Where next for dairy milk? Value-added products drive future of the category, says DMI

By Mary Ellen Shoup contact

- Last updated on GMT

Photo Credit: Getty Images / Rawpixel
Photo Credit: Getty Images / Rawpixel

Related tags: fluid milk, Dairy milk

While fluid milk consumption has been declining since the 1970s, US retail sales rose 7.1% last year (52-weeks ending Jan 2, 2021, according to NielsenIQ Total U.S. xAOC data). However, is this trend indicative of an actual revitalization of the $15.1bn category, or is it no more than a COVID-induced blip?

The decline in fluid milk consumption over the years has been driven by a combination of factors with the main reason being, consumers are consuming other products in place of fluid dairy milk, said Paul Ziemnisky, executive vice president, global innovation partnerships at Dairy Management Inc. (DMI).

“Really what’s taken away from fluid milk is the dramatic innovation and investment in water and coffee,”​ Ziemnisky told FoodNavigator-USA.

The other piece, he said, is the continued decline of conventional low-fat and non-fat milk (which still accounts for several billion dollars in sales) – the only segment of the fluid milk “that’s really hurting.”

According to USDA ERS data for the 2020 year up to August, commercial sales of conventional low-fat (1%) milk and non-fat skim milk declined 4.3% and 14.1%, respectively. Whereas, whole milk experienced a 4.1% sales increase over the same time period.

And while the fluid milk category was largely impacted by restaurant and school closures (-21% in volume), retail – which accounted for 75% of the milk volume sales in 2019 – grew by volumes by 2% in 2020.

Ziemnisky noted how elevated at-home consumption of milk (e.g. cereal, coffee, baking) was a strong contributing factor of increased dollars sales for fluid dairy milk.

Historically, 30% of milk sales have been tied to cereal consumption (which had been a sleepy category up until March and April of last year). According to IRI data (total US Multi Outlet + Convenience) for the weeks of 3/15/20 and 3/22/20, US milk and cereal sales surged to near identical levels (see chart provided by DMI below).

According to a report​​​ from the USDA's economic research service (ERS), the increase in sales of plant-based milks over 2013 to 2017 was one-fifth the size of the decrease in Americans’ purchases of cow’s milk.

"Therefore, sales of plant-based milk alternatives are contributing to—but not a primary driver of—declining sales of cow’s milk."

Biggest growth opportunity: Value-added milk

Ziemnisky said the largest opportunities for growth in the category are in the segment of value-added milk products (e.g. ultra-filtered, high protein, lactose-free) that are carving out new niche spots in a consumer’s day.

 “When you’re in 94% of households there’s only a few ways to grow (i.e. driving new usage occasions),” ​said Ziemnisky.

Ziemnisky said that the fluid milk category is branching off into several successfully-growing offshoots such as minimally-processed dairy creamers and coffee additives, ultra-filtered premium milk (e.g. Fairlife), full-fat, lactose-free, hybrid dairy and plant-based blends, and indulgent offerings.

Value-added innovation in milk

milk innovation
milk innovation 2

Between 2015 – 2018 incremental consumer spending to this area of premium milk innovation was up $250m, and has continued to grow into 2021.

The top performing brands in dollar sales growth for the past five years have been: Fairlife (+$437m), Almond Breeze (+291m), Lactaid (+$227m), private label plant-based alternatives (+$187m), and Horizon Organic (+$104m), according to IRI data tracking dollar sales growth.

In absolute dollar sales, value-added milk edged out plant-based milk alternatives ($847m vs. $839m).

“We know there are opportunity spaces to grow, and you’re going to see an evolution into these value-added innovations,”​ said Ziemnisky, who said that brands that can market to specific usage occasions and functional benefits are poised to capture consumer spending.

Gen Z consumers are also driving much of the innovation for value-added milk products (mostly where milk is used as an additive rather than a feature such as in ready to drink coffee).

“Long-term, you’re going to see coffee continue to grow, and you’re seeing that being moved into the younger generation (who are viewing dairy-based beverages as a 'reward'),”​ said Ziemnisky.

 Milk as an ingredient in foodservice

“Milk in foodservice is growing. The bigger growth is as an additive,”​ noted Ziemnisky.

In 2019, 25% of fluid milk volume sales came from the foodservice channel (including schools), where demand for milk as a beverage has declined (-$9.6m since 2016).

However, as an ingredient in beverages and food items, milk has gained ground and generated nearly $50m in additional sales between 2016 and 2019.

Through its Dairy Checkoff program, DMI has partnered with the likes of McDonald's and Pizza Hut over the past few years to develop new menu items using milk as an ingredient.

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