What’s next for dairy?

| Article

Consumer behavior in an era of mission-driven and price-sensitive purchasing has caused uncertainty for dairy, as for most consumer packaged goods (CPG) companies. Supply- and value-chain disruptions have compelled the sector to manage complexity and higher costs.

The industry has proven its resilience and ability to adapt creatively, and its confidence is growing. New realities will continue to challenge the industry—from inflation, to fluctuations in demand, to labor shortages and logistical bottlenecks. To maintain profitable margins in 2022 and beyond, close attention must be paid to evolving consumer and economic trends.

In this article, we look ahead, considering ways to guide the industry in 2022 and beyond. We base our insights and recommendations on market observations and research, a September 2021 proprietary survey of US CPG consumers, an October 2021 proprietary survey of dairy executives, and 20 in-depth interviews with United States-based CEOs and senior dairy executives in the fourth quarter of 2021.

Consumer impulses and market-shaping trends

A surge in demand for dairy products in 2020 improved the overall economic performance of the industry in the midst of great challenges. In contrast, 2021 saw the stabilizing of demand and the emergence of new growth inhibitors. As industry leaders plan their consumer-facing and internal strategic approaches for the future, certain market-shaping trends will be critical.

The last couple of years have significantly altered how consumers shop for CPG goods. Most metrics of consumer behavior (such as confidence and price sensitivity) have improved since last year but are still up from 2019 levels. For example, 36 percent of consumers cut back less on spending in 2021, compared to 41 percent in 2020 (exhibit). However, today’s levels of cutting back are 9 percent higher than in 2019. Similarly, 45 percent of consumers report paying attention to prices in 2021, compared to 51 percent in 2020 but 29 percent prior to the pandemic.1

Consumer purchasing rose in 2021, though it still trails pre-pandemic levels.

Consumers are exhibiting a range of sometimes conflicting impulses. They are both more likely to purchase less expensive products—with trade-off rates 2.3 times higher in 2021 than 2019—and to pay premiums on company attributes: 59 percent are willing to pay more for healthier products and 54 percent for better animal welfare, for example.2

Against this backdrop, several key consumer themes are driving major headwinds and tailwinds for the industry:

  • Commitment to sustainability, especially reducing the carbon footprint, is a company value that half of consumers are willing to pay more for in 2021. Of those consumers who switched to more expensive dairy brands, 22 percent report doing so for sustainability reasons.4 This indicates accelerated appreciation for dairy as a sustainable category, and recognition of how the industry has embraced green practices. That said, dairy production makes an undeniable contribution to greenhouse-gas emissions. It is crucial that the industry continue investing in areas such as responsible waste disposal, water and energy management, recyclable packaging, and renewable energy. It is also important that, where possible, dairy leaders support farmers in adopting green practices.
  • Health and wellness: This year, four in ten consumers who purchased more dairy alternatives than last year did so based on perceived health benefits, a two percent decrease from 2020. That said, health and wellness remain key drivers for choosing dairy alternatives, with half of consumers reporting “less fat” and “no artificial ingredients’ as important characteristics; nearly half list “enriched” as another desirable feature.4 Leaders should continue strengthening the narrative of dairy’s many attributes: new product lines may usefully position dairy as a competitor rich in protein, nutrients, and vitamins.
  • Brand experimentation: Like most CPG products, dairy is vulnerable to brand experimentation. Loyalty shake-ups appear here to stay, with seven percent more consumers changing brands in 2021 than in 2019.5 Of the two in five consumers who report trying a different brand, and of the 34 percent who report trying a different retailer, store, or website, over 80 percent intend to continue with those shopping changes.6 Investment in brand differentiation, from seasonal ice-cream flavors and indulgent dairy desserts to layered yoghurt and specialty cheeses, can uplift brand propositions and attract new consumer groups.

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Remaining resilient in the face of inflationary pressures

Nearly half of executives surveyed expect more than five percent revenue growth over the next three years, while six in ten saw increased margins over the last 12 months.7 However, there are three shadows that loom over this optimism: labor shortages, freight disturbances, and input-cost escalations. Major shocks incited by the pandemic, as well as climate disruptions, contributed to a perfect storm, allowing inflationary pressures to hinder the dairy industry’s access to workers, shipping lines, and commodities.

  • Labor shortages: Currently, the labor market is undergoing the highest supply-and-demand pressures since the Great Recession. Job openings are at a record high, 41 percent above pre-pandemic rates, and these rates will likely continue to outpace the rate at which unemployment is dropping.8
    Within dairy, the tighter and more competitive funnel for labor in 2021 is evident in high employee attrition and wage costs. Dairy manufacturing and processing plants are operating, on average, with 11 percent of their target labor force unfilled. Executives also report wage-cost increases of 11 percent in 2021, coupled with higher signing bonuses, expanded benefits, and greater competition for hiring.9

    Over half of surveyed executives are committed to implementing permanent hybrid options. Many are also considering how to utilize flexible hours, days, and geographies, as well as leadership training and quicker promotions, to attract and retain a vibrant workforce.
  • Freight disturbances: The past two years marked a major reconfiguration of the freight landscape, with sea- and land-freight prices increasing in 2021 by up to 400 percent and 25 percent respectively across industries.10 What this means for the dairy industry ranges from longer lead times, to skyrocketing prices for simple, necessary goods such as valves.

    One hopeful projection is that sea-freight cost hikes, worsened by port congestion and decreased availability of ships and containers during the peak of COVID-19, will stabilize in the short term. This will ease the burden for dairy companies who source or deliver goods internationally. On the other hand, e-commerce penetration and fewer available truckers render land-freight challenges more permanent. Executives are already exhibiting their adaptability in these complicated conditions, with nearly 100 percent having changed suppliers in 2021.11
  • Input-cost escalation: Some of the major consequences of labor and freight disruptions have been limited supply, stalled distribution, and cost elevation of hard and soft commodities, from feed and chemicals to packaging materials and energy. The drivers of such volatile inflationary pressures are likely to subside within the next 6–12 months, but uncertainty due to structural increases in land-freight prices could complicate the recovery.
    In every week of 2021, according to dairy executives, a crucial input was short, out of stock, or threatened. Executives report input costs increasing, on average, by nearly 20 percent, and up to 30 percent in some hard commodity categories, resulting in moves to rationalize stock-keeping units (SKUs), eliminate product lines, and limit production.12

How can the dairy industry prepare for the future?

Resilience for the dairy industry will depend on successful business-model adaptation, especially in terms of attracting labor, rethinking shipping capabilities, and passing on higher input costs where possible. It is important to consider what will soon be table stakes across the dairy industry, and what will elevate companies as leaders in the field.

In both the short and medium term, dairy executives can take various strategic actions to engage with consumer trends: improving pricing strategies to ensure that the company’s value proposition remains relevant to customers in inflationary times; and reformulating, diversifying and differentiating products to target consumer preferences and more attractive segments. The sooner companies focus on better understanding the drivers of customer loyalty, experimentation, attrition and churn, using data and analytics, the sooner they can set a virtuous growth cycle in motion.

Finally, the current attrition of talent is likely to continue; it will be important to elevate and strengthen the company value proposition for employees as well, becoming an employer of choice—from HQ to plants, warehouses and offices.

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