AUTHOR Lillianna Byington@lil_byington

November 12, 2019

Dive Brief:

• Dean Foods, the largest dairy producer in the U.S., filed for Chapter 11 bankruptcy on Tuesday. The company also said it is in "advanced discussions" with Dairy Farmers of America, Inc. for a potential sale.

• The dairy producer said in a release it intends to use this process to support its ongoing business operations and address debt while it works toward selling the company. Dean Foods has secured commitments for $850 million in debtor-in-possession financing, which is funding for companies in financial distress.

• "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," Dean Foods' CEO Eric Beringause said in a release.

Dive Insight:

Just two months after Dean Foods completed a strategic review and decided against a sale, the company is reversing course.

After a seven-month review, the dairy producer's Board of Directors decided in September to trust in its new CEO to turn the company around, saying Beringause would "provide the best opportunity to enhance long-term shareholder value." This was a lot of pressure for Beringause, who became CEO in July and inherited a troubled company.

Despite Beringause's extensive experience in the food and dairy industry, it seems he decided the problems facing Dean Foods were too large to tackle. 

"Since joining the company just over three months ago, I've taken a hard look at our challenges, as well as our opportunities, and truly believe we are taking the best path forward," Beringause said in the release. 

This filing for bankruptcy doesn't come as a shock, considering the years of struggle the dairy giant has had amid competition from milk alternatives and deeply discounted private label dairy.

Dean has tried many methods to improve its position, to no avail.  Dean Foods has reported net losses in seven of its last eight quarters. In an attempt to overcome these hurdles, the company cut costs, increased its borrowing base and replaced its CEO. Last year, Dean Foods laid off 207 workers with the closure of two milk processing factories, ended more than 100 dairy contracts with the company to curtail how much milk it was buying and closed three other facilities. 

Although food and beverage companies face financial turmoil, few file for bankruptcy. With this filing Dean joins companies including Hostess, which, under previous configurations, has filed for two Chapter 11 bankruptcies and a Chapter 7 bankruptcy. Atkins Nutritionals, Pure Foods and Groeb Farms have also filed for bankruptcy. Analysts have said the diversified portfolio of brands at most food companies can help a company in financial trouble avoid bankruptcy because there are opportunities to raise cash through asset sales.

That strategy didn't work for Dean, which has tried to diversify its portfolio during the last several years. As dairy, in general, continued to decline, Dean diversified its investments. The company purchased a majority stake in Good Karma Foods, which sells flaxseed-based milk and yogurt. It bought Uncle Matt's Organic, a maker of probiotic-infused juices and fruit-infused waters. It also acquired the retail ice cream business of Friendly's Ice Cream. But those moves have not been enough since the company is now working toward a sale of "substantially all assets."

One of the reasons Dean decided to stay independent after its recent strategic review could have to do with its lack of interest from potential buyers. Rumors that Saputo was looking at buying the company were squashed when the CEO told Bloomberg months later he wasn't interested. But now the company says it is in advanced talks with Dairy Farmers of America, which means that a deal could be close. 

The dairy co-op could be buying Dean at a good price. Dairy Farmers of America, a co-op with 14,000 dairy farmer members with 47 plants nationwide, is accustomed to the troubles of the dairy industry today. The co-op was formed 21 years ago, and last year's net sales were down $1 billion from 2017. 

If Dairy Farmers of America does buy Dean Foods, it will likely face similar struggles. Plant-based dairy alternatives have jumped in popularity across the country, hurting farms and milk producers. U.S. non-dairy milk sales were up 61% over the past five years, while dairy milk sales plunged 15% from 2012 to 2017, according to Mintel. Just last month, Dean Foods gave up its membership in the International Dairy Foods Association because it said the trade group doesn't share its key priority of opposing the labeling of plant-based products with dairy terms. 

Looking to the future, it seems like the dairy industry's problems are on track to continue. Dean's move for bankruptcy — and potential sale — is its way out.

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Photo - Credit: Dean Foods