Rising milk prices continue pushing dollar sales higher and pulling volume lower.

www.curwood.com


At first glance, the news is hopeful–milk sales are up. In overall dollars, yes, but consumption is a different story.

Higher milk prices mean more revenue but fewer sales for the dairy industry, as current economic conditions pierce processors with a double-edged sword. Each day’s gloomy news of a crisis-stricken economy features vignettes of folks struggling to make ends meet, many forced to choose between paying for milk or their mortgage. And in many households, milk is losing that battle.

“Dairies are feeling the pain of the 2008 trifecta: abnormally high fuel, raw milk and resin pricing, which cannot be recovered,” says Miriam Erickson Brown, president and chief executive officer of Des Moines, Iowa-based Anderson Erickson Dairy Co. “The fluid-milk sales gains we enjoyed nationally quickly disappeared this year with little fanfare.”

Dollar sales for the total milk category were up more than 10.3% to $13.02 billion for the year ending Sept. 7, according to Chicago-based Information Resources Inc. But that accounts for sales of 4.34 billion units, down 3.6% for the same period.

That’s not too far off where things were about a year ago, actually better in dollar gains. And milk is still selling pretty well, despite prices 20 to 30% higher than two years ago. Overall, the beverage segment offers a lucrative selling environment for dairy processors.

When Dairy Foods visited the milk segment in 2007, unit sales and consumption figures were a bit more upbeat. The price spikes had only begun, and the milk category was beginning to show some measureable growth, a holy grail that industry groups had been pursuing for years.

Earlier this year, key leaders in milk promotion said no one could have anticipated the sustained high prices, but were encouraged by its apparent resilience in the competitive beverage category.  “It’s a tough category, and higher prices have only made it tougher,” Kurt Graetzer, chief executive officer of the National Fluid Milk Processor Promotion (MilkPEP) board, told DF earlier this year. “But there are worse things than a higher price. Milk’s a lot more elastic than we thought it was.”

The latest data, though, showing a continued downward trend in unit sales suggests cash-strapped consumers are purchasing milk less often as they deal with the rising cost of other food products as well as gasoline and other necessities.

“We see consumers in every market making alternate beverage choices and downsizing from gallons of milk to smaller sizes out of budgeting necessity,” Brown says. “The bright side of this consumer trend is the opportunity for our industry to demonstrate the value of the total nutritional package of milk-a point few other foods and beverages can make as well.”

Mintel forecasts total U.S. sales of milk to hit $24.8 billion by 2011, with growth to be driven by innovation in types of milk, packaging and hybrid products, as well as price increases.

Shoring up sales

The downward trend in use is being seen at the local and regional level as well. “In our markets, we have seen a decline in consumption of 10% in Kansas City and approximately 6% in the Omaha markets,” says Al Streeter, corporate marketing manager for Omaha, Neb.-based Roberts Dairy Co., co-owned by Prairie Farms and Dairy Farmers of America. “Gallon sales are down a bit and half-gallon sales are up slightly, mostly as a result of price levels and continuing budget pressures on our consumers faced with high fuel prices and escalating food prices across the board.”

Dollar sales of whole milk are up 8.35% to $3.4 billion, while units sold are down nearly 5% to 1.08 billion, according to IRI data, which includes sales at food stores, drugstores and mass merchandisers other than Wal-Mart. Sales of skim and lowfat milk are up nearly 12.4% to $8.27 billion, with units down 2.54% to 2.72 billion.

In the flavored milk/eggnog/buttermilk category, dollar sales are up about 1.3% to $764.7 million, while units are down 8.8% to 352.7 million units. In the milkshakes/nondairy drinks category, with sales down nearly 15% to $58.8 million, and units down to nearly 27.9 million, a drop of nearly 28%.

Though processors are no strangers to weak fluid sales, they’re looking at new ways to shore up business. For example, couponing is seeing a renaissance in some markets as cash-strapped consumers seek to economize. “We have responded with increased couponing of the Roberts brand,” Streeter says. “Coupon redemption has increased in our markets after almost a decade of slowly declining redemption rates generally.”

Concerns over the environment, health and food safety are playing a key role in new marketing efforts as well. “Consumer trends and concerns we have identified beyond pocketbook concerns include a desire to buy local, support ‘green’ practices and a renewed and heightened interest in food safety,” Streeter says. “We are addressing these consumer concerns with new creative emphasizing our farmer-owned, local sourcing, sustainable practices and history of a very high level of inspection and food safety.”

Further, Streeter notes, Roberts went “rBST-free” in February, one of the latest in a wave of processors that have turned their backs on the controversial synthetic bovine growth hormone over the past couple of years.

With a mature product like milk, an important ingredient for growth is always innovation. Value-added products, like lactose-free and organic milk, continue to grow sales by both dollar and volume measures.

Organic milk in particular continues to be a light amid the darkness. Horizon Organic, part of Dean Foods’ WhiteWave division, is the top-selling brand of whole milk (right behind private label) and the No. 2 brand of skim/lowfat, according to IRI data. Horizon’s whole milk saw sales approaching $82 million for the year ending Sept. 7, a 46% increase over the previous year; unit sales rose more than 44%. The brand’s skim/lowfat selections saw dollar and unit sales increases nearing 30%.

Reports to investors from Dean indicated the influx of additional raw milk in 2007 helped boost Horizon to its market-leading status. WhiteWave spokesperson Sara Loveday, said earlier this year the supply stabilization helped R&D efforts as well. “The increase in supply allowed us to innovate with products like Milk Plus DHA Omega-3, the first national organic milk to market fortified with DHA omega-3, and lactose-free milk,” Loveday said of these new Horizon products that launched in February.

Such growth would suggest organics have moved from niche to mainstream, as would entry into the segment by traditional dairy companies like Smith Dairy and Shamrock Farms (which introduced a line of organic milk last year). Major retailers also have pumped up their private label organic offerings. In the nearly three years since Wal-Mart jumped into private label organic milk, other major retailers-including Kroger, Costco, Whole Foods and Publix-have joined the pack.

Among other value-added products, Minneapolis-based Kemps (part of New England’s HP Hood) worked with Canadian-based Ocean Nutrition to develop a line of milk fortified with omega 3s.

Kemps Plus Healthy Lifestyle Milk and Kemps Plus Healthy Kids Milk both contain 32 mg of MEG-3 brand omega-3 EPA/DHA, from fish oil, per 236 ml serving.  Each serving of Kemps Plus Healthy Lifestyle also contains 50% more calcium than regular 1% milk, whereas each serving of Kemps Plus Healthy Kids contains 50% more calcium than regular 2% milks and is an excellent source of vitamin C. Launched in early 2008, these products are available throughout the Midwest.

Messages about milk being part of a healthy diet still seem to resonate with consumers. The difference may be that the good feelings about milk-particularly organics and their hotly debated perception of superiority over conventional milk-seem to be mitigating the potentially drastic impact of the spikes in retail prices, where those good feelings had previously been pushing milk toward incremental volume growth.

Looking at the long-term picture, and how this period of high prices fits into the big picture, economic analysts say the emergence of a true global market may be impacting the way the milk market behaves in the United States.  It appears that the usually volatile cycle of domestic production and price has changed.

Tom Gallagher, CEO of Dairy Management Inc., says discussions about price and impact are in and of themselves often misinterpreted. “Our view of price is that when people say the price is too high it is a misstatement. The issue isn’t the price as much as it is the price volatility,” Gallagher told DF in February. “Typically with consumable goods other than gasoline, you don’t see a whole lot of price volatility. But with milk you can see it go anywhere from $2.50 a gallon to $3.50 or even to $4.75.”

As for the potential for this to change, Gallagher points to recent comments from Peter Vitaliano, an economist with the National Milk Producers Federation. “Peter’s analysis is that the strengthening of the global market provides an underlying strength in domestic market so that after this period of high prices, we may not have the sharp declines that we had after the high prices in 2004,” Gallagher says.

Reaching upward

Moving forward, processors continue to trumpet milk’s nutritional wealth and stress that it’s a good bang for the buck these days. In fact, the “got milk?” campaign recently signed on financial guru Suze Orman for its latest marketing blitz positioning milk as a “nutritional bargain.”

“In the face of declining consumption and the threat to brand sales, we are seeking to remind our customers of the reasons that they have chosen the Roberts brand for over 100 years,” Streeter says. “We are the local dairy in our markets, we are farmer-owned and we have been in the forefront on source reduction (reusable plastic cases, etc.) and conservation practices from the beginning.”

Brown makes a similar case: “As consumers continue to be cost-conscious, they are more closely evaluating where their milk products are coming from and what ingredients their dairy products contain. For local dairies like Anderson Erickson, it is an opportunity to tell our story, including how AE products are rigorously tested and tasted, and our unique approach to our family-owned business.”

She also warns against cutting corners to save money, such as Hershey’s swapping cocoa butter for vegetable oil in some of its products, a move that’s generating discontent among chocolate aficionados.

“During these challenging economic times, it would be easy to begin to focus more on the bottom line and less on consumers-using more sweeteners and fewer fruits or cocoas, or taking away customer benefits like freshness seals on packaging,” she says. “But I think the way to a consumer’s heart is to stay the course. To learn from 2008, invest in your brand and stay true to the type of business you are. For us, it means we don’t skimp on quality-ever.”

Fast Facts

  • While dollar sales are up for overall milk sales, units sold are down – signs that consumers are being shooed away by high milk prices in a weak economy.

  • This trend has been consistent across the past six financial quarters.

  • Total dollar sales of milk are expected to approach $25 billion in the next four years.

  • Average price per unit for the overall milk category increased nearly 13 cents over the previous year for the 52-week period ending Sept. 7. The biggest single increase among the top 20 brands: 60 cents.

  • The highest per-unit price among the top 20 brands for the same period was $4.40.
Source: Information Resources Inc.

Links