Dairy industry examines shifting prices' toll on sales

By CAROL RYAN DUMAS
Capital Press

With retail milk prices up significantly in 2007 and 2008, Dairy Management Inc. wanted to understand how those increases impacted overall milk sales.

Manufacturers and retailers typically pass price increases on through infrequent but large price increases, gradual price increases spread over time or a combination of both.

In order to determine which method impacts milk volume sales the least, DMI turned to data from Information Resources Inc. It found that milk pricing is more volatile than total food and beverage pricing.

During the recent price inflation, all food and beverage sales leveled off due to the economy, said Todd Dittman, Dairy Management's vice president of business development and management. But milk sales came down faster.

Milk prices in September 2008 averaged 28 percent above September 2007. Total retail milk prices were up 15 percent for the 52 weeks ending August 2008 compared with year earlier prices. Retail sales for that same period were down 3.8 percent. Promotional activity also dropped.

Dittman said the increase in all retail product prices made consumers more aware of their overall spending.

"But milk is not as sensitive to price as some other products," he said.

A 10 percent price increase for a gallon of milk in 2007 and 2008 translated to a 5.6 percent decrease in sales. Because the change in volume was proportionately smaller than the change in price, total overall revenue increased.

The data also showed that branded gallon milk sales are more price-sensitive than private label sales.

"The first thing (consumers) do is trade down in brand, not size," Dittman said.

The analysis found branded milk lost 7.7 percent in sales volume after a 10 percent price increase, while private labels lost about 5.1 percent. Branded milk buyers traded down to private label milk, and private label gallon buyers traded down to half-gallons.

But because prices were higher, those total sales increased revenue by 1.5 percent and 4.2 percent, respectively.

"Pricing is not taken lightly at the retail level," Dittman said. Retailers use dairy as a draw and carefully analyze what to charge.

DMI determined price increases of milk in the retail sector are best managed with a gradual strategy: smaller, more frequent increases.

Comparing the three methods of passing on price increases to consumers, assuming aggressive marketing, base volume sales in branded milk during that period decreased 7.8 percent with fewer, larger price increases, 6.2 percent with moderate price increases, and 3.5 with frequent, smaller increases. In private label milk, sales decreased 2 percent with fewer, larger increases; and actually increased 0.4 percent with moderate price hikes and increased 0.5 percent with frequent, smaller hikes.