer co-packing services to keep your production lines running
  • Sell or shed businesses that don’t fit your mission
  • Develop new products and create line extensions from them
  • Back the winning products and eliminate those that don’t sell
  • Follow eco-friendly practices  in processing and transportation to drop dollars to the bottom line

 These are not business “secrets.” I see these items in my visits to dairy processing businesses across the country and hear them in conversations with the owners. These are common-sense business practices. But you need common sense to practice them, whether you are a Dairy 100 company or a start-up.  

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