Question 1 (40 points)

Read the case below and complete an analysis of the industry environment for dairy product companies using the 5-forces framework. Analyze each of the forces to indicate whether they are high, moderate, or low. If no information is provided regarding a specific force, indicate this with no information. Which industry forces are supportive of higher profitability for dairy product companies? Which ones are working against the industry? Whats your overall conclusion about industry profitability?

Biggest U.S. Milk Company Dean Foods Files for Chapter 11 Bankruptcy

Dairy producer in talks about sale to Dairy Farmers of America

Dean Foods Co., the biggest U.S. milk company, filed for bankruptcy protection, a fresh setback to a U.S. dairy industry struggling against declining U.S. milk consumption and rising competition.

Dean and dairy farmers for years have grappled with consumers decades long move away from traditional cows milk, as beverage sales shift toward bottled water, fruit juices and milk alternatives made from soy and oats.

Within the milk business, Dallas-based Deans brands have struggled as grocery chains push low-price store brands and in some cases build their own milk plants, reducing their reliance on Dean. A recent jump in milk prices, up 10% over the past three months, boosted costs while Dean has worked to close plants and reduce expenses. The company said it has secured financing to continue operations and pay employees while it discusses a potential sale to Dairy Farmers of America Inc., the largest U.S. dairy cooperative.

Despite our best efforts to make our business more agile and cost-efficient, we continue to be impacted by a challenging operating environment marked by continuing declines in consumer milk consumption, said Eric Beringause, Deans chief executive, who joined the company in July as its third CEO in three years.

Evaporating Milk

Sales of traditional cow's milk have declined, while consumers spend more on other beverages, such as soy- and almond-based milk alternatives.

*Yearly ending in October.

Source: Nielsen

Dean operates about 60 dairy processing plants in 29 states, a network it built through years of acquiring regional dairy companies to become the top U.S. milk processor by volume. The company, which supplies restaurants, supermarkets and schools and also sells ice cream and creamers, traces its history back to 1925, when Samuel E. Dean Sr. acquired a northwestern Illinois evaporated milk plant.

Dairy Farmers of America, which represents about 14,000 dairy producers, has been closely tracking Deans financial situation and has financially prepared for the companys bankruptcy, said Monica Massey, executive vice president of the Kansas City-based cooperative. Dean Foods is integral to the dairy landscape and our largest customer representing more than 20% of DFAs raw milk sales, she said.

For years Dean has tried to shrink its network and in March estimated its head count at 15,000, down from about 23,000 a decade ago. The companys efforts to close underperforming plants and cut costs havent been able to keep up with declining sales, however, as big retailers like Kroger Co. , Albertsons Cos. and Walmart Inc. one of Deans biggest customershave opened their own plants to supply their store-branded milk.

Cheap milk is a tool for many retailers to draw customers, pressuring margins for Dean, which has invested heavily in its national DairyPure brand. Most consumers view milk as a set of commodity products, ranging from the standard whole milk, 2%, 1%, and fat free, allowing

U.S. consumers in 2018 drank 146 pounds of milk on an annual per capita basis, according to U.S. Department of Agriculture datathe lowest level since the agency began keeping records in 1975 and down 39% over the past 40 years. Overall U.S. dairy consumption has grown by nearly one-fifth over that period, however, as consumers buy more yogurt and pile more cheese onto pizzas.

Tanner Ehmke, manager of knowledge exchange at agricultural lender CoBank, said consumers arent totally abandoning milk, with some purchases shifting toward organic and ultrafiltered varieties. But the days of the gallon-size plastic jug as a staple in U.S. refrigerators are fading, he said. Theyre not pouring milk on their cereal anymore; theyre having a power bar instead, Mr. Ehmke said.

Dean Foods said Tuesday it would use the bankruptcy process to address its debt and unfunded pension obligations while it pursues a sale. Bankruptcy could also help Dean close more plants, though previous closures led some Dean customers to complain last year about shortages and late deliveries. Some grocers drew up contingency plans in case Dean sold off operations or faced other problems.

For dairy farmers like Brent Pollard, the tumult around Dean adds more uncertainty to an agricultural sector where profits have been slim and bankruptcies have been on the rise, due to low prices and high supplies. Wisconsin, the second-largest milk-producing state, lost more than 800 milk-cow herds over the past 12 months, according to USDA figures from October.

Though Mr. Pollard hasnt marketed much of his milk to Dean, he said its struggles would send a ripple through the industry. Whenever we as farmers lose a potential market or buyer for our milk, thats a bad thing, he said.