Paul Carbonneau, a partner with McKinsey & Company and Ludovic Meilhac, an associate partner with McKinsey & Company, started surveying and speaking with multiple IDFA dairy organizations many months ago to find where US companies can find growth in an ever-changing industry. They interviewed 33 US c-suite executives, 61 dairy companies and 10 McKinsey dairy and retail experts.
During this research, the duo found that 40% of dairy companies said they have plans to expand operations outside of the US, which means 60% have none.
Why might this be a problem? “Decreasing consumption” was the phrase most often used during these interviews, Carbonneau and Meilhac said. It’s no surprise, as there are no US per-capita consumption gains in dairy over the past four years, even with a 0.8% population increase from 2010 to 2014.
Meanwhile, in this same period, China has seen a 6.1% per capita consumption growth and India 3.6%.
“Wealthy consumers putting new foods into their bodies,” Carbonneau said of the growth these markets.
Some companies have started their work toward expansion, he said, as 25% of those companies that have expanded to other markets said they have plants abroad. Approximately 68% of these companies said they have more capacity than five years ago, a key to serving growing markets.
“Somebody has figured this out,” Carbonneau said. “They’ve taken a business model that works… so much so that they’re doubling down on the opportunity. So it is possible”
What can help turn this around?
Carbonneau and Meilhac said there are three strategic responses that can help dairy organizations grow:
- Global growth
- Growth beyond traditional business models
- Insight-driven innovation
Capturing global growth as a dairy company may mean looking at home and international markets differently. Carbonneau said at the top five leading US dairy companies, only 5% of revenue comes from international markets and 95% from home markets. For IDFA companies, this number moves to 15% international revenue. For the top five European Union dairy companies, 49% of their revenue comes from international business, meaning outside of the EU, and 51% comes from the home market.
“This is a profound change,” Carbonneau said, adding that these numbers will change as US companies start realizing how advantageous it is to attract more global business.
Carbonneau said there will be four questions that US companies need to answer before achieving global growth, including how they can figure out trends in key markets, if the organizations are ready to invest resources into new markets, whether there needs to be an international partnership in place, and how commodity and currency risk and volatility will be managed.
Dairy companies may find growth coming from non-traditional methods, Meilhac said. Milk is losing market share, but dairy ingredients are seeing some big growth.
In fact, dairy ingredients will see a 3% yearly growth from 2011 to 2020, when they will reach 5.2 billion pounds of production. This is a much faster rate than the yearly growth of 1.3% of natural cheese over this time, or the negative 0.5% shrinkage of processed cheese in this period.
Meilhac likened this to what the soft drink industry has been going through. This industry had to shift from soft drinks, sugary juices and sodas to non-sweetened drinks and water. He pointed to growing segments dairy organizations can take advantage of in the global market, including non-dairy milk alternatives (a predicted yearly growth of 8.1% to 2020), flavored milk drinks (up 5.4% yearly until 2020) and organic milk (up 4.4% each year until 2020).
This may mean dairy organizations will need to consider going from a standard product oriented company to a focus as a health and wellness or lifestyle company. This, Meilhac said, will help expand growth opportunities at home and abroad.