Dairy Marketing Dr. Roger Ginder Econ 338 Fall 2007 Lecture # 7

SUPERMARKETS & C-STORES (Concentration) The Structure of the Supermarket Industry Has Changed Radically in the Past Decade The Industry Has Become Very Concentrated Since the Late 1990’S

Grocery Store Consolidation in the Late 1990’s n Kroger n Albertson’s n Safeway n Ahold n Super Value n Fleming n Food Lion n Shaws/Sainsbury n Fred Meyer, Smith’s, Smitty’s, QFC & Hughes n Ralph’s & Food 4 Less n Albertson’s: Buttrey, Smitty’s, Seessel’s + Brunos n American Stores: Jewel, Ames, Lucky n Von’s, Dominicks, Randalls n Bi-Lo, Tops, Stop & Shop, Edwards, Finast, Giant, Giant & U.S. Foodservice, Peapod (Online Grocery) n Wetterau, Richfoods n Scrivner n Kash N’ Karry, Hannaford n Star Markets Grocery Acquisition, Expansion & Format Variations

Top Grocery Firms Sources: Wall Street Journal, 8/4/98 Customer Estimates, 1998 Marketing Guidebook, SuperMarket News, 6/14/99.

Changing Market Environment: Top Retail Food Companies Rank SafewayAmericanKrogerWal-Mart* 2Kroger Wal-Mart*Kroger 3A&PSafewayAlbertson's 4LuckyA&PSafeway 5Winn-Dixie SupervaluAholdUSA *Wal-Mart includes supercenters and Sam’s Club wholesale outlets Source: Supermarket News, 2001

Dramatic Change in the Supermarket Sector During the Past Decade n Rise of the Walmart “Super Center”&Club Stores n Rapid Merger of Supermarket Chains in the Late 1990’s Left A Few Giant Retailers n Concentration of Buying Power in Supermarkets n Consolidation of the Regional Class I and II Dairy Processing Firms---Deans& Suiza n Concentration of Class III & IV Processors

FOOD SERVICE (Products) Bulk fluid Cheeses Bulk Class II Individual serving package Specialty products NMP/WMP/BMP ESL fluid products

FOOD SERVICE CATEGORY SEGMENTS Approximate Segments $ Vol. BilPercent Restaurants & Bars 75 bil 51% Fast food Full service Cafeteria/Buffet Bars Retail hosts 12 9% Travel leisure 10 7% Business institute128% Education institute107% Health care/service64% All other1510% $140 bil

LONG TERM TRENDS IN FOOD SERVICE INDUSTRY Consolidation of large number fragmented firms Development of low cost supply chains Partnering with low labor cost manufacturers with unique products to meet needs Food safety important +Manufacturer assurance about production (e.g., GMO micro organisms) +Product safety +Product wholesomeness

MASS MARKET RETAILERS Diet beverages (Slim Fast) Evaporated milk NMP based products Dried cheeses Aseptic packaged milk

INGREDIENTS TO FOOD MANUFACTUERS (Products) Cheeses (including dried, sauces, extracts) Whey powder/Whey fractions NMP/WMP/BMP Buttermilk (fluid) Class II products Fluid milk Casein Butter/Butter Oil

Retail Stores 39-41% Food Processing 16-18%

HEALTH FOOD STORES Protein supplements Mineral supplements Other specialty products

INDUSTRIAL USERS/FEED USERS Glue and adhesives Chemical proteins Calf milk replacers Starter feeds

Regional Milk Production as a Percentage of 2006 Total U.S. Milk Production with Percentage Change in Production: 2006 vs % +25% 40% +2% 19% -5% U.S. Change '06 vs ' %

Fluid Milk & Cheese Consumption n Two General Product Categories Account for the Majority of Per Capita Milk Consumed n Fluid Milk and Cream Account for About 205 lbs. Per Capita n Cheeses Account for About 315 lbs. Per Capita n Butter, NMP, Ice Cream, Condensed and Evaporated Milk, Account for Most of the Remainder of Per Capita Milk Consumption

U.S. Per Capita Consumption of Fluid Milk & Cream Source: Agricultural Statistics, NASS, USDA

All Cheese Per Capita Consumption Source: Livestock, Dairy and Poultry Outlook, ERS, USDA, July, 2003

American Type Cheese Per Capita Consumption Source: Livestock, Dairy and Poultry Outlook, ERS, USDA, May, 2003

Italian Type Cheese Per Capita Consumption Source: Livestock, Dairy and Poultry Outlook, ERS, USDA,2005

Per Capita Cheese Consumption

Source: Livestock, Dairy & Poultry Outlook, ERS, USDA, 2005.

Regional Cheese Production as a Percentage of 2006 Total U.S. Production with Percentage Change in Production: 2006 vs 2000 U.S. Change '06 vs ' % 44% +43% 42% +1% 14% -2%

Regional Cheese Production Source: Federal Milk Market Administrator, Tulsa, May, 2004

Regional Cheese Production as a Percent of Total U.S. Production Source: Federal Milk Market Administrator, Tulsa, April, 2004

Regional Butter Production as a Percentage of 2006 Total U.S. Production with Percentage Change in Production: 2006 vs % +23% 45% +16% 9% -14% U.S. Change '06 vs ' %

Regional Butter Production as a Percent of Total U.S. Production Source: Federal Milk Market Administrator, Tulsa, April, 2005

Regional NFDM Production as a Percentage of 2006 Total U.S. Production with Percentage Change in Production: 2006 vs 2000 NFDM U.S. Change '06 vs ' % 75% -14% 11% -39% 14% +12%

Regional Nonfat Dry Milk Production as a Percent of Total U.S. Production Source: Federal Milk Market Administrator, Tulsa, April, 2002

Regional Ice Cream Production as a Percentage of 2006 Total U.S. Production with Percentage Change in Production: 2006 vs 2000 U.S. Change '06 vs ' % 23% -11% 50% -2% 27% -15%

U.S. Per Capita Consumption of Selected Dairy Products Source: Agricultural Statistics, NASS, USDA

U.S. Per Capita Consumption of Selected Dairy Products Source: Agricultural Statistics, NASS, USDA

Source: ERS data, USDA Net Removals, Milk Equivalent-Milkfat Basis, 8/23.05 CCC Net Removals (milk equivalent, milkfat basis)

CONSUMER TRENDS (ETHNICITY ) U.S. population will be nearly 50% non white by year White72%53% Hispanic11%25% African American12%14% Asian4%8% Native American1%1% Trend will be led by an increase in Hispanic population of more than 125%