Wal-Mart Stores, Inc. (NYSE:WMT) is entering the milk production business. The global retail giant announced it will create a private-label milk that will be sold at 600 stores. This news affected some suppliers, including Dean Foods Co (NYSE:DF), which saw its shares slide 10 percent after the news made headlines.
Wal-Mart Stores, Inc. Foray Into Milk Hurts Suppliers
Would you drink milk made by Wal-Mart? The retailer is hoping U.S. consumers will.
Wal-Mart confirmed that it will construct a 250,000-square-foot dairy processing plant in Indiana. This facility will supply private-label milk to around 600 stores. Its milk will be sold beginning in 2017 to around 600 Wal-Mart and Sam’s Club stores in Illinois, Indiana, Michigan, Ohio and Kentucky.
As the company begins to produce its own milk, Wal-Mart will start to minimize business with several suppliers. The insourcing milk move would likely lead to additional savings, which would then be passed onto the customers.
“By operating our own plant and working directly with the dairy supply chain in the Midwest, we’ll further reduce operating costs and pass those savings on to our customers so that they can save money,” said Tony Airoso, senior vice president of sourcing strategy for Walmart U.S., in a statement.
However, one of the most affected supply firms will be Dean Foods.
Dean Foods said in a securities filing this week that the move will lead to the reduction of 100 million gallons of “very low-margin private-label fluid milk volume” as of late 2017. Despite the bad news, Dean Foods doesn’t expect any significant impact on the supply of its own national brands. Nonetheless, its shares tumbled 10 percent when the news broke.
Morgan Stanley analysts did release a report that urged caution. It put forward an $18 target price, and called for a more than six percent downside potential from the $19.24 closing price Monday. After the report was published, there were huge trading volumes. Around 11 million shares exchanged hands, which is much higher than the three-million daily average.
Wal-Mart did try to put investors’ minds at ease. It said that Dean Foods will still supply milk for its milk and chocolate milk Great Value and Member’s Mark private labels. These would be stocked at the other Wal-Mart and Sam’s Clubs stores elsewhere across the country.
This comes as milk prices are expected to decrease 12 percent in 2016 year-over-year.
Wal-Mart Stores, Inc. Looking For Savings
The retailer made headlines earlier this year when it was reported it was shutting down 269 stores. The move comes as it faces growing competition in the retail landscape. Ultimately, Wal-Mart is looking for some savings, which can then lead to lower prices for customers.
Wal-Mart has seen parts of its business weaken in recent quarters. One area of its business that needs a makeover is its grocery section.
Since its grocery business accounts for more than half of its sales, Wal-Mart has been finding ways to improve its grocery selection. However, customers are still dissatisfied as they continually post negative reviews. The common complaints include poor service, empty shelves and a lack of fresh produce.
Moreover, its market share in this realm has slipped. The likes of Publix and The Kroger Co (NYSE:KR) have been aggressively improving its grocery business. The way it’s achieving this is by stocking organic products, putting out more prepared food and showcasing fresh produce.
The one thing that Wal-Mart holds over its rivals is lower prices. The data suggest that grocery prices at Wal-Mart are as high as 15 percent lower than those of Kroger or Publix. Despite this, Wal-Mart still can’t seem to gain any momentum in this part of the business.
It’s believed that its competitors’ loyalty reward programs are helping them significantly. Customers receive better deals, and the company can better track their spending habits.
Still, Wal-Mart’s shares are up 10 percent to just over $67 year-to-date. But in the last 12 months, its stock’s value has plummeted 18 percent.
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