Dean Foods (NYSE: DF), America's largest dairy producer, filed for Chapter 11 bankruptcy as its fortunes are fading due to slowing demand and rising costs as Americans' taste buds change. Some of Dean Foods' notable brands include Dairy Pure, Organic Valley, and Land O' Lakes Milk. The company is working with the Dairy Farmers of America cooperative on a potential deal in which the coop would take over the company's operations while paring its liabilities.
In the meantime, the company has been able to secure funding to continue operations, while it works its way through the bankruptcy process. Nevertheless, given the company's massive debt load, its equity is already essentially wiped out, and debt holders are expected to take a significant haircut. Currently, its stock is trading for around 12 cents on the pink sheets. The stock opened the year around $4 and was over $20 at the beginning of 2017.
Another challenge for Dean Foods beyond falling demand for its primary product is its massive liabilities. Partly it's due to the capital-intensive nature of producing milk. It's a low-margin business that only works at high volumes due to economies of scale. Another factor is that due to its age, the company had a heavy pension load.
Despite these challenges, the company had managed to survive and thrive for decades due to the increasing demand for milk. As long as demand grew, the company was able to produce more milk and achieve efficiencies to drive down per-unit costs.
The dropping demand kickstarted a negative spiral for the company. Less demand resulted in lower prices. It also meant lower production which led to increased per-unit costs. Basically, fixed costs remained the same, while variable costs climbed.
Another new challenge this past decade was the increasing consolidation in groceries. This led to retailers having more leverage to negotiate lower prices. Additionally, the share of groceries sold by corporations as opposed to mom-and-pop retailers also climbed. Companies like Walmart (NYSE: WMT), Target, (NYSE: TGT), Dollar General (NYSE: DG), and Dollar Tree (NYSE: DLTR) are increasingly dominating the sector.
So far this year, sales are lower by 7%, and profits are down by 14%. This continues a trend of falling sales over the past few years as milk consumption in America has declined by 2% on a year-over-year basis over the last decade. In its place, alternatives to milk are becoming more popular as that category's sales are increasing by 9% on an annual basis. Notably, Dean Foods completely missed this trend.
Overall, the combination of massive liabilities, falling demand, and a more competitive landscape killed Dean Foods. In hindsight, the company was always in a tough business, but this was masked by Americans' consistently increasing demand for milk which led to higher prices and lower costs.