A shot across the bow deconstructing Dean Foods: Spinning-off organic / namebrand division (opinion)

Monday, January 24, 2011 by: Mark Kastel
Tags: Dean Foods, organics, health news

(NaturalNews) A version of the following commentary appears in the January 2011 edition of the Milkweed, a monthly dairy marketing report for farmers and others with an interest in the dairy industry. Visit: www.themilkweed.com

Make no mistake about it. As Calvin Coolidge put it, "The business of America, is business!"

Nowhere in the dairy industry has that philosophy been truer than the example of the dairy empire built by Suiza Foods Corporation CEO Greg Engels, now known as Dean Foods.

Dean's was just one of the numerous acquisitions Engels put together to create the largest dairy empire (enterprise) in the United States. Although accused of crushing competition, both on the retail level and at the farmgate (as evidenced in part by the recent $30 million settlement in favor of the Northeast dairy producers), my message today primarily concerns their investments in the organic industry.

Recent Dean history might prove the adage, "The bigger they are the harder they fall."

Dean Foods stock has been in free fall. Their stock lost 84 percent of its value since its peak in 2007. CEO Greg Engels was ranked 338th, out of 338 CEOs, in terms of wealth destruction, in a recent report by Chief Executive Magazine.

All this amounts to easy pickings for "bargain hunters" on Wall Street. Rumors have been flying, as reported in the Milkweed, that major food and dairy conglomerates, including Groupe Danone, are eyeballing Dean Foods, or selected assets, as possible acquisitions.

And that leads this discussion to Dean's branded products division, at WhiteWave.

WhiteWave is a weird conglomeration of organic, and formerly organic brands, along with disparate offerings such as International Delight nondairy coffee creamer (what we refer to in Wisconsin as: White Death). How can Dean executives look consumers square in the eye and profess their commitment to the environment and the healthy ideals of organic food while hawking a potion as damaging to human health as their imitation cream is beyond my imagination. But I digress.

In the middle of the 2000s, when the value of Dean Foods stock was hurting, and dairy producers were receiving recent record-high prices (Dean seems to only be able to excel when farmers are being screwed by low farm gate prices), CEO Engles passionately hung his hat on the "future" of the company within the WhiteWave portfolio, principally Silk soy "milk" and Horizon.

In a flip-flop, as the market for organic milk became glutted (due in part to factory farms that that Dean Foods invested in), and dragged down profit margins at WhiteWave, Engels was quick to tell stock analysts to quit focusing on Horizon, "organics are less than 3 percent of our business."

And in the next flip-flop, in what's beginning to look a bit schizophrenic, Dean Foods executives are now hyping the value of WhiteWave once again. Their acquisition in 2010 of Alpro, with five manufacturing plants in Europe, makes Dean/WhiteWave the largest soy foods marketer in the world.

Executives no longer refer to Dean Foods as a "dairy" business but rather as a "consumer packaged goods company." Maybe not surprising because few of them have any experience in dairy or organic industries.

For some time it had been rumored that Dean Foods was looking to either spin-off WhiteWave or sell the division outright. A few years ago the company announced completion of an initiative to separate the manufacturing, marketing and distribution functions of WhiteWave from the rest of Dean Foods. They named Joe Scalzo, formally with Gillette and Procter & Gamble, as the new operating unit's CEO. Everything was ready to pull the trigger on cashing out the WhiteWave assets.

That is, everything except pending legal action at the USDA that could have shut down the large factory farms producing Dean's Horizon milk, including one corporate-owned dairy, managing at the time approximately 8000-head of cattle, in desert-like conditions in Idaho.

Instead of seeing the writing on the wall, and looking for additional family farm milk to potentially phase out their vertically integrated milk production (an aberration in the dairy industry), Dean Foods announced plans to spend an additional $10 million upgrading their Idaho facilities to accommodate grazing (according to Cornucopia research and related formal legal complaints they had been illegally operating a confinement feedlot dairy).

Current and former Dean/WhiteWave employees now estimate the investment in their Idaho "organic" dairy as being between 20 and 22 million dollars (over and above their original cost basis). Even if consumers believe that operating an industrial dairy, with thousands of cows, isn't a betrayal to the values that the organic movement was founded upon, it's certainly questionable whether this facility can ever be operated profitably.

And now comes the warning. At The Cornucopia Institute, while acting as a corporate and governmental watchdog, we always say that the questions in this industry are about corporate ethics, not just about corporate scale.

Regardless of who purchases the Horizon organic label, and Dean's lesser-known organic brand, distributed in the Northeast, Organic Cow of Vermont, we sincerely recommend that they purchase "selected assets" of the operation from Dean Foods - without the white elephants - the corporate-owned Idaho dairy, a smaller corporate owned dairy farm in Maryland and a number of other certified organic "factory farms" that Dean Foods has either invested in or is leasing.

Consumers first come to organic food because they were looking for what they perceive to be safer and nutritionally superior food for their families. And there is now a growing body of scientific literature substantiating this perception.

But we know that the reason there is such little price resistance to the premiums in organics in general (organic milk sales increased by double digits in 2010) is that people think they are also doing something good for society.

Organic dairy customers think they are supporting a more ethical environmental approach, a more humane animal husbandry model, and they think that economic-justice for farmers is built right into the organic milk price.

So a new corporate parent could turn things around at Horizon. At least half of the milk right now, being packaged under Dean Foods' organic labels, comes from family-scale farmers. And we have no reason to believe they aren't every bit as ethical and authentic as the farmers shipping to other major brands.

The new owners might have to temporarily continue to purchase organic milk from the Dean Foods' dairies. But they can make it clear that they will put a program in place to help transition the brand to 100 percent, legitimate, organic farm milk. Then someone might have a winning investment in what is not just the largest organic dairy brand in the country but is the largest volume organic brand, period.

If this sincere advice is not heeded, investors will acquire not just a brand but an ongoing prairie fire that has made Dean Foods the pariah of the organic dairy business.


About the author:
Seeking economic justice for the family-scale farming community. Through research, advocacy, and economic development our goal is to empower farmers - partnered with consumers - in support of ecologically produced local, organic and authentic food. Learn more at www.Cornucopia.org