The growth in demands for white fluid milk has been flat and even below zero and there are increasing interests from consumers in innovative milk products, a result of combining impacts of demographics, economy, and peoples’ health styles.

Sector’s current, trend, causes behind trend, and future

Current and Trend

• The growth in demands for white fluid milk has been flat and even negative; there are increasing interests from consumers in innovative milk products such as flavoured milk products. At the same time, demands for low-end milk products still keep strong.
• Unfavourable situation in retail industry may contribute negatively to poor performance of branded products of companies in this sector that traditionally rely on major chain retail channels.
• Intensive competition in private label milk products from retail clients of companies in this sector created huge troubles for them in pricing of branded products and sales of private label products.
• Companies’ sale numbers have been mainly determined by the price of milk products and companies’ performance of sales were jeopardized by significantly decreased raw milk price in the past three years.

 

Causes behind the trend

• Per capita consumption of fluid milk continues to decline according to the U.S. Department of Agriculture ("USDA"). Therefore, when this decline fail to be fully offset by the increase in numbers of milk consumers in total consumption of milk decreased.
• The decrease in demands for branded while milk and increase in flavored milk and private label milk products present similar characteristics as those in some of other sectors of food industry. It is that consumers in today’s food and beverage market are inclining to purchase either better products or lower end products. The drivers behind this trend come from quantitative easing monetary polies that pushed up household’s wealth, the long-lasting downturning economy that dragged down incomes of low-income population, and  the health awareness that cause consumers to be willing to pay more for better products.

 

Industry Future

We did not see any potential fundamental changes in the factors behind the demands for fluid milk. Consumption of milk and thus companies’ sales volume are expected to continue to go down. However, the sales and profits may be volatile as changes in raw milk price. Product innovation may be the key for existing companies to gain competition edge in the current situation.

 

General Financial Performance of Companies In the Sector

Data indicates that the demands for fluid milk in US seem to have been declining in the past several years as indicated by continuously decreasing sale volume of some of typical companies in this sector. And this is consistent with data provided by the U.S. Department of Agriculture ("USDA") that per capita consumption of fluid milk continues to decline. It may also be related to change in traditional distribution channels of those companies and increasing competition from private label market.

While the average sales volume have been declining at about 2-5% annual rate in the past several years, it seems the profit and cash inflow of the companies in this sector have been determined to larger extent by the margins than sales volume because of large volatility in raw materials’ price even though the average gross margins and operating margins are relatively low as a mature industry. By the federal regulation, the minimum dairy commodity price such as class I milk changes monthly. The changes in raw milk costs can partially be transferred by the companies of fluid milk to the price of their private label products immediately but not for their branded products. Therefore, for those companies the large fluctuation in price of raw milk can be reflected directly to its margin and the income for branded products, which are the major resources of those companies. This is reason behind what we see from the companies’ performance in the past several years as the average class I milk’s price went down.

Raw milk price are related to the whole diary environment and get involved with many uncertain factors. Therefore, we are not trying to predict the changes in their price and as well fluid milk companies’ financial performance given that the demands have been declining. However, what we know is that the decreased demands have been concentrated on white milk but not on advanced processed milk such as flavored milk. We think this is consistent with what is happening in other sectors of food industry as consumers’ preference for premium products, which are able to provide high quality and better taste, has been the major trend in today’s food consumption industry thanks to the new changes in demography, economy, and life styles of young generation.

According our data, the sector‘s average enterprise price/EBI ratio is 38 currently, a signal of confidence on profitability of this company while shrinking demand. It is also a signal that gross margin is at low level at which it will have no positive reflection on the changes in sales and this company is using its spending on advertising and SG&A inefficiently.

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