Dairy Trends to Watch in 2023

The dairy industry is expected to face several challenges throughout 2023, including extreme inflation, supply chain issues, shifts in consumer behavior and other external factors influencing consumer demand in the new (ab)normal. Despite these challenges, the industry will see growth driven by several key trends.

The Impact of Inflation

Inflation continues to be a significant concern for shoppers in the new year. Despite some signs of moderating in areas of the perimeter like produce, meat and seafood, cost of sales remains consistently high. The dairy sector is particularly affected by this trend, with inflation in this category reigning most extreme at a whopping 23%, five points higher than the next highest category, bakery, and 10 points higher than the average for food and beverages.

Despite the challenge of inflation, the CPG retail industry continues to be less volatile and more resilient in economic downturns than other sectors. This is because consumers tend to pull back from discretionary spending first during times of economic decline, meaning that necessities like food products are less affected. However, economists expect economic conditions to weaken in the coming months, which could further impact the CPG industry and the dairy sector specifically.

Private Label Will Remain Elevated

One of the main trends to watch this year in the dairy industry is the continued impact of inflation on consumer purchasing decisions. As consumers look to save money during these pressured times, they will exhibit various value shopping behaviors to reduce spending, such as switching to private label brands, trading out of expensive food categories, and consuming more at home versus away from home.

Private label is currently outpacing brands in 13 of the 15 categories that IRI tracks in its Dairy15 report, completely reversing the trend seen in 2021 when private label outpaced brands in only four categories. This trend indicates consumers’ growing acceptance and trust in private-label products. It is worth noting that private label use is likely to remain elevated in select categories where consumers are familiar with it, but it is unlikely to make further inroads in areas where brands are strong. This is because consumers tend to have strong loyalty and trust in certain brands, especially in categories where quality and taste are important factors. Brands that can effectively differentiate themselves through innovation, clear benefits and claims communication, along with winning pricing and promotion strategies, will continue to be successful in these areas.

The Year of Promotions

Promotions will play a more significant role in the dairy industry in 2023 as brands that took considerable price increases in 2021-2022 will be reluctant to take price decreases, choosing instead to deal back margin in promotions. Promotions were expected to return in 2021 following a dry 2020, but they did not materialize.

Expect 2023 to be the year of promotions as brands try to attract consumers with discounts and deals. However, brands must be careful not to rely solely on discounts and promotions to attract consumers. They will also need to create value through high-quality product offerings, packaging, marketing strategies and availability. By providing retailers with consistent and reliable supply, brands can help optimize shelf assortment by ensuring that the fastest moving items have ample facings and monitoring external factors influencing consumer demand.

Record-High Egg Prices

It’s hard to discuss the state of the dairy industry without acknowledging the sky-high egg prices causing consumers to consider building chicken coops in their own backyards. Conventional shell egg unit prices grew an outstanding 112% in December 2022 compared to the same period the year prior, while cage-free and free-range egg prices grew at less than half the rate of conventional. Conventional shell egg prices are now almost equal to cage-free and free-range egg prices, with the price gap shrinking from $1.70 in January 2021 to $0.22 in December 2022. The record-high egg prices are being driven by a combination of factors, including avian influenza and increasing statewide cage-free mandates.

Avian influenza, also known as bird flu, is a highly contagious virus that affects poultry and can lead to significant losses in egg production. Outbreaks of bird flu have occurred in various parts of the world in recent years, leading to the culling of infected birds and other measures to control the spread of the virus. In addition, cage-free mandates, which require raising egg-laying hens without the use of battery cages, are also contributing to the supply shortage. These factors, in turn, have led to a decrease in the overall supply of eggs, contributing to the increase in egg prices.

While the dairy market continues to face a number of challenges in 2023, the industry has proven resilient. Producers, retailers and brands can find success this year by adopting a strategic approach to identifying and adapting to changing consumer shopping behaviors, price inflation and potential disruptions in the supply chain. To meet consumer demand and capture growth now and in the future, the industry will need to focus on innovative products that balance premium experiences, better-for-you claims, taste and convenience.