Niche dairy products adapt to changing consumer preferences but complicate costs and logistics. As consumers increasingly seek beverages made from soy, almonds, coconuts and rice — even peas and oats — the dairy industry is responding with niche products of its own, but more changes are ahead as the traditional gallon jug milk business struggles to compete with plant-based competition.
A new report from CoBank’s Knowledge Exchange Division predicts continued double-digit growth in the plant-based milk alternatives market. Sales are up 61% over the past five years, with slower growth of 15-25% projected by 2022. Meanwhile, cow’s milk consumption continues a decades-long slump.
“The total volume of the alternative milk market is still relatively small and is not a major factor behind declining fluid milk sales,” CoBank senior dairy economist Ben Laine said. “However, plant-based milks are helping revolutionize how the dairy industry does business. Excitement around plant-based milk alternatives has forced traditional milk to differentiate into a number of premium products in order to compete.”
Premium products buck trends
Laine cited organic, grass-fed, ultra-filtered, lactose-free and a2 milk as niche products that buck the downward trend in milk consumption. These products command a higher price and compete more directly with plant-based alternatives. “Certain value-added dairy milk products will experience growth alongside plant-based beverages,” Laine said.
Most consumers who buy alternatives are not completely abandoning milk. “Nine in 10 households that purchase plant-based alternatives also buy cow’s milk, and among those purchasing both, their cow’s milk choice is more likely to be organic or from the premium tier of milk products. That opens up opportunity for the dairy industry,” Laine said.
If you can’t beat them, join them
According to the report, some traditional dairy companies are adding plant-based alternatives to their portfolios. Even Dean Foods, the largest milk bottler in the U.S., recently invested in Good Karma Foods, a plant-based milk and yogurt company. An extreme example, Elmhurst Dairy in New York City, stopped producing cow’s milk altogether in 2016 and pivoted to nut-based alternatives.
Still, CoBank said dairy case differentiation doesn’t come without complications.
“Managing diversified product lines adds logistical challenges to an industry accustomed to a commodity product structure. For example, adding a grass-fed option to an organic milk portfolio requires separate handling all the way from farm to milk truck to bottling plant and onto retail shelves,” the report explained.
Marketing costs are also increasing in the form of slotting fees. As plant-based beverages enter the dairy case, CoBank said many grocers are increasing slotting fees for this now-valuable real estate, altering the cost structure of the traditional low-margin gallon milk jug business.
“Traditional milk bottlers have focused on keeping costs low and have avoided raising prices, hoping to slow the trend of declining demand,” Laine said. “New cow’s milk offerings will challenge the efficiencies of traditional large-scale supply chains handling smaller volumes of a wider variety of more specialized products.”