Disruption in Dairy Forces an Expensive and Strategic Shift

Battling falling conventional fluid milk sales, overproduction and increasing competition from traditional rivals and retail giants, these companies are overhauling their businesses.

Dean Foods, the U.S.’s largest domestic processor and distributor of dairy products, has responded by consolidating cost controls and operations. They’re pushing premium milk brands and pivoting aggressively into new food and beverage categories such as ice cream, sour cream, cottage cheese and juice.

Similarly, last year Irish milk marketing co-op Glanbia acquired Grass Advantage, a plant-based nutrition product maker known for the Amazing Grass superfood bars, and Body & Fit, a consumer direct brand focused on performance nutrition.

Further, after years of acquiring multiple dairy companies, milk marketing co-op Dairy Farmers of America, has added probiotic milk and frappuccinos to their lineup. A few months ago, they also recently bought Cumberland Dairy, a family-owned producer of ultra-pasteurized food and beverage, to expand in extended shelf-life processing.

Lastly, during the past few years, Organic Valley, the U.S.’s largest farmer-owned organic co-op, added the Grassmilk line of organic grass-fed milk, yogurt and cheese, along with Organic Fuel and Organic Balance ready-to-drink (RTD) products to capitalize on favorable grab-and-go convenience trends.

How are dairy companies funding this monumental shift?

Looking at Dean specifically – their aggressive reset calls for an enterprise-wide cost productivity plan slated to generate an incremental $150 million in annual run-rate savings by 2020. CEO Ralph Scozzafava said during the dairy giant’s fourth quarter earnings call that he expects to achieve one-third of the savings this year and the remaining two-thirds in 2019. The big, one-time investment will impact short-term free cash flow performance, creating a runway for increased productivity in 2019 and beyond.

This multi-year, methodical approach to finding efficiencies and reallocating waste into driving growth is crucial for Dean and their competitors to compete in the changing market. But is it enough?

For Dean, recent deals such as organic juice company Uncle Matt’s Organic and a minority stake in Good Karma Foods, a producer of flaxseed-based, dairy alternative food and beverage products, haven’t made much of an impact yet. A bigger acquisition that can better prepare the dairy giant to respond to today’s consumers may be in order.

But, are these cost reduction initiatives enough to free up sufficient working capital for a bigger deal? Is this savings strategy enough for rivals to pivot without taking on crippling debt?

Another innovative way to generate millions of dollars without negatively impacting the balance sheet or increasing financial debt is supply chain finance (SCF).  SCF improves cash flow by allowing dairy companies to extend supplier payment terms, while offering suppliers a way to accelerate their own cash flow.

The first step for the company implementing an SCF program is initiating longer supplier payment terms, such as extending terms from 30 to 90 days. This allows the company to free up cash to use for strategic initiatives, such as new equipment, product development and M&A activity. Next, the company provides suppliers a way to mitigate the impact of longer payment terms.

Suppliers that participate in the SCF program can be paid early by a funder – often as early as the day after an invoice is approved by the buyer. Further, suppliers can accelerate payment on some, all or none of their receivables. For those receivables that are paid early, the supplier pays a small finance fee.

And, PrimeRevenue’s bank-agnostic SCF platform offers access to multiple and more varied sources of funding, giving dairy producers and their suppliers the flexibility and control needed to unlock more cash than they could with a closed bank proprietary platform.

Both sides win because both sides have increased access to working capital. As legacy milk companies combat disruptive change and evolve to meet the demands of today’s consumers, it’s crucial to tap new, game-changing funding solutions such as supply chain finance.

If you’d like to read more on the disruption taking place in the dairy industry, check out my article published on DairyBusiness.