Food wholesaling is a tricky business.
On the raw materials side are commodities prices -- grains,
meats, dairy -- perpetually driven by factors like weather and
speculative investors. On the end-market side are retail prices,
forever changing to meet consumer's tastes and spending trends.
The combination of drought and recession over the past few years
has made the challenge particularly complex.
During those years, wholesalers have worked to retake a
measure of control by pursuing new levels of "value-add," the
process of improving or altering foods to make them more tasty or
convenient. No one seems to have figured that out quite likeGreen
Mountain Coffee Roasters (
). And no one seems to have wrestled with the process quite like
dairy industry heavyweightDean Foods (
Capitalizing On The Buzz
Since it bought Keurig seven years ago, Green Mountain has
become an industry leader by selling the single-cup brewing
devices along with its specialty coffees, under its own brand
name as well as under acquired names like Tully's, Diedrich and
On top of that, Green Mountain's is in a pricing sweet spot.
Prices for Arabica beans, those most commonly used by top
roasters, recently hit a 3-1/2-year low. The reason: Brazil,
which supplies about a third of the world's beans, has been
producing record crops.
Meanwhile, demand has continued to grow. A survey released in
March by the National Coffee Association reported that 83% of the
adult population of the U.S. drinks coffee, up five percentage
points from a year ago. Daily coffee drinkers held steady at 63%
of the populace.
Significantly for Green Mountain, 82% are aware of single-cup
brewing devices like the Keurig, up from 71% last year. Thirteen
percent drank a single-cup product the day before, up from just
4% three years earlier.
"You'll see a package of Folgers coffee falling in price as a
result of lower input costs, but we haven't seen any material
change in the pricing of K-cups," Scott Van Winkle, analyst with
Canaccord Genuity, told IBD. "Demand is strong."
This has helped drive up Green Mountain's margins, which hit
14% after taxes in the most recent quarter.
Fly In The Organic Ointment
Green Mountain shares are up almost 90% so far this year, and
have played a leading role in lifting the Food-Wholesale group
into the top 30 of IBD's Industry Group rankings.
Other stocks in the group, from commercial food products
) to cigarette and snack wholesalerCore Mark (
), have faced a more difficult pricing environment.
One of the big food stories of the last decade has been the
mainstreaming of organic and natural foods, which for a time
turned distributorUnited Natural Foods (
) into a leading stock.
Van Winkle says investors have been disappointed at how thin
United Natural's margins have remained even as it's turned out
consistent topline growth in the teens.
The company has a much more diverse product mix than a
specialist like Green Mountain, but it has been stymied by, among
other things, the Federal Reserve's strategic effort to tamp down
the inflation rate. Van Winkle says distributors normally pass
inflation increase through to their customers, increasing their
margins in the process.
Van Winkle expects the natural-food industry to continue to
grow 10% a year, a modest rate, but still ahead of the industry
as a whole.
A rising number of grocery chains, includingWhole Foods
Markets (WFM),The Fresh Market (TFM) and privately owned Trader
Joe's, are in hot pursuit of the trend. Traditional grocery
chains are also rapidly expanding natural and organic offerings.
All of this means more business for the industry's wholesale
The cultural shift also drove Dean Foods' recent decision to
spin off its organic/vegan divisionWhiteWave (WWAV).
Facing Udder Failure
Dean Foods is the heavyweight in the very small Food-Dairy
Products industry group. The group's six stocks have a combined
market capitalization of $14 billion, less than half that of the
Wholesale Foods group and in the smallest 15% of the 197
industries tracked by IBD.
But Dean Foods also occupies a niche between producers and
retailers, buying milk and dairy items and turning them into
products sold as Alta Dena, Berkeley Farms, Garelick and many
Dean Foods was a leading stock in the middle of the last
decade. But the recession hit it hard.
Morningstar analyst Erin Lash says that even when commodity
milk costs are low, retailers under competitive pressure often
cut their milk prices to help drive volume through their
During lean times, customers also often trade down to
To make matters worse, major drought's last year hit the U.S.
as well as New Zealand, the world's largest dairy exporter.
Drought pinches grain supplies and boosts the cost of cattle
feed. More expensive cattle feed leads to pricier milk.
Drought also forced mass reductions in dairy herds in the U.S.
and New Zealand. Fewer cows mean less milk. Less milk means
These and other problems helped drive Dean Foods deep into
Fortunately, the company had built up several leading brands
in growing niche markets, including Horizon Organic milks, the
Silk brand of soymilks and the popular Morningstar brand of
meatless burgers and sausages.
Dean agreed to sell Morningstar to Montreal-based Saputo late
last year. It then bundled together Horizon, Silk and a couple of
other brands into WhiteWave.
The company spun off part of WhiteWave in an IPO last October,
and distributed another large chunk of shares in May, bringing
Dean's ownership down to 20%. It plans to halve the rest of the
company sometime in the next 18 months.
Lash says such changes are aiding the recovery in Dean's stock
price, but over the last year the company also has said it sees a
longer-term stabilization in the pricing environment. As a
result, despite the fact that it has practically no sales growth
at this point, Dean's shares are up 32% so far this year. That,
and a 96% advance by the thinly tradedLifeway Foods (LWAY),
lifted the dairy group to a No. 21 ranking on Friday among the
industries tracked by IBD.
Weaning Of WhiteWave
WhiteWave, in spite of the optimistic name, hasn't done as
well since its initial offering. Sales growth has held in the
double digits. But earnings have declined for three straight
quarters, and the stock ended Friday just even with its October
IPO price. Lash, however, believes investors in WhiteWave may yet
benefit from a future buyout, perhaps byDanone (DANOY), the
French giant of the industry.
The remainder of Dean, meanwhile, is mostly dependent on the
highly commodified fluid-milk space. As always, the market
depends on factors outside the company's control.
"We're in the midst of the planting season with regard to
grains, which could have an impact," Lash said. "Dean has talked
about the fact that they don't expect retailers to use milk to
drive traffic like they did a few years ago, but that's always a