Nothing will stop consolidation of the United States dairy industry. Large national dairy producers will continue to expand their markets, fueled by an insatiable demand from super retailers and mass merchandisers. The only other business model that can survive an ever-increasing number of mergers, acquisitions, and downsizing is the small dairy company that provides local vertical integration of the entire dairy supply chain, said speakers at the 2003 Dairy Distribution and Fleet Management Conference in Savannah, Georgia.
“The growth of mass merchants and the increasing concentration of food retailers are driving consolidation in the US dairy industry,” said Björn A Berg, senior vice-president — business development, Swisslog North America. “Whether you like it not, this is what is happening in your industry. If you don't like the message, don't shoot the messenger. If you like it, then you need to take action.”
From 1998 to 2002 worldwide, 641 mergers and acquisitions took place in the dairy industry, and 141 were related to the US dairy industry, he said. Food sales for mass merchants in the United States grew from $5 billion in 1992 to $30.2 billion in 2002 — an increase from 3% to 14% of total food sales. During the same decade, sales from grocery outlets decreased to 84% from 95%. Food sales from drug outlets remained flat at 2%.
“Mass merchandisers and large food retailers are growing,” Berg said. “National dairy producers will achieve cost leadership through production, distribution, and integration of sales channels. In Switzerland and France, the three largest food retailers have 80% of the market share.”
As a percentage of total US food sales between 1998 and 2000, sales from Kroger, Albertson's, Wal-Mart, Safeway, and Ahold USA increased from 33% to 42%. That year-2000 percentage equals $213.5 billion in sales from the top five food retailers in the United States.
“Mass merchandisers, as well as the super retailers, are going to grow dramatically,” Berg said. “They will ask for national suppliers, and they don't want 20 — they will limit the number to two or three, and they will want their supplies from all over the country.
“Some companies merge because of branding issues,” Berg said. “If you are trying to build brand equity with local, regional, and national brands, it is very expensive. You have advertising, merchandising, and promotions. With one national brand, you have economies of scale.”
If a product, such as milk, is easy to duplicate, then it's well-suited as a commodity. Conversely, a specialty cheese item is difficult to duplicate. The private-label market varies dramatically depending upon product. Cold cereal sells very well as a branded product. In 2001, private-label share for cold cereal was only 8% while that of milk was 70%, he said.
“You have to look at the category of food to determine if private label is a threat to your market. If so, you have to spend a lot of money on branding. When the general economy is strong, sales of branded products increase. When it's weak, sales of private labels increase. The big companies such as Procter & Gamble don't like major fluctuations in product price. Consistently low prices protect their brands.”
As consolidation of the dairy industry continues, smaller regional dairy brands will sell out to larger national brands. The smaller dairy brands that survive will feel additional competitive pressure because of fewer SKUs, less shelf space, and more emphasis on timely and efficient distribution. Big retailers prefer the national dairy producers because they offer large national brands, efficient distribution, direct store delivery, and economies of scale and scope.
Local dairy companies can survive and even thrive, if they are agile enough to change with market conditions. They must provide local brands and specialties; local vertical integration of the entire dairy supply chain; direct home delivery model to the end-customer; and sell organic and health labels.
“You can combine dairy farmers with the production and processors and sales people as a vertical supply chain, “Berg said. “Companies such as Whole Foods Market have proven themselves a successful alternative business model to the national dairy producers. I live in Boulder, Colorado, and there are many retail customers like myself who prefer the small retailer that offers local specialties and organic labels. Consumers who are born, live, and die in the same community are used to local brands, and they are faithful customers of local brands.”
Founded in 1980 as one small store in Austin, Texas, Whole Foods Market says it is now the world's largest retailer of natural and organic foods with 143 stores in North America. Food products include a variety of private-label brands.
Product strategies for new packaged food products are tested according to four basic consumer demands: snacks, nutrition, convenience, and indulgence, Berg said. “Consumers don't know 20 minutes beforehand what they will eat for dinner. There are a lot of value-added opportunities for prepared food so consumers can make last-minute eating decisions.”
Fewer products
Between 1992 and 2000, new product introductions in the dairy industry decreased from 1,320 to 455, partially because the success rate of new products has decreased, he said. “Failure is very expensive. Imagine all the marketing dollars you lose if your product is not successful. Because of consolidation within the industry, companies also have consolidated research and development of new products.”
Transportation costs have dropped because of improved infrastructure, better transport communication systems, and the increase in involvement of highly efficient third-party carriers. So the optimal number of warehouses is falling, said Urs Siegenthaler, Swisslog vice-president — logistics solutions. At the same time, labor costs are increasing because fewer people are willing to work in such harsh environments as refrigerated warehouses.
“At Wal-Mart, 56 weeks is the average time that an employee will work in a distribution center,” Siegenthaler said. “You have to educate and train employees to use manual processors. When they leave, you have to start over with new employees, and that becomes a large part of your operating costs.
Fewer distribution centers
“In a consolidated network, fewer distribution centers with a higher performance or crate throughput are built,” Siegenthaler said. “Higher crate throughput opens the door for using automation as a means to reduce operating costs. As standard crates are used, a standard interface to the load is established. Therefore, robotics for handling product can be introduced.
“Costs in a distribution center are different, depending on whether you use robots or humans or some combination of the two. If you want to measure your whole supply chain costs, you have to take that into consideration.
“A robot is simply a stacking machine. Inventory is an issue that never goes away. If you deliver milk that has a shorter shelf life, you receive a deduction in the price. If you have a manual system in the warehouse, you have to juggle the crates to find products with the optimum date. Every time you touch something, there is a cost.
“Retailers certainly know this, and they try to optimize handling of the product. Forty-eight percent of stock on hand is at least three codes old. When they start to charge you for these costs, it will impact your business.”
Investment in two larger automated distribution centers can be the same as for three conventional facilities, he said. Automation reduces the operational costs within the distribution centers by 20%. This compensates the additional premium for primary and secondary transportation. Inventory levels drop because of the consolidation of the safety stock. A standard warehouse management system increases the transparency of inventory levels.
“Benefits include less dependency on labor and unions,” Siegenthaler said. “Handling costs for customers are reduced because of exact sequencing of plastic containers and safer handling of products. Personal injuries are reduced, and shelf life of products is extended by following the first-in, first-out principle.”
Swisslog is a global provider of integrated logistics systems for optimizing production and distribution processes. Headquartered in Buchs/Aarau, Switzerland, Swisslog has about 3,400 employees in 23 countries worldwide.
The company's comprehensive portfolio ranges from building of complex warehouses and distribution centers including Swisslog's software, in-house logistics systems for hospitals and pharmacies as well as consulting services in the field of supply chain management. Material Flow and Robotics Systems complete Swisslog's offering.
Wal-Mart contracted Swisslog to build a distribution center for perishable products for the first time outside the United States. The San Martin Obispo, Mexico, distribution center will incorporate a semi-automatic approach to provide an optimum level of automation in the freezer and refrigerated environments. Estimated completion is June 2004.
