The Economics of Plant-Based Milk
This Variety Pack Does NOT Make a Profit!
It is 11AM on a workday, October 2013 and our team had just wrapped up the monthly all-hands meeting with our General Manager (big boss). All-hands meetings are functional monthly meetings intended to fill the big boss in on all aspects of the business. Supply chain, marketing, and finance all present in sequential order and the meeting ends with the big boss dismissing everyone, kindly, with an “all right, I got it, thanks everyone for the information”.
In that particular meeting, the major development was that our organic milk business unit would be moving from a -14% Gross Margin to -2% Gross Margin. Still NOT break-even, but getting closer. The big boss was downright JUBILANT and dismissed everyone with an upbeat “GREAT work everyone!”
I am knocking on my supply chain colleague John’s office door after the meeting with a smile on my face because I know I’m about to ask him a sarcastic smart ass question.
"John, can you please explain to me, in detail, specifically why we lose money on this business? And more importantly, why everyone was just grinning ear-to-ear about continuing to LOSE money?"
John sits back and smiles.
"Kyle, we ship liquid concrete around the country. And our trucks are more heavy than they are even full"
Basically, our organic milk semi-trailers weighed out (met the National Transportation Safety Board’s maximum weight limit for a trailer weight of 43,000 pounds) before they cubed out (not enough room to fit more pallets of milk inside). Gillette razors as an example are super light weight, and never weigh out first, they cube out first (can't fit more in).
Note: Now you know what those scales on the highway are for! Checking to be sure trucks don’t exceed their maximum weight - this is due to wear and tear on the road and reducing stress load on their braking systems.
"So, Kyle if that weren’t bad enough to try and make money shipping concrete around the country, sucking down $5.00 per gallon diesel, it gets worse. We ship concrete that must be refrigerated. Yes, we must use refrigerated trailers, which use even more energy, fuel and are overall less common, thus pricier to reserve. This about doubles the price."
"Furthermore, our concrete, our organic milk, spoils, and t spoils QUICKLY. We may drive to a farm, pick it up, and ship it on a heavy refrigerated truck 500 miles away, and if that grocery store doesn’t sell through it, we have to return to pick up all that spoiled product and destroy it on our own dime."
"So, right now, things are good. We just raised shelf prices, we are picking up just the right amount of organic milk from the farms and demand is strong, so there are minimal spoils and gas prices are moderate, so we are squeaking by."
"But out of all those variables, the only one we really control is price, the rest can change as you well know, at the drop of a hat if and change they will! So yes, people are passionate about this business, and after going through years before you came on board of being in the hole -30%+ on gross margin, folks are understandably happy today."
"Make sense!" I said, picking my jaw up off the floor, for this was the first time it occurred to me (at 25 years old) that business is not only hard, but massively unpredictable. Profit forces are often predicated by events outside of the producer’s control.
"But Kyle, wait."
Just as I was leaving out, head spinning.
"We DO make 30% margin on our shelf-stable milk business, which has never changed."
"Ah, right, we do...because no refrigerated trucks and no spoils because of the full year shelf life - so ⅔ of our variables are always in our favor, not subject to change...."
10 years later, this is why we launched Tally Kids in a shelf-stable container.
That is a true story about the fires that burn profits in CPG (Consumer Packaged Goods), and those profit variables are as true today as they were then. That business, Horizon Organic Milk, ended up pushing hard into shelf-stable milk over the coming years and became reliably break-even. By the time I left in 2018, the business had sold to large food producer Danone, who could afford the ups/downs in order to have a well-loved brand in their portfolio.
The largest fixed costs in refrigerated plant-based milk (or any refrigerated beverage) are:
Formula: cost of the beverage inside the package
Packaging: cost of the package - both the bottle or carton, and the outer corrugate case.
Freight & Storage: cost to store and ship to retailer or consumer
Spoils: is your inventory spoiling out at your warehouse or the retailer, or returns online.
How this applies to Tally Kids:
Formula: Above average cost: Our formula, as you know, is loaded with Vitamins, Minerals, Omega-3’s, Choline, Fiber, etc etc. Not cheap.
Packaging: Above average cost: Shelf-stable packaging has a paperboard exterior with a UV impenetrable film on the inside that reflects all light rays to prevent degradation and oxidation of product. Not cheap. Certainly when compared to a clear plastic milk jug.
Freight, storage & spoilage: Below average cost: Ha! We finally got a win. Our inventory takes a year to spoil out as opposed to a matter of weeks and we are able to ship it shelf-stable on trucks that are not refrigerated, and our warehouses do not need to be air conditioned.
Still, as you can see, Tally Kids has ⅔ of the three profit variables against us. We chose to invest in a nutritious formula, and it’s still heavy to ship liquid concrete around the country, and our packaging is more expensive. We offset this with non-refrigerated trucks and warehouses. But we don’t offset those losses completely…
…remember that one variable John said we control? Price.
This is why Tally Kids has an above-average price point. Some of our costs will improve with scale, but the fact of the matter is that they will not improve THAT much with scale.
So, in order to fund future production runs, we must protect our profit.
Using the current production run, we must turn a profit, and we must turn a certain amount of profit. Our price reflects the amount of profit we need to return in order to finance the sequential production run.
You cannot keep going to the bank every week asking for money to produce a product that doesn’t make any profit. They would have no hope of getting their money back on their loan, and promptly laugh you out of the building, telling you to come back when you are IN business, to say, when you are in a business that is actually in the business of making money.
I can assure you, if price is a concern, that as we scale and more comfortably finance production runs using profit and IF the variables (formula cost, packaging, freight, storage, fuel) hold steady or move in our favor (go down), you will see us do more price promotions.
As an example, today, we are in an inflationary environment, and costs are not holding steady, they are rising, sometimes quickly. Furthermore, global political strife and war play a part. Not everything everyone needs is grown (or should be grown) in the United States. Ingredients are sourced globally from their optimal environments. Ingredients in our label included. Sunflower Oil for example, comes from Ukraine, (it’s why their flag is yellow and blue - sunflower fields and sky) and that cost has spiked due to the Russian aggression in their country.
Every ingredient has a story, and we the producers don’t have the slightest clue how their stories will play out. That is why large companies, like Nestle or Unilever, buy their food ingredients two years in advance at a negotiated rate, to lower the risk of a crazy event causing an issue in their supply chain.
Their supply may be affected, but at least they won’t have to pay a higher price. It’s like buying insurance. This is why the Chicago Board of Trade exists, to buy & sell “futures” as they are called, in commodity food ingredients.
So, all that said, in order to plan ahead, the only variable I can control is price. Note: I could lower the formula cost by lowering the quality, but I won’t do that, because I would lose my competitive advantage and market, which is serying you all and your kids, the most nutritious plant-based milk on the planet).
So this is why we don’t run price promotions, and must hold that price variable steady. It is our rudder in the wind, as these choppy waters slosh on board all around us.
We have our ship pinned on the future. We will get there, with your support, we will all get there together, and in calmer seas, I look forward to running some price promotions!