The US dairy industry currently faces both serious challenges and exciting opportunities. Despite a steady decline over recent years in core categories including cheese (–1.2 percent), milk (–6.3 percent), and yogurt (–3.3 percent), there has been impressive growth among products and brands that are positioned to respond to changing consumer needs. Examples of these growth pockets include Icelandic yogurt, (+60.3 percent) and lactose reduced milk (+12.6 percent).
Findings from McKinsey & Company’s US dairy consumer survey reinforce the increasing importance of meeting consumer expectations for value, health consciousness, and transparency across their dairy purchases to capture growth.
To further understand what is shaping consumer behavior, McKinsey & Company conducted its first US dairy consumer survey of more than 1,100 respondents in December 2018.
The main insights drawn from this survey are as follows:
1. Health considerations are increasingly important. Consumers are committed to healthier lifestyles and make their dairy purchases based on perceptions of health, primarily around “all natural,” organic, and low-sugar options.
2. Transparency is expected. More than two-thirds of consumers want to know more about ingredients, sourcing, and manufacturing processes when they are considering dairy purchases.
3. Openness to trying new brands and products is expanding. Consumers are eager to try new dairy brands and products. Many are willing to purchase from new dairy brands in addition to their existing brands.
4. Plant-based dairy alternatives continue to grow. Most consumers have now tried plant-based products and will continue to purchase them because of a perceived healthier image.
5. Channel and value preferences vary by age. Millennials perceive value in premium products and prefer purchasing online, while Generation X and baby boomers perceive more value from private label and discount channels.
1. Health considerations are increasingly important
Over a third of consumers report eating more healthy foods (Exhibit 1). In addition, some of the most common reasons influencing consumer purchasing decisions are related to health. This finding suggests that perceptions of a category’s healthiness are becoming increasingly important. When consumers are asked why they are buying less of a category, they often cite dietary restrictions or a preference for healthier alternatives. Overall, consumers report buying less ice cream and cream but more cheese, yogurt, milk, and butter. Depending on the category, one-third to one-half of surveyed consumers have changed the amount of dairy they purchase over the past 12 months, suggesting a relatively volatile market that is influenced by changes in consumer perception (Exhibit 2).
A complex picture emerges due to the different attributes that consumers associate with each dairy category. For example, 33 percent of all consumers reported purchasing ice cream less often, primarily due to health considerations. To be successful in this category, dairy companies need to adapt by exploring ways to respond to consumers’ health concerns. This is demonstrated in the ice cream category by the rapid growth of lower-calorie, high-protein ice cream in recent years.
The health perceptions around butter are more varied. Overall, 37 percent of consumers have changed the amount of butter they buy, but how and why this has changed differs by age group. Nineteen percent of millennials reduced their purchase of butter compared with 8 percent of consumers aged 65 and older. Our survey shows that 34 percent of consumers reported buying less butter because they “found other products that are healthier,” while 40 percent are buying more butter because they “feel it is the healthiest option.” This result demonstrates a range of perceptions as to the health benefits of some dairy products, with no single view being dominant (Exhibit 3).
Certain attributes are more likely to influence whether the consumer views a dairy product as healthy. These are “low sugar” and “all natural” (49 percent of consumers stated they perceived these attributes as healthy), followed by “organic” (38 percent) and non-GMO (36 percent). These perceptions create an opportunity for dairy manufacturers to focus messaging around health-related attributes, display health claims more prominently on packaging, and ensure sourcing practices meet this need in a transparent manner (Exhibit 4).
2. Transparency is expected
Before purchasing from a dairy brand, approximately 80 percent of consumers “must know” or “would like to know” about the product’s ingredients and manufacturing process. In addition, 70 percent express a similar desire for information on sourcing practices, such as the origin of the ingredients and whether they are sourced in a sustainable, environmentally friendly way (Exhibit 5).
In the digital age, consumers expect their dairy brands to operate accordingly. Access to information and transparency are closely linked to perceptions around health and sustainability. Consumers want to know not just what is in their food but also the impact its production is having on the environment and society more broadly, including animal and worker welfare. Dairy companies and retailers must reflect these values in their production and marketing in order to meet this need. Winning brands communicate clearly about their products and the ingredients, origin, and manufacturing processes. Many successful retailers are reacting to this trend by including information in their stores about which products are locally sourced and how and where those products are grown and made.
3. Openness to trying new brands and products is expanding
Dairy is a highly dynamic industry with many choices, so new brands and product innovations can achieve rapid share growth. Forty-one percent of dairy consumers report having tried a new dairy brand in the past 12 months, and of this group more than 70 percent continued to purchase this new brand after trying it. Twenty-four percent reported fully switching to that new brand, while 48 percent reported simply expanding their purchase portfolio and buying both old and new brand products. Millennials are the most open to try new products: in the past 12 months, 45 percent of millennial consumers have tried new dairy brands (Exhibit 6). This openness is demonstrated by the rapid success of new products in categories like low-fat ice cream, and high-protein yogurt that market themselves effectively, often leading with health-driven attributes. While consumers’ openness to trying new brands and products creates opportunities, successful brands must also be conscious of the challenges of sustaining new success. Brands must constantly monitor and adapt to consumers’ shifting tastes to meet the needs of the dairy consumer and stay ahead of competition.
Most consumers do not perceive any difference in value between generic and name brand products in dairy. However, there is a distinct shift towards private-label store brands across all age groups. Name-brand growth, while smaller, is fueled by millennial consumers (Exhibit 7).
Major dairy companies will need to find ways to take part in this growth by deepening partnerships and brand offerings through private-label products as well as focusing on more innovation in name-brand products.
4. Plant-based dairy alternatives continue to grow
Non-dairy alternatives are growing in popularity. Sixty-two percent of dairy consumers indicated that they have purchased non-dairy alternatives in the past 12 months. Of those consumers, 41 percent state that the main factor for selecting a non-dairy product was the perception that it was healthier (Exhibit 8).
This health perception is particularly apparent when consumers consider the source of fat in their food. Forty-five percent of consumers view animal fat as “very unhealthy” or “somewhat unhealthy” compared with 10 percent for plant-based fat (Exhibit 9). There is a similar though less pronounced difference regarding protein. Fifty-seven percent of dairy consumers consider protein-based plant and animal products as “very healthy” or “somewhat healthy” compared with 30 percent of consumers who think the same for fat-based plant and animal products.
For consumers who are not interested in trying non-dairy products, the main reasons they cite are taste, cost, and a desire to support dairy agriculture.
These findings suggest that dairy companies and retailers can defend against non-dairy alternatives by focusing on communicating these factors, particularly the health benefits of dairy, as compelling reasons to purchase dairy products.
5. Channel and value preferences vary by age
Consumers in different age groups have distinct differences in how they purchase dairy (Exhibit 10). Regional and national grocery store chains are the largest channel across all age groups. However, the millennial segment is almost twice as likely to purchase in “natural” premium grocery stores such as Whole Foods and Trader Joe’s than consumers over 35 years old, who tend to favor traditional as well as discount grocery stores. This pattern aligns with the increasing role that health perceptions play in food consumption, particularly among millennials.
A new channel for dairy purchases is online, led again by young consumers: 18 percent of 18-to-34-year-olds state that they mainly buy dairy products online compared with just 4 percent of 55-to-64-year-olds.
The value perception of name versus private-label brands also varies with age, with millennial consumers more likely to feel that name brands offer better value than store brands.
To account for these differences, dairy companies and retailers must strive to identify and serve the channel preferences and value-based needs of different consumer segments. Growth can be achieved with the right value proposition and targeting.
Given the shifting consumer perceptions and trends highlighted in the US dairy survey, dairy companies and retailers need to develop strategies that will allow them to defend against competition while seizing new growth opportunities.
- Targeted segmentation of the dairy consumer market is critical, given the variety and sophistication of consumer preferences for dairy. Growth can be captured by communicating the benefits of dairy products in the right way, to the right consumer, and through the right channel.
- Innovation agility through fast product launches supported by an agile supply chain is an important part of successful strategies. Dairy companies can find pockets of growth by identifying trends early and launching new brands and packaging options to match consumer perception.
- Data and insights on shopper and usage behavior, consumer segmentation, value promoters, and e-commerce experience will bolster existing brands and help new launches be more successful. This visibility is especially relevant as more dairy purchases are made online.