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Dean Food Recommendations

Essay by   •  March 2, 2019  •  Case Study  •  1,925 Words (8 Pages)  •  18 Views

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Greetings,

Regarding your request for a company analysis and recommendation, this memo begins with a five forces and concludes with a value chain analysis.  Financial results from Dean Foods as well as Nestle and Danone for the years of 2015 through 2016 are enclosed at the end of this memo.

The global dairy market represents a total combined value of over $600 billion as of the year 2016.  This market experienced a 4% compound annual growth in the years between 2012 and 2016 and is expected to have an even stronger growth from 2016 through 2021 projecting to exceed $760 billion.  The United States market represented 20% of the overall world consumption but grew only .9% between the years 2012 and 2016 compared to the Asia-Pacific market which grew at a pace of 7.7%.  This flagging growth rates creates more competitive pressures to capture market share between competitors in the United States.  The major products of the dairy market are liquid milk and cheese products, representing 36.8% and 31.8% respectively.  The global dairy market is extremely fragmented with many competitors holding only a small percentage of the overall market.  Looking at the top four competitors worldwide, they collectively have less than 9% of the market with the other 91% being distributed among numerous smaller suppliers.  These factors are contributors to the overall competitive nature of the dairy industry in the United Stated comprised of a highly fragmented market with many competitors, a relatively small growth rate producing homogenous products.[pic 1]

Beginning the 5 forces analysis we will look at new entrants.  Since the dairy production industry requires high fixed cost and there are high barriers to exit, it is possible that smaller market players could enter but less likely for larger competition to enter the market directly.  The recent history for the dairy product industry is more focused on consolidation through mergers and acquisitions.  Since dairy products have limited shelf life it would be important for new companies to quickly develop an efficient and sophisticated distribution system or suffer loss resulting from waste.  The existing dairy product producers have worked diligently to establish their name brands with consumers which would increase the pressure for a new entrant to create a competitive brand presence.  Government regulation related to the food industry is very strong in most developed counties, providing an additional hurdle for new market entrants.  Because of all these factors, the threat of new entrants to the market segment is less likely.

The bulk commodity for the majority of the Dean’s Food portfolio is raw milk.  The raw milk commodity is extremely homogenous and suppliers have very little methods for differentiating their product.  Dean Foods as with most dairy production companies employs a large supplier base, with no single supplier providing the bulk of the raw product.  This lessens the supplier power in the business relationship.  Some suppliers could engage in forward integration, but for many of the same reasons that prove prohibitive to the new entrant, the supplier bent on forward integration would face significant obstacles in forward integrating on a large scale.  A forward integrating supplier would possibly find more success in smaller and more local market segments, possibly creating boutique products that do not significantly challenge Dean Foods.

Buyer power in the industry is somewhat different than supplier power.  The majority of dairy products are sold to a smaller number of larger retailers.  Hence each retailer is responsible for a larger portion of the sold product making milk producers.  As an example WalMart and Sam’s Club are directly responsible for over 16% of the liquid milk product sold by Dean Foods.  This shifts the power of the relationship significantly to the buyer.  While backward integration is not a large threat from smaller buyers, larger retailers could benefit from acquiring existing smaller producers for their own benefits and private labels.  As an example, Walmart is planning to open its own dairy production facility in Indiana which could jeopardize a significant portion of the liquid milk contract with Dean Foods.  The buyer power in this segment is significant and must be managed carefully by Dean Foods.

Regarding substitutes, dairy products are generally a staple of many American consumer diets.  The benefits of vitamin fortified milk and calcium for all age groups are highly published, specifically the young and older members of the public.  While complete elimination of dairy products is unlikely there are some threats of substitutes.  As the general public becomes more aware of the necessity of healthy food choices, some dietary recommendations are to reduce consumption of high fat dairy products.  In addition, a larger population is looking to consume more plant based products for health or conscience reasons creating a market for such products as almond and soy milks.  Dean Foods is exposed to some risk in this category since the majority of the product line is milk based.

Regarding the degree of competition in the dairy products market, while the overall growth of the market has increased which has a tendency to lower competitive pressure there are many factors that increase competition.  The dairy product market is comprised of many different suppliers whose products are somewhat difficult to differentiate.  With the exception of exclusive contracts, the cost for buyers to switch products is relatively low.  The dairy production market is comprised of products that require high fixed costs, are volatile and costly to store and transport and are perishable making long term storage problematic.  These combined factors make competitive rivalry significant for Dean Foods.

Continuing our analysis of financial results and value chain, we begin looking at a year over year performance trend for select financial results of Dean Foods.  The three year trend from 2014 through 2016 shows that gross sales have been on a progressive decline from $9.5 billion to $7.7 billion, representing a 14.5% and 5% decline in 2015 and 2016 respectively.  The direct cost of goods sold during this time has also decreased from $7.8 billion to $5.7 billion representing a 21.5% and 7% decrease respectively.  During this same time the Sales, General and Administration cost has increased from $1.64 billion to $1.69 billion.  The positive aspect of these numbers being that he cost of goods sold is falling faster than the gross revenue, however the SG&A numbers are rising instead of falling with the revenue costs.  Major dairy competitors Nestle and Danone are much larger organizations with gross revenues averaging $89 billion and $26 billion respectively over the three year period of 2014 – 2016, compared to Dean Foods gross revenue average of $5 billion during the same period.  However, if we compare selected common size financial number of two or our major competitors, Nestle and Danone, we see that while Dean Foods has a relatively lower SG&A cost as a percentage of total revenue, Dean Foods has an even more significantly higher cost of goods sold as a percentage of total revenue.[pic 2][pic 3][pic 4]

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