Got Milk?

Gershon Morgulis
Published on November 26, 2019

Over the past 10 years, milk sales have gone down by 18%. Cold cereal sales are trending down too.

In light of this, it should not be surprising that Dean Foods, the largest milk producer in the country, recently declared bankruptcy. With less milk being sold, a large milk company would naturally suffer.

Nevertheless, the situation with Dean is not simply a case of the market contracting over the years — Dean Foods did multiple things that set them up for this day.

Plenty of gallons to choose from

Dean Foods is selling a commodity, and when you sell something that many people can easily produce with low barriers to entry, you will have price competition. Retailers know milk is milk and used this to pit Dean against its competitors. As a commodity, it was tough for Dean to differentiate itself once it got onto a retailer’s shelf. Why would a consumer pick up Dean milk as opposed to the competition? Yes, there is some level of brand recognition, but would you actually pay 20 cents more for a bottle of milk because it didn’t say Kirkland or Stop and Shop?

When milking debt goes too far

Dean had substantial debt, which isn’t a problem in and of itself. During good times, companies borrow money. A relatively stable company can afford the interest payments, and by borrowing against the substantial cash flow, owners/shareholders can “take money off the table,” pay themselves dividends or invest in other projects. But Dean is paying over $50 million a year in interest payments alone; that is interest on their over $900 million of outstanding debt, most of which is due within the next 5 years. And in 2 of the last 5 years, Dean’s interest payments alone were more than their total earnings before interest. In the remaining 3 years, interest payments made up at least 25% of the company’s earnings before interest. 

Don’t put all your milk in one bottle

Dean Foods’ declaration of bankruptcy is like a case study on the importance of diversification. Walmart made up over 17% of its sales in 2017 and over 15% in 2018. The company’s top 5 customers comprised 32% and 29% of total sales in 2017 and 2018, respectively. With so much revenue coming from so few customers, Dean was just one “hiccup” away from a net loss throughout the last 5 years. Brands often fail to realize that the big client comes with tighter margins and dictates a lot of your business. If you need to take on debt or buy assets to support a big client, you could be left holding the bag when they leave. Incidentally, in 2018 Dean disposed of over $500 million worth of “excess raw material” — roughly corresponding to the amount they did not sell to Walmart. And how much of that was sold at a loss?

There are definitely issues with the long term viability of the dairy business — the Dairy Farmers of America reported that milk sales had dropped from $14.7 billion in 2017 to $13.6 billion in 2018 — and those issues will have a greater impact on companies that are more established and less nimble. Dean had significant debt and revenue concentration problems, and combining that with the tough state of the market ultimately hastened their downfall. Let’s hope their creditors negotiate with them; otherwise, you may just have to go to Walmart for your next bottle of milk.