Wednesday, July 3, 2013
Why Profit Margins Are Trending In The Dairy Industry
What a better way to say goodbye to the chilly, wet spring that most of the country experienced than by jumping into June—Dairy Month—with some great research on profit margins.
As Americans become increasingly concerned about the negative health effects of certain foods or food ingredients, manufacturers are introducing a greater variety of healthier products. This includes lower-sugar flavored milks and reduced-fat cultured products.
This move has expanded profit margins throughout the food industry because health-conscious consumers are generally willing to pay more for food that they believe is healthy for them. (Think Greek yogurt.) In particular, large companies that have been providing Americans with foods for years have established brand loyalty, so when they introduce healthier, more-expensive products, they typically do not experience significant declines in demand for their products because people view them as high-quality brands, according to a recent industry report. As such, these companies can realize higher profit margins than companies that do not have well-established brands.
Food processors must purchase a variety of commodities, such as feed, corn, milk, wheat and sugar, to produce their goods. The prices of these commodities help determine how processors in a variety of food industries price their goods. So when the price of a commodity fluctuates rapidly from year to year, the cost of manufacturing products becomes volatile. (The dairy industry knows this very well.)
Volatility, in turn, leaves processors less able to anticipate cost increases. They will often pass these costs on to consumers in the form of higher product prices, or, as in the case of ice cream, by reducing package size. Although this move does not bode well for consumers, many will still pay the higher prices, or accept the smaller package, especially for foods that are staples in their diets. Processors end up benefiting because the higher input prices aren’t eating into their profit margins, while demand from consumers stays steady.
And here’s some good news on commodity prices. They are expected to be less volatile during the next five years, which presents even more opportunity for processors to expand their profit margins. Most notable is the price of corn, which is an input in all 10 of the most profitable food industries, one of which is ice cream.
Food processors aim to strike a balance between providing Americans with the food that they love at a reasonable price and maximizing company profitability. During the next five years, profit margins in these already-profitable food product industries are expected to expand as commodity prices become less volatile and operators cut costs associated with production. In addition, if prices do rise, they will be better able to pass off cost increases in the form of higher product prices to consumers because disposable incomes are improving in line with the economy.
In particular, larger and well-established companies produce brands that millions of Americans are familiar with and loyal to. Still, Americans will look to their favorite brands to introduce healthier food products as they strive to live healthier lives. Processors that introduce and advertise healthier products are likely to be rewarded with greater sales, thus benefiting margins further.
To get a full dose of Dairy, go to www.berryondairy.com to learn about new featured dairy products every day. Read about our new Blog contributor, Donna Berry and see samples of her featured dairy products here.