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CoBank: Dairy Supply Chains Adjust to New Consumer Behavior
USAgNet - 07/02/2020

COVID-19 is dramatically affecting consumer habits and dairy supply chains as food service demand plummets and grocery sales surge. Consumers struggling with job losses and economic uncertainty quickly returned to buying basic dairy products like fluid milk, commodity cheese and butter.

A new report from CoBank's Knowledge Exchange indicates that consumer behavior will be different for the next 12 to 18 months than it was pre-pandemic, and as that behavior takes root, dairy supply chains will need to adjust from farm to fork.

"The dairy industry is coping with some new realities, largely driven by the decrease in food service demand and restaurant sales," said Tanner Ehmke, manager of CoBank's Knowledge Exchange. "The challenge for dairy supply chains will be adapting to focus on meeting demand trends based on evolving consumer behavior as we navigate through an uneven reopening."

As consumers heeded the stay-at-home advisories, they increased purchases of products that in recent years had fallen out of favor. Processed cheese sales increased by nearly 20% during the eight weeks ending May 31. White milk sales gained more than 10% during the same period. Cereal is also doing well with sales up almost 15%.

Even as restrictions have begun lifting, polling has shown widespread reluctance among consumers about immediately returning to normal activities like restaurant dining and business travel. In late April, a Business Insider poll found just 9% of Americans believed they would resume their routine exactly as it was before the lockdowns, with only 16% saying they would resume "almost all" of their activities.

At a minimum, it will take some time for sit-down restaurant traffic to look anything like it did before the pandemic. Forecasts from Open Table suggest that the U.S. could lose up to 25% of its restaurants.

Any structural reduction in restaurant sales has potential product mix implications for dairy processors and converters. For instance, firms that specialize in making or packaging products for food service accounts will need to retool, making different types of cheese or filling different-sized sour cream containers for at-home consumption.

Much of the price volatility experienced over the past 90 days has more to do with massive supply chain disruptions than major changes to aggregate demand and supply. Perishability played a big role in the upheaval. As demand spun toward retail, food service operators disposed of fresh products that now have to be replenished for reopening.

Some buyers are asking if suppliers can develop and provide extended shelf life alternatives. Movement in that direction would presumably help on the supply side, giving manufacturers and dairy farmers more supply cushion.

A world with more extended shelf life manufacturing options might mean less dumping of milk than took place in April. Business models may also be readjusted from just in time inventory practices to having more inventory stored in warehouses.

Grocers are also cutting down on product selection to enhance operational efficiency. Published reports say that the popular Wegman's supermarket chain, for example, has cut its offerings from about 52,000 products to 30,000 products.

Data from Nielsen shows that for the four weeks ending June 13, supermarkets carried nearly 7% fewer dairy items than the year prior. For dairy companies and other food marketers, that could mean fewer line extensions, fewer opportunities to differentiate, fewer chances to test new concepts.

As the economy reopens, potential changes in consumer habits, the level of social distancing that remains in place, and the level of disposable income will again reshape dairy supply chains long term.

Read the report, "Dairy Supply Chains Adapt as Consumers React to COVID-19," at cobank.com.


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