Private label sales’ continuing disruption of its core markets sent Dean Foods Co. to a fourth-quarter loss from year-ago profit, company executives say in its latest quarterly earnings conference call. The milk producer sees signs of stabilization – and continuing challenges -- ahead for the industry.

“Throughout the year, our core dairy business was faced with highly promotional retail pricing, wholesale price pressure, weak consumer demand and volatile commodity prices,” says Gregg Engles, chairman and CEO. “The use of private label milk as a loss leader to drive store traffic has proven highly disruptive for the processing industry.”

Dean Foods posted a loss of $20.7 million, or 11 cents per share, for the quarter, compared with year-ago earnings of $50.3 million, or 27 cents per share.

Given unusually low private label pricing, price gaps with Dean’s regional brands widened, and “cash-strapped consumers traded down to private label,” says Engles. That gave retailers leverage to push suppliers for lower prices. As a result, Engles says, processor margins on private label milk declined meaningfully.

Some signs indicate the milk category is stabilizing, the company says, although at historically low levels of profitability. Retailers are reducing promotions on private label milk and the company's own regional branded milk sales volume beat private-label sales in the latest quarter, it says.

“As retailers have taken early steps to reduce heavy private label promotions, our regional brand volume mix has begun to stabilize. Private label wholesale prices appear to have stopped declining, although we have not yet seen them rise,” says Engles. “Volume, however, remains weak, which we believe will limit upward price mobility.”

Dairy commodity prices should climb though the first half of the year before flattening out or declining slightly in the second half, the company believes. But because overall volume remains weak, its ability to raise prices to pass along with those higher costs will be limited.

“In fact, there is more excess capacity today than there was last quarter because the volume in the category was down 2.5 percent in Q4. And that is going to constrain the ability to restore pricing in that private label arena,” Engles says.

Excluding litigation costs, restructuring charges and other one-time items, the company earned 15 cents per share versus 32 cents per share in the prior year.