Name: Cong Ngo

Economics 1902

Writing assignment 1

Professor: E. A. Blackstone

Cheese Manufacturing Industry

The Cheese Manufacturing Industry (NAICS: 311513) comprises establishments primarily

engaged in producing cheese (except cottage cheese) from raw milk or processed milk and

manufacturing cheese substitutes from soybean and other nondairy substances. Its main products

are eclectic, ranging from Mozzarella, Parmesan to Cheddar, Cream, and other American

Cheese. According to the Economic Census of 2012, there are 390 firms in this industry. The

definition of this industry is exhaustive and reasonable, because no substitution can be found

outside this industry.

Because cheese is one of the most fundamental ingredients in American diet such as pizza and

pasta and can be found in every family’s kitchen, it is widely bought in supermarkets and

grocery stores throughout the United States. Cheese is so common and important that everyday it

is served for a wide range of customers—from amateur home cooks to restaurants, young

students to the elder, and low-paid workers to high-paid ones. Therefore, the consumption and

demand of cheese in America tends to be stable and is continuously increasing in the recent ten

years. Based on the chart below from ibisworld.com, per capita cheese consumption in 2016

increased by approximately 5% compared to 2007’s while the domestic demand rose from $38

billion in 2007 to $51 billion in 2016. With its popularity and attractiveness to consumers, cheese

consumption is promised to rise in the next five years.

1st Chart (Source: IBISWorld)*IVA: Corporate Profits with Inventory Valuation Adjustment

There are some factors that influence the amount of cheese demanded, including the price of

cheese, individuals’ preference, and the income of people. It should first be recognized that

cheese’s retail price has a huge impact on the consumption of cheese.

2nd Chart (Source: John Geuss’s Blog)

Indeed, cheese’s price elasticity of demand varies from year to year. While cheese had inelastic

demand—when the price rose cheese consumption did not decrease—from 2000 to 2002 and

from 2010 to 2012, its demand became elastic—when the price plummeted cheese consumption

increased—in the recent years from 2012 to 2015. There are several potential reasons for those

changes in cheese’s price elasticity of demand, one of which might be the amount of cheese

imported in the U.S. Based on the 1st chart, the government’s money spent on cheese imports

from 2012 to 2015 ($1.2 - $1.3 billion) was much greater than on those of two years ago ($1 -

$1.1 billion). Hence, from 2010 to 2012, there were fewer substitutes for domestic cheese and

customers had to purchase cheese despite its rising price due to their lack of options for cheese

compared to three years later.

Preferences of consumers hold no less importance in cheese consumption. In the past few years,

there has been a cooking trend that encourages American to add melting cheese to every type of

dishes, such as steak and grilled pork ribs, leading to a huge increase in the amount of cheese

consumed. According to Malinda Geisler’s article, there has been a mainstream acceptance of

ethnic cooking in the United States such as Mexican and Italian, which use substantially more

cheese. The total per capita consumption of Italian style cheese, therefore, is reported to rise in

2013 to 14 pounds and the per capita consumption of Hispanic cheese is reported to grow in

2013 by nearly 6 percent to 0.71 pounds (Malinda Geisler).

Finally, because cheese is essential in American daily meals, its demand is likely to be slightly

affected by the income of people. Although the higher salary does raise the cheese consumption,

such increase is not so big. As cheese is not a luxury good like jewelry and cars, people tend to

continue buying cheese until it reaches its satisfactory limit and does not make any difference in

customer’s satisfaction for additional amount.

On the other hands, the main factors that affect cheese supply are the entries of new firms and

the state of technology. Because of its growing popularity, cheese industry has been promised to

attract several new companies to join the market. Indeed, in the past five years, there has been a

constant increase in the number of cheese establishments and in the quantity and variation of

cheese products. Such a surge in cheese manufacturers increased the amount of cheese supplied.

Moreover, technology is also crucial to the production of cheese. Recent technological advances

in cow raising, milking, and some cheese-making processes such as molding and aging bring

about higher productivity and quality of cheese. Therefore, American cheese has become a

favorite product of not only domestic customers but also international ones, substantially raising

the quantity of cheese exported to global markets.

In terms of market competition, according to the Economics Census of 2012, the CR4 for this

industry is 29.9% and the HHI is 373.9. These data indicate that cheese manufacturing industry

is highly unconcentrated, and none of the firms is dominant in the market share. Its CR4, which

is much lower than the minimum CR4 for oligopoly industry, points out that this industry is very

competitive. The giant firms in this industry, such as Kraft Heinz Co. and Sargento Foods Inc.,

each only holds less than 6% of market share and focuses on competing in certain aspects, such

as special varieties and cheese quality, and brand reputations.

Moreover, because some people tend to prefer homemade cheese, manufacturers have to

compete with local products, which account for considerable percentage in the market. Besides

competition within the U.S., firms also face pressure from a large amount of imported cheese

from other European countries. In fact, according to an article of Alan Bjerga and Lydia

Mulvany, in 2016 the U.S. Department of Agriculture planned to buy $20 million of stockpiled

cheese due to a combination of plentiful supply and flagging global demand of cheese as

international consumers preferred European cheese products, which are cheaper but same

quality. Because of such competiveness, the annual growth of cheese manufacturing industry has

decreased recently. While in the past five years (2011-2016) the annual growth was 2.7%, it is

predicted to fall to 1.7% in the next five years (2016-2021) (IBISWorld). Although expected to

grow at a lower pace in the future, industry enterprises’ revenue is estimated to steadily increase

as consumers are willing to pay a premium for better-quality cheese in their food. Based on the

1st chart, the total revenue in cheese industry in 2021 is estimated to reach $55 billion, producing

more than $5 billion compared to 2016’s total revenue.

Though most of major companies in this industry are private firms, such as Sargento Foods Inc.

(market share: 3.8%), Associated Milk Producers Inc. (market share: 1.9%), Cabot Creamery

(market share: less than 1.0%), there are some publicly held firms that facilitate the insight into

its performance.

One of the most influential large-scale firms is Kraft Heinz Co., which is a merger between Kraft

and Heinz in 2015, then becoming a multinational consumer package food and beverage

company. According to ibisworld.com, in 2016 Kraft Heinz’s cheese and dairy segment

accounted for 32% of its net revenue, holds 5.6% of the market share in 2016. Below is some of

its financial information

- Stock price: 91.06 (approximately 72 in August, 2015)

- Beta: 0.36 - Return on assets: 3.72% - P/E Ratios: 32.17 - PEG: 1.62

Based on the stock price, Kraft Heinz Co. demonstrates a considerable growth (about 26%

increase in its stock price compared to August 2015). The low beta indicates that this business

has been stable in the recent years, while the low return on assets shows that investment on this

company does not bring about much profit. Because both P/E Ratio (price-earnings ratio) and

PEG (price-earnings to growth ratio) are slightly high but smaller than other companies in this

industry, we can see that Kraft Heinz Co. is still doing well. As stated above, the cheese industry

is projected to grow slowly in the future, so a giant firm like Kraft Heinz Co. might be affected.

For small-scale manufacturer, we will discuss the performance of WhiteWave Foods Co., which

is a consumer packaged food and beverage company. Its major products are branded plant-based

foods and beverages, coffee creamers and beverages, and premium dairy products. Here is its

financial information:

- Stock price: 54.77 (approximately 15 in November, 2012)

- Beta: 1.49 - Return on assets: 6.08% - P/E Ratios: 46.42 - PEG (5 years expected): 2.03

WhiteWave Foods Co. has its stock price substantially increased for the past five years (about

3.6 times higher compared to the price in 2012). Unlike Kraft Heinz Co.’s, the beta of this

company is higher than 1, meaning that WhiteWave Foods Co. tends to be volatile. Its return on

assets is in a good range; nevertheless, due to pretty high P/E Ratio and PEG, investors who do

not prefer risks and instabilities of their stock investment are less willing to spend money on this

company than on Kraft Heinz Co. Indeed, regardless of the general industry’s growth at a slow

pace and the competition with large firms, WhiteWave Foods Co. will be able to sustain its

business and have a potential of thriving in the next five years.

Finally, we will look into a micro-scale company, Lifeway Foods, Inc., which is a specialty dairy

food manufacturer of Cheese, Kefir and Organic Kefir.

- Stock price: 10.48 (approximately 13.7 in August, 2015 and 8.5 in April, 2012)

- Beta: -0.23 - Return on assets: 5.39% - P/E Ratios: 51.12 - PEG (5 years expected): 4.31

Compared to companies with bigger capacity like WhiteWave Foods Co. and Kraft Heinz Co.,

Lifeway Foods, Inc. has been performing not so well in the past few years. Its stock price has

depreciated by about 23% since August 2015 and slightly increased in comparison to 2012’s

price. Different from the other two firms, this company has negative beta, which shows that an

investment on it moves in the opposite direction from the stock market: when the market rises,

that investment falls, and vice versa. While the return on assets is decent, its unusually high P/E

ratios and PEG indicate that there is a small chance of profiting from investing on this company

than others. There are some aspects that drastically raise those ratios, two of them might be the

firm’s small earnings per share and small growth rate because of its recent poor performance in

the market. Certainly, in the following years, Lifeway Foods, Inc. is the company that is most

likely to encounter financial difficulties in operating its business.

In conclusion, due to fierce competitions of not only numerous companies in the U.S. but also

imports of other firms around the world, the cheese manufacturing industry is projected to

experience a growth at a slower pace in the future. Therefore, even though firms of different

sizes in this industry will have several scenarios in the next five years, they will hardly avoid that

high competitiveness. Based on companies’ performances above, while large-scale firms are

more likely to steadily grow, small companies will decline if they do not have any breakthroughs

in their products.

References: - Government’s Economics Census

- Finance.yahoo.com

- IBISWorld.com

- Nasdaq.com

- Cheese Sales and Trends, International Dairy Foods Associations, April 2014,

http://www.idfa.org/news-views/media-kits/cheese/cheese-sales-trends, accessed March 13,

2017.

- John Geuss Blog, February 22, 2016,

http://milkprice.blogspot.com/2016_02_01_archive.html , accessed March 12, 2017.

- Alan Bjerga and Lydia Mulvany, “U.S. Takes a Bite From Cheese Mountain With

Stockpile Purchase”, Bloomberg, August 23, 2016,

https://www.bloomberg.com/news/articles/2016-08-23/u-s-to-buy-11-million-pounds-of-cheese-

to-boost-dairy-prices , accessed March 13, 2017.

- Malinda Geisler, “Cheese Industry Profile”, Agricultural Marketing Resource

Center, May 2012, http://www.agmrc.org/commodities-products/livestock/dairy/cheese-industry-

profile/, accessed March 13, 2017.