Hygiene is everything for farmer Heinrich Gropper.
He owns the Gropper dairy company. He pulls a net cap over his short, brown-gray hair, then reaches for a white work coat. He pushes open the doors to a filling station where the air is warm and moist.
“Each day we process more than 700,000 kilograms of milk here,” he shouts above the clatter of machinery. He hurries down the hall and stops at a conveyor belt where brown plastic containers filled with coffee and milk rush by. Mr. Gropper grabs a filled cup called “Bellarom,” a brand by German discount supermarket chain Lidl.
Each day, almost 455,000 bottles of yogurt drinks and more than a million containers of yogurt pass through the facility in Bissingen, a town in southern Germany. The plant produces yogurt, milk, mixed-milk drinks, juice, smoothies and pudding desserts bound for grocery chains such as Aldi, Lidl, Edeka and Rewe. The products don’t carry Gropper’s name; instead, they’re labeled Milbona, Milfina, King Frais, Desira or Gutbio.
Mr. Gropper leaves the filling station and heads down a long corridor taking off his hairnet. What worries him these days is the falling price of milk.
“Of course, this isn’t the first time that the price for milk has dropped,” said Mr. Gropper. “But it’s not every year that the situation is this bad.” Between 2007 and 2009, the price fell to 23 cents per kilogram and then recovered. A kilogram of raw milk sells for about 37 cents today, according to the milk-industry association. “Now,” said Mr. Gropper, “the next downward trend is coming.”
That’s because of a glut in milk production lately. The cows of German farmers produce a great deal already, but New Zealand, for example, exports up to 95 percent of its milk. And this comes as markets in Russia disappear amid sanctions over the Ukraine crisis.
“Of the 150 German firms that were active in Russia two years ago, only five were still permitted to make deliveries last year,” said Eckhard Heuser, president of the milk-industry association. “Since August of this year, no products are going there, because Russia closed the border.”
It all has a big impact on mid-sized companies in the Swabian countryside of southwest Germany. Falling prices are passed on to dairy processors. Mr. Gropper must compensate and likewise pass it on – to 900 farmers who provide his company with milk each day.
“I’m pretty concerned,” said Mr. Gropper. “We’re talking about a lot of money.”
He also feels a sense of responsibility for his 600 workers. The firm founded by his grandfather in 1929 had €360 million in sales last year, or about $457 million. Mr. Gropper can’t compete with large dairy companies such as Müller or Danone. The Müller group has annual sales of €4.9 billion.
But Mr. Gropper is leader of the pack when it comes to producing for food retailers. The company not only delivers products, but also offers ideas to supermarket chains. For example, Mr. Gropper developed an organic yogurt with granola in the lid for Aldi. His firm also produces Flecki, a chocolate vanilla pudding that made headlines in Germany in 2012 when the companies Oetker and Aldi fought over trademark rights. The dairy has since been cleared of all trademark infringement and Gropper can keep producing Flecki.
The Gropper dairy is unique in that it makes only trade brands. Other large dairies make proprietary products along with trade brands.
Depending on such trade brands can be a risky business, said trade expert Jörg Funder, who teaches business and trade management at a college in Worms. That’s because the market power of four major food-retailing chains — Lidl, Aldi, Edeka and Rewe — is so massive. On the other hand, there is an upside. “It allows a mid-sized firm to generate growth in a short time that otherwise wouldn’t be possible,” said Mr. Funder.
He believes that trade brands will remain dominant. Fifteen years ago, the share of trade brands was around 20 percent. Today it is close to 60 percent, according to the GfK consumer-research institute.
“Through the growth of the retailers, we started getting involved in trade brands and eventually we came to focus exclusively on them,” said Mr. Gropper.
“Every cent less has an immediate impact”
Mr. Gropper opens the door to a conference room. Beyond the window, trucks drive across the courtyard and pump milk into tanks through thick hoses. “If we only produced fresh milk, we would go bankrupt,” Mr. Gropper said. So the company processes raw milk into yogurt or mixtures of coffee and milk.
Producing regional and organic goods also helps reduce the effects of price pressure. Per year, 285 million kilos of milk, or about 75 million gallons, pass through the 14 filling stations at Mr. Gropper’s plant. About 40 million kilos of that come from organic farms in Swabia and the Allgäu region of Bavaria.
One of those operations is an organic farm run by Beate Kleinle. Every two days a collecting truck hooks up to the milk tank in front of her barn, sucks out 2,000 liters of milk and then delivers it to the Gropper plant about 10 minutes away.
Wearing rubber boots, the farmer walks along a dirt path to the pasture where her 60 cows graze. In 2011, she converted her conventional farm to organic, following strict guidelines set by the organic retailer Demeter.
Ms. Kleinle plants clover as fodder. It is harvested four to five times a year, in contrast to the widely-used corn that is harvested only once. She also built a new hay-drying facility, which was expensive. But she is happy that she made the change to organic farming. Her cows are doing better because they are outside more, she said. There is also less price competition and the product is popular. A trainee who once used to get stomach aches from regular milk has no problems drinking the organic milk, she said.
Every quarter, a committee of dairy farmers negotiates the price of milk with Mr. Gropper. The organic milk that Ms. Kleinle delivers currently costs 50 cents per kilo. In comparison to conventionally produced milk, prices for organic milk have so far been stable. But Ms. Kleinle doesn’t want to become dependent on Mr. Gropper.
“I have several areas of business, including grain sales and a photovoltaic facility,” she said, gazing across her farm with drying hay, many pastures and fruit orchards that extend over 100 hectares. Her cows produce 350,000 liters of milk annually, or about 92,000 gallons.
Now she hopes falling prices won’t be passed on to organic famers. “Every cent less has an immediate impact,” she said.
Mr. Gropper seeks understanding for the farmers. He points out that they are the last in the chain. Most of the 900 farmers with whom he works come from the region.
In order to keep competing with big companies like Müller, Danone, Arla or Zott, Mr. Gropper has to be creative. So he and his employees are always on the lookout for new ideas. He has already identified a new trend: Dairy products fortified with additional protein. For now, he doesn’t want to reveal any more.
Anja Müller covers medium-sized and family-owned firms for Handelsblatt; Katharina Kistler is a trainee journalist at Handelsblatt. To contact the authors: firstname.lastname@example.org, email@example.com