“Competition for volume increased significantly in the first half of the year and we lost volume at higher levels than we planned. As a result, we experienced increased levels of costly leverage that put pressure on our operating income,” CEO Ralph Scozzafava said during the company’s Q4/17 earnings call.
“We also saw an increased level of retailer investment in private label products at many customers, and this created a mix shift which pressured margins.”
As these milk volume challenges escalated throughout the year, Dean Foods took steps to direct its focus on securing both branded and private label volume while lowering its overall cost base as it aims to become “the partner of choice” across all of its customer segments.
Enterprise-wide productivity plan
Dean Foods is working to reset its cost structure by building on its Opex 2020 framework that targets saving $80m to $100m per year.
“This year, we’re challenging ourselves to do more,” Scozzafava said.
“We’ve completed the assessment phase of our enterprise-wide cost productivity plan and are now in the advanced stages of designing and in some cases already implementing an aggressive plan to lower our costs.”
The new multi-year plan is divided into three work streams starting with re-scaling its supply chain then moving on to optimizing spend management and integrating its operating model. The company expects these efforts to deliver annual run rate saving of $150m by 2020, one-third of which the company intends to achieve in 2018.
Continued investment in building warehouse capability for products outside of the company’s DSD system and increasing operational efficiency by replacing “over-cumbersome, manual, and expensive” processes to streamline work will be key focuses for 2018, Dean Foods chief accounting officer, Scott Vopni, said.
“In short, we’re making important choices in 2018 and taking aggressive but necessary steps to drive our strategic plan; reset our company to make Dean Foods more competitive,” Scozzafava said.
Beyond fluid milk
Diversifying its portfolio is a priority for Dean Foods, Scozzafava added, and in 2017 it launched its first sour cream under the DairyPure brand. In 2018, the dairy company will roll out its single-serve cottage cheese ‘Mix-Ins’ products in mid-March.
“We’ve had positive customer acceptance on this product line and are focused on driving distribution throughout 2018. This will prove to be a promising extension for the DairyPure brand into an innovative and fast-growing segment of the dairy category,” Scozzafava said.
The Organic Valley joint venture has progressed from “standing up the business to accelerating the business” in 2018 by moving beyond the natural channel into national and regional accounts within conventional channels.
Extending further into food service outlets has proved successful for Dean Foods, offering incremental opportunities for the company, according to Scozzafava.
“The scale of the opportunity in food service rivals that of retail and importantly our products and brands performed very well in this channel,” he said.
“Food service operators know the quality of our offerings in the back of the house as well as the value that our brands can provide in the front of the house to boost sales, drive traffic, and increase loyalty and trust with their customers.”