“Milk Cost Up Faster Than Gas” — Already frustrated by the sky-high cost to fill their tanks during the traditional family vacation season, consumers were understandably exasperated when they found this headline (or some variation thereof) in their morning newspapers this past June.

Indeed, the United States Department of Agriculture (USDA) reported the price of a gallon of milk had increased twice as much as that for a gallon of gasoline during the previous 12 months. U.S. milk prices soared from a 23-year low in late 2002 and early ’03 to dizzying heights by the first half of 2004.

The causes were many; they included high feed prices, low demand for milk and strong cattle prices as the meat-rich Atkins diet gained popularity. Also among the factors was an effort by the National Milk Producers Federation, dubbed Cooperatives Working Together, which sought to raise milk prices by reducing supply. Its effort to thin dairy herds has succeeded in reducing cow numbers by about 30,000 head.

Other contributing factors included a 17.8 percent decrease in the number of dairy farms between 2000 and 2003, and a reported case of mad cow disease that brought a stop to the movement of cattle into the United States across the Canadian border. Before the mad cow scare, American dairy farmers would typically buy 60,000 young cows from our neighbor to the north each year.

While mad cow may have impacted dairy farmers directly in the form of smaller herds, it appears to have had little or no direct impact on retail milk sales.

When the disease, formally known as bovine spongiform encephalopathy (BSE), was detected in one infected cow in Washington state last fall, processors expected to receive a flood of calls from concerned consumers.

Fortunately, the industry had long ago prepared for such an eventuality, allowing it to put plans into action promptly, assuaging fears that it might be possible to contract mad cow disease through milk consumption, which it isn’t.

“The safety of milk was never really called into question,” says David Pelzer, spokesman for Rosemont, Ill.-based Dairy Management Inc. (DMI). “In a couple of cases where people raised issues, we jumped on that right away, contacted the news organizations and made sure they were aware of statements by the FDA and the World Health Organization, verifying and reaffirming the safety of milk.”

While BSE fears failed to cause consumers to steer clear of the milk category, processors agree that high prices definitely have played a significant role in keeping sales down. The pricing issue isn’t solely to blame, however, as Kevin Burkum, DMI’s senior vice president for retail marketing, cites another contributing factor, one he calls “competitive pressures.”

“When you look at tea and isotonics and bottled water, they are all enjoying solid growth, which doesn’t bode well for milk,” Burkum says. “Also, when you look at products that are consumed with milk, such as ready-to-eat cereal, cookies and even things like cocoa mixes, they are all showing declines, so it’s like the perfect storm is happening against milk.”

Consequently, milk took a hit, particularly in unit sales, which is evident in data from Chicago-based Information Resources Inc. (IRI) for the 52-week period ending May 16, 2004. Dollar sales of whole milk in supermarkets, drug stores and mass merchandisers, excluding Wal-Mart, rose 2.1 percent, but unit sales fell 3.9 percent, while skim/lowfat milk sales were up 1.4 percent in dollars and down 4.4 percent in units. Even flavored milk, long considered the growth engine of the category, fell 0.6 percent and 4.4 percent, respectively.

As if to pour salt into the wound that is the declining sale of fluid milk, sales of soy beverages are soaring. According to IRI, sales of soymilk and milk substitutes rose 18.6 percent in dollars and 14.4 percent in units during calendar year 2003.

While processors express some frustration over this trend, they stress that people who are downing soy beverages may not necessarily be milk drinkers in the first place.

“Undoubtedly, it’s affecting consumption of regular milk somewhat, but it’s also bringing new users into the category who just plain weren’t drinking milk before, possibly because of lactose intolerance, and now they’ve found a way to include a beverage like that in their diet,” says Ron Schroeder, director of marketing, Swiss Valley Farms, Davenport, Iowa.

Similarly, Dennis Lund, chief financial officer of Modesto, Calif.-based Foster Farms, points out that soy beverages remain a relatively small niche. Therefore, even a significant increase in sales doesn’t mean all that much in the grand scheme of things.

“A large percentage doesn’t necessarily mean a large percentage compared to milk sales,” Lund says. “If you have a small number and you double it, that’s a 100 percent increase, but overall impact-wise, it’s not that great.”

Still, dairies are sitting up and taking notice, and many of them have jumped on the soy bandwagon themselves. Seattle-based WestFarm Foods co-packs soymilk for a national brand, while Swiss Valley is exploring the possibility of developing a hybrid soy protein/dairy milk product.

Meanwhile, Fresno, Calif.-based Producers Dairy Inc. now sells Producers Soymilk, a lowfat, low-sodium, cholesterol-free beverage described as “great for shakes, smoothies baking, cereal or drinking cold or warm.” Available in Original and Vanilla flavors, the calcium- and vitamin-enriched product is promoted as “a healthy alternative to cow’s milk.”

Such a claim isn’t likely to sit well with Tom Nagle, vice president of marketing for the International Dairy Foods Association (IDFA), Washington, D.C. He reports that soymilk has been found to be not nearly as effective in delivering essential nutrients as genuine fluid milk.

And Lund and his colleagues are disturbed by the continued struggle over the use of the term “milk” to describe such beverages, which obviously don’t meet the definition of what can rightfully be called milk. The issue has become so great that the state of California is reportedly getting involved in the fight and will eventually weigh in on whether soy beverage manufacturers can continue to use the “M word” on their packaging.

Lund’s concerns are echoed by Sandy Kelly, director of marketing for Phoenix-based Shamrock Farms. Consumers often get confused, Kelly says, believing that a so-called soymilk is actually a dairy beverage.

But she gives soy beverage makers their due, crediting them for providing products that meet consumer demands and overcoming taste issues that once plagued the soy industry. “They’ve really stepped it up from a packaging standpoint and a taste standpoint,” she says. “The soy category has also had some positive things to talk about with respect to the health attributes of soy, and they’ve really played that card.”

Kelly would like to see the milk category follow suit, particularly with regards to the new scientific research linking dairy products to weight loss. Industry groups have already laid the groundwork, launching programs such as “Healthy Weight with Dairy.” Developed by IDFA, DMI and the Milk Processor Education Program (MilkPEP), the “Healthy Weight with Dairy” campaign centers on long-awaited research that suggests a link between dairy consumption and body weight control.

MilkPEP is following that up with its “24/24” campaign, which promotes consuming 24 ounces of dairy products every 24 hours as part of a lifestyle that includes a balanced diet and exercise. In-store guides, created in partnership with Shape magazine, offer consumers nutritional information, exercise tips and recipes showing various ways to incorporate dairy products into one’s diet.

“Milk has a unique opportunity here,” says Nagle. “In the past, the tendency has been to cut milk out when dieting, but here, we’re giving them a solid reason to not only not cut milk out, but to focus on milk and dairy in their dieting activity as a way to succeed.”

Processors are encouraged to sign up for a license from IDFA, which allows them to include the weight-loss claim in product packaging and marketing efforts. But Nagle is careful to stress that the goal of the campaign is not to turn dairy into the next dieting fad. Instead, it’s to let people know that the milk they’ve always loved can serve as a critical component of any successful diet.

“We want to get the message out that whatever kind of diet you are on, your dieting success and your nutritional well-being are better if you consume milk,” he explains. “That’s a much bigger message than any particular diet fad.”

It’s also a much bigger message than low carb, according to both Nagle and Burkum. As the carb-counting craze sweeps across the food and beverage industry, Burkum says it’s already had an impact — a positive one — on cheese sales.

However, it’s too early to tell if any of milk’s woes can be laid at the feet of the late Dr. Atkins. That said, processors are not about to take any chances, and a number of them have already rolled out an array of reduced-carbohydrate offerings.

HP Hood, Chelsea, Mass., launched Carb Countdown, a line of four reduced-carb dairy-based beverages: Homogenized, 2% Reduced Fat, Fat Free and 2% Reduced Fat Chocolate. Likewise, Swiss Valley Farms introduced a no-sugar-added chocolate milk, containing half the carbs of regular chocolate milk. Available in half-gallon jugs, the milk is designed to appeal not only to Atkins dieters, but also to diabetics and to parents who simply want to reduce their kids’ sugar intake, Schroeder says.

Shamrock Farms also rolled out its no-sugar-added 1% chocolate Mmmmilk. Sweetened with Splenda® brand sucralose — as are most of dairy’s low-carb offerings — it’s available in 12- and 32-ounce sizes.

Meanwhile, Des Moines, Iowa-based Anderson Erickson Dairy Co. (AE) introduced its own Splenda-sweetened Chocolate Fat-Free Skim Milk, containing 14 grams of carbohydrates, or about half that of regular sugar-sweetened chocolate milk. “Consumers are really watching their carb intake, and we need to think outside the box as far as how to entice Atkins Dieters to consume dairy products,” says Betsy Watson, AE marketing specialist.

Syracuse, N.Y.-based Byrne Dairy plans to introduce its own line of Splenda-sweetened milk in skim, 1%, 2% and whole varieties later this year. WestFarm also has several low-carb products in development. But Randy Eronimous, WestFarm’s director of marketing, is generally unimpressed when it comes to the low-carb offerings currently on the market.

“Many of the low-carbohydrate products that I’ve tried fall into the ‘not bad’ category,” he says. “If the best thing you can say about a product is, ‘It’s not bad,’ you know you’re not destined for greatness.”

It’s all about share of stomach, says Kelly. If milk is ever going to shed its commodity image and begin to really compete with soft drinks, juices and other beverages, she explains, processors must respond to consumer needs and preferences with a steady flow of product and packaging innovations.

What’s more, they must levy the power of their brand, differentiate themselves over private label products and help consumers understand many branded milks have different attributes. Kelly likens it to what once may have been best described as the ultimate commodity: water.

“If you look at brands like Aquafina, they have done a lot to elevate water past commodity status just by being a brand and by setting themselves apart from the generic store brand,” she says. “It used to be ‘water is water.’ Well, it’s no longer just water anymore. That’s what the power of brands can do.”

Recognizing the value of its brand, Swiss Valley recently revamped its label in order to make its products more easily identifiable at retail. The company also actively markets its products through television and radio advertising, as well as free-standing inserts. For Shamrock, meanwhile, strong brand recognition has helped the company succeed in alternate channels of distribution, such as convenience stores, where Shamrock sells 10 flavor varieties in single-serve bottles.

According to Burkum, the vast majority of milk volume is still sold in the form of gallons and half-gallons. But single-serve containers are playing an important role in increasing its availability, specifically “allowing us to take milk to places it hasn’t been before.” Not only have single-serve containers opened the door for milk to compete more effectively in convenience stores and vending machines, but they also have provided the ideal carrier for breaking soda’s hold on the quick-serve restaurant industry, a place where milk has long been available, even if few people realized it.

“Traditionally, milk was seen as a kids’ beverage, with most chains offering one variety, that being white milk, but by and large, it was not even listed on the menu as a beverage option,” explains Chris Moore, DMI’s vice president of foodservice, channel development. “The opportunity for us is to partner with chains — particularly kid-friendly chains — who demonstrate a willingness and a commitment to improve their current milk offering.”

According to Moore, the industry has its work cut out for it, as milk is severely under-represented and under-promoted within most fast-food restaurants. He says many chains mistakenly believe they cannot aggressively promote milk because of margin and profitability issues. When milk is prominently featured and properly marketed, however, Moore says sales increase across the board, thereby mitigating any concerns about profits.  

“Profitability becomes a non-issue because you are attracting consumers who otherwise might not have even come to your restaurant,” he says. “Because you are screaming from the mountaintops that you’re offering a wholesome beverage, packaged in a resealable container, you’re driving incremental traffic that you otherwise wouldn’t have had and you’re putting yourself in a position to sell other items on the menu, so you’re definitely going to make up any loss you would have incurred.”

To prove that theory, MilkPEP partnered with the nation’s leading quick-service restaurant chain, McDonald’s, to test milk in selected markets. Milk had long been available under the Golden Arches, albeit only in white varieties and only in old-fashioned gable-top cartons. Through the partnership, McDonald’s began offering a plastic resealable single-serve bottle and added chocolate milk to its menu as well.

The result? “Milk just blew the doors off,” Moore says.

Subsequently, McDonald’s expanded its new milk offerings across its entire 14,000-restaurant U.S, operation. In addition to prominent in-store and drive-through merchandising, McDonald’s has committed to national television and local radio advertising, all designed to make consumers aware that they can now purchase handy, flavorful single-serve milks either for their children’s Happy Meal or even for themselves. More recently, the process was repeated throughout the Wendy’s chain with similar results.

According to Moore, decision-makers at both chains were astonished to discover that adults, as well as kids, would choose milk if it was offered to them and showcased on the menu. This finding has led MilkPEP to focus on what Moore calls the next big opportunity: getting more adults to drink milk away from home.

“This is just the tip of the iceberg,” he says. “What we’ve demonstrated through partnering with both of these chains is that milk has staying power in foodservice and that it can compete with other beverages if it’s promoted accordingly.”  df

Top 10 Whole Milk Brands*
	$ Sales (In Millions)	% Change vs. Year Ago	Dollar Share	Unit Sales (In Millions)	% Change vs. Year Ago
Total Category	$3,162.2	2.1%	100.0%	1,317.1	-3.9%
Private Label	2,052.6	0.6	64.9	848.8	-5.8
Borden Milk Products LP	42.6	2.4	1.3	16.4	-4.2
Lehigh Valley	30.2	42.6	1.0	13.3	25.9
Horizon Organic	29.7	26.4	0.9	8.4	22.5
Lactaid 100	29.5	21.8	0.9	8.5	20.1
Garelick Farms	29.0	-3.5	0.9	14.2	-4.7
Prairie Farms	28.6	5.4	0.9	12.7	1.8
Mayfield	28.2	-6.8	0.9	9.5	-12.1
Pet	27.7	8.4	0.9	11.4	2.6
Dean’s	27.7	-4.3	0.9	13.7	-6.1
* Total sales in supermarkets, drug stores and mass merchandisers, excluding Wal-Mart, for the 52-week period ending May 16, 2004. Source: Information Resources Inc.
Top 10 Flavored Milk Brands*
	$ Sales (In Millions)	% Change vs. Year Ago	Dollar Share	Unit Sales (In Millions)	% Change vs. Year Ago
Total Category	$721.2	-0.6%	100.0%	418.0	-4.4%
Private Label	192.1	0.7	26.6	110.8	-2.8
Nestle Nesquik	109.4	-3.4	15.2	63.7	-4.5
Dean’s	32.0	-3.4	4.4	19.9	-5.3
Kemps	21.8	17.4	3.0	11.2	3.2
Hershey’s- Morningstar	21.5	-8.1	3.0	12.3	-17.6
Borden Milk Products LP	13.0	-7.2	1.8	6.3	-11.6
Mayfield	12.5	2.8	1.7	6.5	-5.9
Garelick Farms	11.2	6.8	1.6	6.1	4.8
Prairie Farms	10.7	9.4	1.5	6.4	5.2
Pet	10.3	-3.3	1.4	5.7	-10.8
* Total sales in supermarkets, drug stores and mass merchandisers, excluding Wal-Mart, for the 52-week period ending May 16, 2004. Source: Information Resources Inc.
Top 10 Skim/Lowfat Milk Brands*
	$ Sales (In Millions)	% Change vs. Year Ago	Dollar Share	Unit Sales (In Millions)	% Change vs. Year Ago
Total Category	$6,346.7	1.4%	100.0%	2,758.8	-4.4%
Private Label	3,983.1	1.2	62.8	1,749.0	-5.1
Lactaid 100	178.1	3.3	2.8	57.9	-0.2
Horizon Organic	86.2	21.4	1.4	25.2	18.0
Kemps	83.6	-4.5	1.3	36.4	-8.4
Dean’s	78.1	-3.7	1.2	40.3	-4.8
Prairie Farms	71.0	14.8	1.1	33.3	10.5
Garelick Farms	64.4	-1.0	1.0	30.4	-3.0
Mayfield	61.3	-3.8	1.0	20.1	-9.4
Organic Valley	48.5	21.4	0.8	14.7	19.3
Hiland	46.7	8.9	0.7	22.2	6.4
* Total sales in supermarkets, drug stores and mass merchandisers, excluding Wal-Mart, for the 52-week period ending May 16, 2004. Source: Information Resources Inc.