The changing composition of the grocery store
The composition of grocery store dairy aisles is shifting due to changing consumer perceptions and expectations, evolving production constraints, innovative product development, marketing, and package design.
Since 2009, annual sales of plant-based dairy alternative beverages in the U.S. have been increasing at an average rate of 9.7% per year and sales of organic dairy products have also continued to increase. Meanwhile, sales of conventional dairy cow beverage milk have been falling.1 Today’s consumers are choosing products that tout health benefits, are produced using methods and inputs perceived as safer or more humane, and are formulated or packaged in ways that offer greater functionality or convenience. After switching from cows’ milk to soy beverages, many nondairy consumers are further altering their course and have begun to purchase almond, coconut, rice, and even walnut-and cashew-based dairy alternative beverages.
Conventional and organic dairy cow fluid milk consumption
As illustrated by the below chart, between 2009 and 2014, annual sales of fluid dairy cow milk declined by over 2 million tons. This translates to a 2.6% decline in fluid milk sales each year — the annual output of more than 35,000 cows, though this does not suggest that 35,000 fewer milk cows are needed in the U.S. Concurrently, U.S. sales of yogurt, cheese, and other cultured dairy products, as well as export sales of a variety of dairy products have been increasing.
As shown in the table below, while the percentage of adolescents and adults that consume dairy cows’ milk as part of their daily snack has remained relatively steady since the late 1970s, the percentage of Americans who consume fluid dairy cows’ milk as part of their regular morning, midday, or night meals each day has drastically declined.
Many consumers didn’t shift completely from dairy cows’ milk between 2009 and 2014, but they instead moved to organic dairy cows’ milk as they became concerned about how conventional dairies produce milk. Despite the increasing demand and the premium consumers are willing to pay for organic dairy products, many milk processors are struggling to meet the rising demand since organic dairy production requires operational changes, and supplemental organic feeds are both costly and difficult to obtain.
Soy-based dairy-alternative beverages
U.S. sales of soy-based, nondairy alternative beverages declined at a rate of 10.2% per year between 2009 and 2014. This caused soy’s share of the U.S. market for dairy-alternative beverages to decline from 90% in 2009 to 33% in 2014.1 Despite the decline in soy-based beverage sales, the revenue from refrigerated soy-based beverages in 2014 was $329 million.2
Soy-based beverages may still face more challenges in the future as more consumer groups call for genetically modified organism (GMO) labeling of food products. While the largest players in the soy-beverage industry already produce many of their soy-based beverages using non-GMO certified beans, those who do not may have to switch to higher cost non-GMO certified beans, discount their products, or risk alienating customers.
Almond-based dairy-alternative beverages
U.S. sales of refrigerated almond-based beverages increased 47.2% in 2014 to $796 million.2 Assuming interest in tree-nut-based dairy alternative beverages and other almond-based products continues to grow at a rapid pace, California growers, who produced 83% of the global almond supply in 2013 – 2014 3, will have to continue increasing almond production. Alternatively, other U.S. states will have to figure out how to successfully grow almonds, or beverage companies may have to make other changes to their nut-based beverage supply strategies.
As depicted in the table below, California’s challenges in increasing production to meet growing global demand stem from water availability constraints and competition for land from other high-valued permanent crops.
More than halfway through California’s 2014/2015 rain season, seasonal rainfall totals are again coming in below average. In response to declining groundwater levels in many parts of the state, California passed the Sustainable Groundwater Management Act (SGMA) in late 2014, adding even more uncertainty to growing almonds. In the next two decades, the SGMA will result in sweeping changes to the way groundwater resources are managed throughout the state.
If U.S. almond growers cannot increase output at a sufficient pace to match global demand growth, Australia could become more relevant in the global almond market. Despite Australia’s current small 8% share of the global market and its own struggles with maintaining a consistent irrigation water supply, U.S. producers should still closely monitor Australia’s growth in almond production. Between 2003 and 2013, Australia’s annual almond production increased at an average rate of 22% per year.4
Coconut, cashew, walnut, and other dairy and nondairy alternative beverages
Given the increasing demand and foreseeable supply challenges faced by organic dairy and almond-based dairy alternative producers, beverage companies are introducing other new beverages to the dairy aisle. The WhiteWave Foods Company introduced its Silk® cashew-based dairy alternative beverage in the U.S. in November 2014. By using cashews as the primary ingredient, WhiteWave can diversify its input supply availability risk beyond just California and Australia. Cashews grow throughout Africa and many other parts of the world. Other nondairy beverages now seen in the dairy aisle include rice-based, walnut-based, and coconut-based beverages. The Coca-Cola Company is attacking the current dairy opportunity from a different direction. The company recently introduced Fair Life® high-protein, lactose-free enhanced milk within the U.S. market.
With the number of dairy and alternative-dairy beverages now available in the dairy aisle, conventional fluid dairy milk processors and distributors will need to adjust operating strategies to remain competitive. This may come in the form of reinvention of product lines, increased efficiencies to salvage market share based on cost competitiveness, or other adjustments.
2. Beverage Industry
3. Almond Board of California
4. Almond Board of Australia
James Cardoza, a Wells Fargo Agribusiness Consultant based in Fresno, California, evaluates food processing companies, farms, and agricultural export companies within the Southwest and Northwest United States. James has worked within the Wells Fargo Agricultural Industries department for six years. Prior to joining Wells Fargo, he managed his family’s dairy and row crop farming operations and worked as a consultant for his family’s electrical connector manufacturing company in Tulare, California.
James received a bachelor of science degree in commerce, magna cum laude, from Santa Clara University, and a master of business administration, with distinction, from the Craig School of Business at California State University, Fresno. He also holds a California real estate broker license (#01375287).