While exports grew to record levels in 2022, consumption in the U.S. domestic market still accounts for over 80% of the demand for U.S.-produced milk and dairy products, notes Peter Vitaliano, the National Milk Producers Federation’s (NMPF) vice president of economic policy and market research. One of the key factors affecting the state of dairy in 2023 is domestic demand and the role inflation has on retail sales.
“Inflation continues to be a significant concern for shoppers in the new year,” says John Crawford, vice president of dairy client insights at Information Resources Inc. (IRI). “Despite some signs of moderating in areas of the perimeter like produce, meat and seafood, cost of sales remains consistently high.”
Based on the latest consumer price index (CPI) data from the U.S. Department of Labor’s Bureau of Labor Statistics (BLS), the inflation of dairy products has outpaced that of all food for several months. Compared to a year earlier, the monthly CPI for all food was up an average of about 10.4% for November 2022-January 2023. During the same period, the average dairy product CPI index was up about 15.2%. Looking at individual categories, the November-January CPI index increases averaged 11.5% for fluid whole milk, 12.1% for cheese and 28.2% for butter.
In late 2022, ag and consumer economists Maria Kalaitzandonakes and Jonathan Coppess from the University of Illinois and Brenna Ellison from Purdue University summarized consumer surveys on how rising food prices affected food purchasing decisions. The summary looked at various coping mechanisms (i.e., buying cheaper or store brands, shopping at multiple stores, changing food types, etc.) used by consumers to reduce food costs.
They also analyzed the proportion of consumers who said they decreased purchases of specific food categories due to higher prices, finding variation among those based on food security status. For example, about 25.9% of consumers with high or marginal food security status had reduced dairy purchases, while about 44.8% of those with very low food security status had reduced dairy purchases.
Private-label sales stronger
IRI’s Crawford also sees changing purchase patterns. “As consumers look to save money during these pressured times, they will exhibit various value shopping behaviors to reduce spending, such as switching to private label brands, trading out of expensive food categories and consuming more at home versus away from home,” he says.
“Private-label” products are those frequently labeled and marketed under a retailer’s name, usually at a lower cost and differentiated from “branded” products labeled and marketed under the manufacturer’s name.
Crawford says that in early 2023, private-label sales are outpacing sales of branded products in 13 of the 15 categories that IRI tracks in its Dairy15 report.
“That completely reversed the trend seen in 2021, when private labels outpaced brands in only four categories. This trend indicates consumers' growing acceptance and trust in private-label products. It is worth noting that private-label use is likely to remain elevated in select categories where consumers are familiar with it, but it is unlikely to make further inroads in areas where brands are strong. This is because consumers tend to have strong loyalty and trust in certain brands, especially in categories where quality and taste are important factors,” Crawford says.
Despite the challenge of inflation, the consumer packaged goods (CPG) retail industry continues to be less volatile and more resilient in economic downturns than other sectors. This is because consumers tend to pull back from discretionary spending first during times of economic decline, meaning that necessities like food products are less affected, Crawford explains.
Dairy sales remain strong, says Pete Kappelman, Land O’Lakes senior vice president of member and government relations. “We’re continuing to see demand for dairy throughout our retail and food service sectors,” he says. “This means consumers and customers are asking about new products. Butter is all over social media and we’re reaching new audiences. We are excited to see that demand continue into this year.”
Positioning for future trends, consumer demands
What must dairy do to position itself for future trends?
“Promotions will play a more significant role in the dairy industry in 2023 as brands that took considerable price increases in 2021 and 2022 will be reluctant to take price decreases, choosing instead to deal back margin in promotions,” Crawford says. “Expect 2023 to be the year of promotions as brands try to attract consumers with discounts and deals.”
However, brands must be careful not to rely solely on discounts and promotions to attract consumers, he warns. “They will also need to create value through high-quality product offerings, packaging, marketing strategies and availability,” Crawford says.
“Producers, retailers and brands can find success this year by adopting a strategic approach to identifying and adapting to changing consumer shopping behaviors, price inflation and potential disruptions in the supply chain. To meet consumer demand and capture growth now and in the future, the industry will need to focus on innovative products that balance premium experiences, better-for-you claims, taste and convenience.”
Daniel Munch, an economist with the American Farm Bureau Federation (AFBF), sees plenty of domestic opportunities for dairy ahead. This growth will come as smaller, specialty farms fully capture the essence of regional markets and benefit from niche marketing and high-end product lines, and as broader product innovation fills the ever-growing interest in fitness, protein and health.
