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How important can one contract be? According to Dean Foods, enough to shock the system.
The company announced fourth quarter earnings Wednesday and said that after losing a portion of its private label milk business with one customer, it would close 10 percent to 15 percent of its plants in 2013 to make up for the expected loss in revenue.
CEO Gregg Tanner told analysts on a conference call that two of the plant closures already had been announced, including the Garelick Farms plant in Maine, with more announcements ahead.
“We have grown share over the past two years,” Tanner said, according to transcripts of the call from Seeking Alpha. “However, business in our industry is regularly put out for bid. In a recent bid by a significant customer, we lost a portion of our low-margin, private label milk volume. As a result, we expect our volumes to underperform the industry in 2013. We believe this volume loss was a result of strategic sourcing decisions by the customer, as well as pricing discipline on our part. We feel very good about the business we kept with the customer.”
Tanner said total volumes were expected to decline in the low single digits because of the contract loss.
“We will also continue our focus on cost, taking advantage of our unique position and cost reductions opportunities to create a significantly advantaged low-cost position in private label milk,” he said, according to the transcripts from Seeking Alpha. “This is our No. 1 near-term priority.”
In the question-and-answer portion of the call, Tanner made the point more directly.
“I think the biggest thing is being the low-cost provider,” he said. “We’re going to assure ourselves that we’re the low-cost provider, no matter how, or whether it’s in the private label business or the branded business.”
Pressed on the point, Tanner hedged, saying that cost was not the only factor in the contract loss.
“I don’t think that you can draw the conclusion that we were not the low-cost bidder mainly because this was set up as a regional bid, and there was strategic decisions that were made by the customer to try to segment their business further,” he said.
He re-visited the point again later.
“The one clarification I would provide you is we are confident that we are the low-cost producer, and I would also tell you that doesn’t necessarily mean we will be the low-cost bidder in there, that there’s a very clear differentiation there,” he said.
Tanner said the private label portion of Dean’s fluid milk business was about 65 percent to 70 percent of its sales, with its branded share of business as high as it has been in three years.
“I believe that our branded business is in good shape,” he said. “I think we’ve got the pricing that we need as an organization, and I think our private label business is – I mean, it just hasn’t changed a lot over the last … probably four, five years.”