WCMA Notes: The Unsettled Months Ahead

Discussions with cheese manufacturers and processors in recent days have yielded a mixed report on cheese demand and sales. While domestic retail growth and international opportunities define the bullish side of demand, cost increases faced by dairy producers, dairy manufacturers, restaurants and consumers soften the outlook for cheese sales success.

Here’s some unsettled conclusions for unsettled times.

WCMA spoke with an array of dairy companies and cooperatives to aggregate a snapshot of the sales environment for cheese made in the U.S.  Sales to retail grocery stores remain solid with manufacturers uniformly using the adjectives “good” and “strong” to describe movement, with a baseline fact that cheese sales increases at retail during the COVID era have not reversed, representing a new plateau.

IRI national sales data defines this new plateau for retail cheese: total cheese sales in 2021 were up 9.9 percent compared to a baseline of 2019 sales, and 2022 sales (through April 24) remain strong at 10.1 percent higher than similar weeks in 2019. Drilling down into a category, shredded cheese sales volume at retail is up 22 percent, comparing 2022 sales (through April 24) to similar weeks in 2019.

Retail sales are meeting and exceeding this elevated baseline in 2022, manufacturers report, but optimism is countered by cautions that full price increases for cheese may have not reached the consumer. Monthly or quarterly pricing plans at wholesale, effective risk management, and/or retailer delays in raising prices may mean the dairy case has been sheltered from price increases at this time.

The Food Price Outlook released by USDA April 25 predicts an increase of 6-7 percent for all dairy products in 2022 – March dairy prices alone were up 7 percent from last March, according to USDA. The Consumer Price Index for dairy products, released April 12 by the U.S. Bureau of Labor Statistics, supports the USDA data. Grocery store indexes rose over the last year [March to March], including a 7 percent rise in dairy and related product prices. Notably, the overall index for food purchased for the home rose 10 percent.

One manufacturer contacted by WCMA sees a bright side in inflation that crosses all categories: “Uniformity of inflation may make higher cheese prices more acceptable,” the manufacturer noted. “People selecting the most affordable protein will still turn to cheese.” 

Every single manufacturer WCMA spoke with noted continuing labor pressures with varying levels of impact on production.  Nearly half stated that reduced employee numbers on the packaging side are directly limiting the ability to meet all sales orders.

Additional issues stunt the productivity picture: receipt of packaging film and anti-caking ingredients are on lengthening timelines, and available trucking remains a challenge in regions.

Foodservice demand and sales temper the largely positive snapshot provided by retail cheese sales. “Foodservice is where our crystal ball gets cloudy,” one manufacturer told WCMA.

Sales to quick service restaurants are described as “good” or “improving” for many cheese varieties, while the elephant in the room, mozzarella for pizza, has mixed reviews. Two manufacturers describe sales of the pizza-topper slowing in recent months after two years of strong sales. Both note that many chains and single site pizza businesses face labor shortages and inflation that have forced reduced days or hours of service.

On May 4, Pizza Hut reported that first quarter 2022 sales in the U.S. contracted 6 percent, but rose 3 percent worldwide. One week earlier, Domino’s announced U.S. same-store sales declined 3.6 percent during the first quarter of 2022. The report from Domino’s noted that the Omicron surge, staffing shortages and inflation “pressured our results.”

On the bullish side, one foodservice supplier believes a strong summer, with consumers spending pent up savings on travel and dining, will buoy demand until fall. Joining the bulls, another manufacturer points to strong sales into traditional vacation locations. On the bearish side, one maker believes cheese costs and other inflationary pressures on restaurant owners will reduce cheese portions or cause ingredient substitutions.

The prospects for cheese exports deserve an entire article, but in the context of this look at domestic demand and sales, cheeses that move overseas have the potential to reinforce wholesale cheese prices and impact sales activity in the U.S. Milk production is down in the European Union and New Zealand and with parity in cheese prices worldwide, “we are seeing international buyers willing to pay price premiums today to secure cheese sales from the U.S.,” one manufacturer told WCMA.

Dairy appears to be approaching several months of marketplace uncertainty from a baseline of relatively good sales and solid prospects overseas. The impacts of broadline inflation, labor shortages and global demand for protein will define the times to come.