Dairy products have an exceptionally rich nutrient profile and have long been promoted in high income countries to redress child malnutrition. But given all this potential, and the high burden of undernutrition in low- and middle-income countries (LMICs), why isn’t dairy consumption more actively promoted in the developing world? In this review we focus on a broadly defined concept of “dairy development” to include production, trade, marketing, regulation, and demand stimulation. We address three key questions. First, how strong is the evidence on the importance of dairy production and consumption for improving nutrition among young children in LMICs? Second, which regions have the lowest consumption of dairy products? Third, what are the supply- and demand-side challenges that prevent LMICs from expanding dairy consumption? We argue that although more nutrition- and consumer-oriented dairy development interventions have tremendous potential to redress undernutrition in LMICs, the pathways for achieving this development are highly context-specific: LMICs with significant agroecological potential for dairy production primarily require institutional solutions for the complex marketing challenges in perishable milk value chains; lower potential LMICs require consumer-oriented trade and industrial approaches to the sector’s development. And all dairy strategies require a stronger focus on cross-cutting issues of nutrition education and demand creation, food safety and quality, gender and inclusiveness, and environmental sustainability and resilience. We conclude our review by emphasizing important areas for research and policy expansion.