This past April, The Fresh Market undertook a total restructuring of its beverage set. Unlike standard category reviews, the natural grocer declared that “no one” was safe as it sought to reverse declining sales.
More than half a year later, the retailer is looking at another category reinvention: the dairy set will no longer be called “Dairy.” Instead, The Fresh Market will now call the coolers where the cow’s milk lives “Refrigerated Grocery.”
“It’s really not dairy anymore,” said director of grocery Dwight Richmond. “It’s still 50% or greater cow-based dairy, but we’re looking at it in a little different light because we’re now getting our refrigerated groceries from multiple sources, not just a cow or animal protein.”
The Fresh Market’s approach may lie outside traditional naming conventions, but there is justification for the transition. According to market research firm SPINS, sales of refrigerated milk in the natural, specialty and conventional multi outlet (MULO) channels declined 0.8% to $12.6 billion in the 52-week period ending October 6 — a loss of $106.2 million. Meanwhile, refrigerated plant-based milk alternatives grew 6% in the same period to $1.8 billion for an increase of $99.9 million.
Even with inverse growth patterns, plant-based milks still account for only a fraction of the traditional dairy market. But with eyes on the future, many retailers are following the direction of the data and have begun allocating significant shelf space to plant-based offerings. In the case of natural channel retailers like The Fresh Market, plant-based can now encompass close to half of the cold case, but even conventional grocery is increasing the space it allots to almond, oat, and other vegan alternatives in fluid milk as well as other categories such as yogurt, cheese and butter.
Greg Steltenpohl, founder and CEO of plant-based milk brand Califia Farms, told BevNET that he believes retailers are right to make the change now as the cohort of “Next Gen Shoppers” — defined as shoppers under 40 — are poised to become the majority of the working population within the next four years. According to Califia’s own internal data, Steltenpohl said that the Next Gen shopper currently spends about $143 annually on plant-based products, up from $100 for the older consumer.
“That’s why we have to pace [shelf] allocation, which can take two years to accomplish,” he said. “These conversations have to happen in a heavy way now.”
Even as the dairy industry continues to lobby for legislation to address the growth of plant-based products — the Dairy Pride Act, which would formally prohibit plant-based products from using terms such as “milk” and “cheese,” is still working its way through the U.S. Congress — the sea change in retail is happening. Dairy producers themselves have begun embracing plant-based; Dean Foods took a stake in flax milk brand Good Karma prior to the company’s filing for bankruptcy in November, Hood has released an oat milk, and even some farmers are changing course as plant-based products maker Miyoko’s Creamery announced in November it is working with California dairy farmers to convert their facilities to plant agriculture.
While dairy will remain on top for the foreseeable future, the cold case is changing today. Dairy industry leaders, however, may be more prepared for that change than anticipated.
Dairy Turns Innovative
According to data from trade association Dairy Management Inc. (DMI), low fat milks have seen large double digit declines in the past five years. Between 2014 and 2018, 2% milk fell 25.4% to $4.7 billion, 1% milk fell 24.8% to $2.4 billion and skim milk lost nearly half of its sales, dropping 47.4% to $1.1 billion (a $1 billion loss).
At a glance, these numbers might suggest that the situation for the dairy industry is dire. But speaking with BevNET, DMI EVP of global innovation partnerships Paul Ziemnisky said that the decline has been mainly isolated to low fat products. In the same period — as consumers attitude towards fat has improved — whole milk grew dollar sales 1% to $5.5 billion with volume growth of 15.3%, maintaining its status as one of the highest velocity items in the grocery store.
Ziemnisky joined DMI in 2015 when the association created a new unit to find ways of driving innovation in the industry. Drawing from past experience as a senior brand manager at Kraft Foods, one goal for Ziemnisky is to get dairy makers to take entrepreneurial approaches to the food and beverage business.
“We relied on the white gallon to carry everything for 40 years,” Ziemnisky said. “Our team formed four years ago. Phase one was to get brands in the category to act like brands. My team comes from big CPG companies, and a lot of the big CPG approach was missing in fluid dairy. The category didn’t have that much emphasis on marketing and innovation.”
While whole milk’s improvements have provided a multi-million dollar silver lining to a traditional dairy industry under pressure, it has been innovative “value add” milks that have seen the most explosive growth. Ultrafiltered milk maker Fairlife and its various product lines including Core Power and YUP saw 908% dollar sales growth to $457 million.
Founded in 2012 through a partnership between The Coca-Cola Company and Select Milk Producers, Fairlife launched in 2014 with premium milk products containing less sugar, more protein and functional nutrients such as omega-3. Now, the brand’s entrepreneurial approach to innovation and go-to-market strategy is providing a model for the dairy industry to maintain its dominance.
“Fairlife came in with strong velocities, although to a retailer it’s still only moving at a third of the velocity of conventional milk,” Ziemnisky said. “[It’s difficult] trying to benchmark new products against milk, where there’s nothing else as strong as it, but Fairlife is now in close to 700 million households and selling at almost three times the price per gallon of conventional milk.”
While functionality and premiumization has been a key driver to Fairlife’s growth, the brand has also benefited through format innovation, he said. The brand is able to sell its gallon jugs in the cold case, but has also succeeded in grab-and-go coolers, giving it a presence throughout the grocery store.
Today, the rest of the industry is now following suit and embracing innovation. In August, Borden Dairy announced Kid Builder, a line of flavored milks fortified with nutrients to benefit young children, and this fall Horizon Organic released Growing Years, an organic whole milk targeted at kids under 5. In March, Darigold released FIT, a high-protein, low sugar, lactose free milk.
In recent years, organic and grassfed milks made by brands such as Organic Valley and Maple Hill Creamery have helped drive traditional dairy milk growth, while brands like Australian import The a2 Milk Company — which removes the a1 protein from cow’s milk while maintaining lactose — has seen traction in the natural channel. As well, there are opportunities for trending functional ingredients to bring in new consumers. Brands like Picnik have released dairy-based creamers featuring collagen and MCT oil, while companies such as Bulletproof have popularized butter coffee.
Meenakshi Trehan, VP of brand marketing and innovation for Organic Valley, told BevNET that her company has focused on disruption and category expansion through innovation. Organic Valley, she said, has seen significant growth in the natural channel over the past several years and is now looking to expand its footprint in conventional.
“It comes back to messaging on-shelf,” Trehan said. “It’s not just about mass communication, but how you make sure when consumers are actually choosing products on shelf that you stand out.”
Dwight Richmond, who prior to The Fresh Market has held category management positions at Earth Fare and Whole Foods, noted that milk sales tend to “ebb and flow over the course of every year.” In The Fresh Market, he noted that whole milk sales have diminished of late in favor of grassfed and other premium products.
“The consumers drive the preferences,” Richmond said. “Recently it was all about whole milks, and now the whole milk customer has evolved into the better attribute milk consumer. But commodity milks behave very differently to the industry because [what traits are popular] really does change year to year.”
In November, the California Milk Advisory Board (CMAB) partnered with Silicon Valley-based innovation consultancy VentureFuel to create The Real California Milk Accelerator, a competition intended to promote innovative dairy brands. The first winner of the accelerator was Bears Nutrition, a line of milk-based nutritional shakes made with protein, vitamins, minerals, and omega 3’s packaged in 8 oz cans.
“Marketing per se isn’t going to solve [dairy’s decline],” said CMAB CEO John Talbot. “We have to have new products, we have to have new ideas in there.”
But reinventing the dairy set in retail takes more effort than simply rolling out innovations. According to Ziemnisky, DMI has worked “hand-in-hand” with education group MilkPEP to teach dairy brands traditional category management principles and marketing strategies — including tools and software, space optimizations, and consumer insights.
“Rather than taking a defensive approach, we just flipped the switch on an offensive approach,” he said. “We’re educating the industry — everybody from the farmers to our retailers to consumers — about the facts.”
Space Is The Place
As more products flood the market, shelf space more or less remains the same. DMI has worked with retailers to explore new placement opportunities (Ziemnisky points to Kroger as an example, noting the retailer places “c-store style” grab-and-go sections at the front of their stores for dairy snacks) but expansion space remains limited.
Talbot noted that the rise of niche product lines, including the rise of plant-based milks, has led to out of stock issues for core dairy products in some retailers.
“The proliferation of all these new products has just jammed doors,” he said. “So a major challenge for us has been trying to manage the space that we believe is deserved for these kinds of products. But because they’re cold and that space is limited in supermarkets it makes it that much more challenging.”
But although the dairy industry has put considerable energy into pushing back against plant-based alternatives, the two categories have come to form a codependent relationship in retail. According to Greg Steltenpohl, a majority of households buy both dairy and dairy alternative products, a result of generational shifts (millennials and Gen Zers living with their parents influence purchasing decisions), different dietary restrictions, and growing concern about sustainability and climate change. Mooala founder and CEO Jeff Richards told BevNET that as many as 70% of his consumers also buy dairy products. Some dairy producers are even finding ways to combine the best of both worlds: Live Real Farms has embraced cross-category innovation with its Blend line, combining dairy with almond milk to provide the nutrition profile of cow’s milk with the flavor of plant-based alternatives.
Ziemnisky and Talbot both noted that although it might appear obvious that plant-based milks are stealing sales from cow’s milk, it is not the leading cause of the sales bleed. Instead, over 60% of the category loss came from bottled water, Ziemnisky said. Talbot put the loss at a more conservative 54%, but attributed the decline in milk consumption as a beverage to water’s portability and convenience factor.
“Bottled water took off like crazy in the 90’s and today it is pretty much everywhere,” Talbot said. “Milk, you typically want it cold, and it doesn’t often times come in those single serve packages, so availability is an issue from that standpoint. But water is everywhere and it’s taking volume from a lot of these other categories as well.”
Plant Milks Stake Their Claim
According to SPINS, almond milk accounted for $1 billion in dollar sales for the 52-week period ending October 6, rising 7.9%. Oat milk holds just a 2.7% share of the plant-based milk category’s dollar volume, but its growth has been nothing if not robust: In the past year oat-based drinks have grown 2094.9%, up from just $2.2 million in 2018 to more than $48 million.
The popularity of oat milk, sparked by the U.S. launch of Swedish brand Oatly in 2017, began in the on premise restaurant and cafe channel but has since broken out into the retail space. Mike Messersmith, U.S. general manager of Oatly, told BevNET that despite the roughly $10 billion lead traditional dairy has over plant-based, hard data is what’s driving retailers’ decision to bring in more alternative products.
“The space allocation for plant-based today may be disproportionate to the percentage of the overall category split, but the retailers that we’re seeing take leadership positions and making bets for the future are the ones that are balancing those traditional staples with products like Oatly,” Messersmith said. “They see it as being able to deliver something new and incremental with rising growth and able to bring in new customers. There’s always that balance retailers are trying to strike of ‘current versus future,’ but they’re doing it using data and market trends and qualitative insights from their shoppers in a way that’s guiding that decision, more so than ever before.”
For Oatly, success in the fluid milk section has also opened doors to spread across the store. Earlier this year, the brand released oat-based ice cream alternatives. According to Messersmith, the line has allowed Oatly to meet consumers in multiple locations but has required very little education as the brand association is intuitive for most consumers.
According to Greg Steltenpohl, strategic placement and merchandising in retail has been pivotal to the rise of plant-based dairy alternatives. Citing Califia Farms’ internal data, Steltenpohl said there is a 2x multiple in sales velocity for plant-based products when they’re shelved together with dairy products. He noted that in the past, some retailers — including Whole Foods — have attempted to separate the two categories, which led to a rapid decline in plant-based sales.
“The number of people who shop off a list is still the minority,” Steltenpohl said. “So merchandising counts, and standing out on the shelf as a clear choice is absolutely critical for this category to get the momentum across the board in [multiple channels] like it has with retailers like Whole Foods or Target.”
Expanding plant-based milk’s shelf space is also not a simple process, as the mechanics of stocking can sometimes mean giving up an entire dairy door. Steltenpohl noted that one headwind Califia has faced is that for decades, many conventional grocers have utilized roll-on racks that come pre-stocked with dairy products right off of the truck, meaning that developing a partial door requires senior level decision making on the retailer’s part.
But ultimately what the consumer wants, retailers will supply.
“On the macro, the space hasn’t really changed a whole lot; The horsepower within it and how it performs has changed,” Dwight Richmond said. “I wouldn’t say we’ve gone out of our way to dedicate more space to plant-based, but what we’re doing is using the same space more efficiently because consumers are dictating the change.”