2022 FCC Food Report: Exploring dairy products

3.5 min read

This information is shared from the 2022 FCC Food Report — highlighting the opportunities and challenges for Canadian food manufacturers by industry. To get the bigger picture — read the full report.

Introduction

Dairy product revenues grew in 2021 but were lower than anticipated due to softer demand. Revenue gains in foodservices outweighed declines from retail. The progressing rebound in restaurant and hospitality demand is forecast to support growth in 2022. Higher prices will help, but we’re anticipating softer grocery volumes. In the face of inflation, the growing threat of alternative dairy products like oat and almond milk should be monitored as they expand their offering into value-added products.

Industry sales grew 0.8% in 2021 YoY (Table D.1). Higher prices drove growth as volumes are estimated to have decreased slightly. Demand remains strong for products like creamers, ice cream and cheese and these will likely be the drivers of growth in 2022.

The industry has historically been very efficient with labour; however, 2021 was trying. A tight labour market meant longer hours worked per employee and higher overtime costs, eating into profitability.

Table D.1: Moderately higher prices drove sales growth in 2021

Sources: Statistics Canada, FCC Economics

Gross margin

Gross margin as a percent of sales decreased in 2021 on higher labour and material costs (Figure D.1). The industry has historically struggled to pass on cost increases and 2021 was no different. Over the past 20 years, only 2017 saw lower margins. Plastic packaging and paperboard container costs increased an estimated 19.4% and 14.5% YoY in Q4, respectively. Hourly wages remained elevated in 2021 (down versus 2020 but up 19% versus 2019) and employees also worked more hours, driving up labour costs. The 2022 outlook for margins rests on the processors’ ability to pass on the higher farmgate milk price.

Figure D.1: Margins have steadily declined as the industry expands into higher volume, lower margin categories

Sources: Statistics Canada, FCC Economics

Sales forecast

FCC Economics projects sales to increase 3.5% in 2022. This growth will be driven by foodservice re-opening, inflation and continued demand for value-added dairy products like cheese and butter. The second half of the year is projected to see the strongest growth YoY given its weaker performance in 2021 versus other quarters.

Dairy retail inflation has historically been lower than most products. This is unlikely the case in 2022. The farmgate price of milk components increased in February as producers recorded higher feed costs at the farm level. Higher prices of dairy products at the manufacturing and retail levels would influence the relative prices of animal proteins consumers face and perhaps lead to shifting consumer behaviour.

Figure D.2: Dairy product sales expected to increase 3.5% in 2022

Sources: Statistics Canada, Barchart, Moody's Analytics, FCC Economics

Grocery report

Dairy products sales at Canadian grocery stores were up 1.0% in 2021 YoY and volume fell 3.3% (Table D.2). For many core categories, sales growth was modest. Fluid milk sales declined 1.0% and cheese sales increased 1.6%. Sales growth would have been lower if it weren’t for inflation. Milk volume sold declined 4.4% and cheese volume declined 1.7%. Coffee creamers were the top growing item for the second year in a row and markets recorded an increase in holiday drinks like eggnog as people gathered for the holidays.

Alternative dairy beverages (soy, almond, oat, etc.) performed well relative to traditional dairy, with sales increasing 3.2% and volume increasing 2.3% in 2021 YoY. FCC Economics estimates the share of alternative dairy beverages is 12.7% of traditional and alternative dairy market. Alternative dairy beverages are on average 35% more expensive per litre, although the price gap has been narrowing. Enhanced milk like high protein, lactose-free, and vitamin rich milk is also growing strong, but from a smaller base. These products offer the dairy industry a growth opportunity through target marketing.

Table D.2: Creamers and yogurt led dairy grocery sales growth in 2021

Source: Nielsen

Bottom line

Monitoring consumption habits and costs will be key to success. Evolving demand from foodservice channels and for value-add dairy products provide optimism. Keep an eye on growth in alternative beverages and consider strategies to maintain market share. Increasing input costs and inflation will impact gross margin in the year ahead.

Food & Beverage Economic Trends