DANISCO Danisco is proud to carry on the Rhodia Food tradition of co-sponsoring Dairy Field’s 2004 State of the Industry issue. This is clearly an action of adding knowledge to our customers which is an action that Danisco holds strongly to and is a key pillar of our program to service our customers. Taking stock in how the industry has changed and where it is trending in the future is important for the cheese industry to develop the products, concepts and ideas which will continue to drive industry growth. One year ago, no one knew cheese prices would hit an all-time record high from the low prices of 2003. The presence of BSE in North America, changes in the availability of bovine somatotropin and increased demand for cheese by the consumer all impacted the pricing structure of cheese. Clearly, this episode demonstrates that the traditional conservative cheese industry is not immune from dynamic pricing swings. We have yet to see the full impact of higher oil prices, transportation costs and energy costs on cheese prices. A second first for the cheese industry is the growth of cheese consumption in the retail and foodservice markets. The last first, and probably the most surprising one, is the increased cheese demand resulting from the low-carbohydrate diet phenomenon. The strength of the low-carb diet in the United States was never expected to hit as strong as it has in 2004. Expanded cheese flavors giving a new twist and flavor to standard food items, consumer trust and faith in cheese as a high-quality product, changes in U.S. ethnic populations bringing in new cheese types, increased number of restaurants adding cheese to the menu and as a flavor ingredient in dishes — all have impacted the change in sales of cheese into the marketplace. There are few food items that have the high overall health and well-being rating of cheese. Naturally high calcium levels, low carbohydrate levels, a richness in protein and data demonstrating enhanced weight loss with the incorporation of dairy into a weight-loss program will keep cheese in the diets of U.S. citizens as we struggle to improve the overall state of our health. The only question to ask here is, what is next? Improving health and well-being is an area ripe for the addition of new products. Whether it is incorporation of probiotics and other health and well-being ingredients into cheese or further enhancing the natural healthy state of cheese, new products are sure to hit the shelves in the coming years. Introducing new cheese products, maintaining a high-quality perception with the consumer and working with our customers to better understand cheese and new applications of cheese will continue to move the demand for cheese to novel and higher priced markets. Pushing this demand for new cheese markets is key to the cheese industry. Danisco is committed to this growth. Our goal of continuing to add knowledge to our customers and to the industry will ensure a healthy market and industry in the future. With your help, we will look back in a year and, again, say it was a year of many firsts. Beth Jones Product Manager, Probiotics & Fresh Dairy Cultures Danisco

With household penetration somewhere around 98 percent and per capita consumption slightly more than 30 pounds, cheese holds a treasured spot in the American diet. From salads and casseroles to pasta, pizza, tacos and quesadillas, many favorite dishes rely on cheese for their unique taste, texture and appearance.

Obviously, that’s great news for cheese processors, but it creates quite a challenge for them at the same time. After all, how do you go about growing a category that’s already so heavily consumed?

Fortunately, cheese has somehow managed to always fall into favor with each emerging trend. Even during the 1980s and early 1990s, when cutting back on fat was thought to be the best means of shedding pounds, pizza consumption soared, countering any hits that cheese might have taken as weight-conscious consumers began cutting back on higher-fat foods.  

As the new millennium dawned and the dominant weight-loss philosophy shifted from cutting fat to cutting carbohydrates, cheese once again found itself in a position to benefit from the emerging trend.

Initially, those in the industry weren’t sure how much they stood to gain from the heavily publicized Atkins and South Beach diets. They weren’t even sure these latest and greatest weight-loss methods had any staying power or if they would prove to be short-term fads, doomed to die out in a matter of months. Consequently, they took an “only time will tell” approach to the whole matter.

“When low-carb diets first started to come into vogue, we were curious as to what kind of impact they would have, but clearly, the trend toward low-carb foods is fueling cheese sales growth,” says Kevin Burkum, senior vice president, retail marketing, Dairy Management Inc. (DMI), Rosemont, Ill.

That growth is evident in data from Chicago-based Information Resources Inc. (IRI) for the 52-week period ending May 16, 2004. Sales of natural chunk cheese in supermarkets, drug stores and mass merchandisers, excluding Wal-Mart, rose 7.6 percent in dollars and 5.3 percent in units, while natural shredded cheese sales rose 5.6 percent and 4.0 percent, respectively.

Such growth is especially meaningful in light of the pricing battles the cheese industry — and all of dairy, for that matter — has been facing in recent months. According to Barbara Gannon, vice president of corporate and marketing communications for Plymouth, Wis.-based Sargento Foods Inc., record- high cheese block market prices forced her company to take its first price advance in seven years, an unusual move for the cheesemaker.

“Normally, the market will be high sometimes and low other times, and we can manage around an average,” she says. “However, it was so extreme this year that the industry really had to advance because the prices were high and the supplies were tight.”

Although private label still accounts for about 40 percent of all retail cheese sales, recent pricing battles have helped branded cheeses gain some ground against their store brand competition, according to Mark Korsmeyer, president of Kansas City-based American Dairy Brands (ADB), a division of Dairy Farmers of America and makers of Borden cheese.

Korsmeyer reports private label cheeses have been forced to raise their prices as well, often to levels approaching those of branded products. Consequently, he says, bargain-conscious consumers might find themselves more likely to choose the brand because the private label product no longer offers them a lower-priced option.  

“It’s a very good thing for branded products,” Korsmeyer says. “As the store brands gravitate upward and are priced very similarly, if not equally, to the branded products, consumers will gravitate their purchasing patterns to brands.”

Despite higher prices, members of the cheese industry report strong demand for their products. In particular, Burkum points to ricotta cheese as benefiting from the low-carb craze, in large part because it is specifically named in the South Beach diet book. Meanwhile, Korsmeyer says, the string cheese category is “just on fire.” IRI data backs up his claim, showing pound volume for string cheese up a whopping 32.6 percent during the 12-week period ending May 23, 2004.

That’s good news for ADB, which rolled out Borden String Cheese in select Wal-Mart Supercenter locations last year. And while Korsmeyer speaks enthusiastically about consumer response to his company’s 100 percent natural, low-moisture, part-skim mozzarella product, top-ranked string cheese maker Saputo isn’t the least bit fazed by Borden’s arrival on its turf, according to Steve Josen, vice president, marketing, Saputo Cheese USA Inc., Lincolnshire, Ill.

“There’s been a lot of competition this year,” Josen admits, stopping short of citing Borden specifically. “Yet, we’ve held our position by offering quality product day in and day out, and continuing to support the business with consumer-compelling promotions.”

Josen is referring to last fall’s Frigo Cheese Heads Back-to-School promotion, a tie-in with the “Looney Tunes: Back in Action” movie, and to this spring’s Game Boy/Pokemon promotion.

This fall, Saputo is teaming up with television’s longest-running comedy program, “The Simpsons,” for a back-to-school promotion “unlike anything else in the dairy case.” The three-pronged promotion offers kids the chance to win DVD players, plasma-screen TVs, “Simpsons” pinball machines and other prizes in the “Win the Coolest Stuff from Bart and Lisa’s Wish List” game. In addition, consumers are encouraged to redeem their proofs of purchase for free collectible Bart or Lisa Simpson clip watches. Each Frigo Cheese Heads wrapper also features a fun “Simpsons” fact, such as Homer Simpson’s philosophy on fatherhood: “Always do the opposite of what Bart says.”

While the cheese category as a whole enjoyed healthy gains this past year, processed cheese didn’t fare as well. According to IRI 2003 year-end data, processed cheese sales fell 2.8 percent in dollars and 1.0 percent in units. That decline comes as no surprise to Korsmeyer, who reports that processed cheese has been on a long-term decline.

“Processed cheese has been a flat to slightly declining category over the last few years,” says Korsmeyer. “In part, that’s because of the demographics of society. People are older, their flavor profiles are stronger and they want different flavor enhancements on cheese, rather than just the standard American type.”

Indeed, today’s consumers are far more adventurous than in years past, according to Chris Dinsdale, vice president of sales and marketing, Tillamook County Creamery Association, Tilla­mook, Ore. Consequently, they are seeking a wider array of cheeses, resulting in increased demand for aged cheeses, particularly sharp and extra-sharp varieties.

“We’ve been able to trade consumers up to those products,” says Dinsdale. “It gives them a different flavor profile, something they can use for parties, where they want something a little different in the cheddar category.”

Unfortunately, developing a new, highly flavored cheese may be easier said than done. Cabot, Vt.-based Cabot Creamery Cooperative learned that the hard way with its Taste of Tuscany flavored cheddar. The all-natural cheese mixed herbs, sun-drenched tomatoes and spices for a flavor that “exudes la dolce vita.”

The problem, says Jed Davis, director of marketing, was that it included simply too many flavorings. “We went with about a dozen ingredients reminiscent of flavors that you would associate with the Tuscany region of Italy,” he says. “It actually does taste very good, but there’s some imbalance in the particulate-to-cheese ratio because the cheese is very crumbly.”

Consequently, Davis reports that Taste of Tuscany has been placed on Cabot’s back burner for the time being, while the company focuses its efforts on other initiatives, like Shapes of the Cape Baked Snack Crackers, a joint effort with Cape Cod Potato Chips. Designed for the upscale consumer, Shapes of the Cape are bite-sized crackers in classic seaside shapes, including a seagull, shell, sailboat and lighthouse. Available nationwide, they are produced in four varieties: Sharp Cheddar, Smoked Cheddar, Sharp Cheddar 40 Percent Reduced Fat, and Beach Party Classic Mix, which also includes Cape Cod’s lighthouse pretzels and peanuts.

Sargento, meanwhile, has focused its R&D efforts on snacking and entertaining. Last year, the company test marketed Cracker Snacks, a line of natural cheese sliced the appropriate size to fit on a cracker. Sold in 6-ounce resealable packages, Cracker Snacks are available in Colby Jack, Medium Cheddar and a variety pack of Monterey Jack and Mild Cheddar.

Gannon says consumers were receptive to the concept, but the packaging needs an overhaul to more clearly communicate the fact that it contains cracker-sized slices of cheese. “They thought it was just a slice of cheese,” she explains. “They didn’t realize that it was actually four slices and already portioned for their crackers.”

The company also introduced Sargento SunBursts and Stars and Moons snacks, bite-size shaped cheese snacks sold in 7-ounce resealable packages. SunBursts are available in a Mild Cheddar, Colby Jack and Monterey Jack variety pack, while Stars and Moons are available in a Mild Cheddar and Monterey Jack variety pack. Unlike many cheese snack items on the market today, these “finger-friendly” items are geared toward adults, rather than children. Gannon says they were developed for adults to either snack on right out of the bag or use on a party tray with crackers or small bread rounds. She cites growth in all snack cheeses, as well as in sliced cheese, both at retail and in foodservice.

“Our slices, in particular, have been very strong, which we attribute to a lot of on-the-go eating and the popularity of sandwiches,” she says. “Sandwiches that are served out of home are very important menu items. They almost always use cheese, and now they are using multiple forms of cheese.”

To encourage further use of cheese through the foodservice channel, DMI in 2001 assembled the Cheese Advisory Panel (CAP), a group of esteemed culinary-thought leaders. Their goal is to identify emerging trends in the cheese world and then help promote and increase demand for U.S.-produced cheeses away from home. According to Chris Moore, vice president of foodservice channel development for DMI, 40 percent of American-produced cheese moves through the foodservice channel. Most food trends, Moore says, start in the so-called “white tablecloth” restaurants and then work their way down through casual dining establishments like Finnegan’s, TGIFriday’s and Chili’s before reaching the quick-serve arena, where chains such as McDonald’s, Burger King and Subway use a great deal of cheese.

“Cheese is pretty ubiquitous on foodservice menus,” says Moore. “It has a wide application throughout multiple menu categories, such as pizza, cheeseburgers and Mexican dishes such as burritos and tacos.”

Recognizing the opportunity to push even more cheese out through the foodservice channel, DMI partners with a number of large restaurant chains to develop signature items that rely heavily on cheese. One of its most fruitful partnerships has been with Wendy’s, which offers, among its most recent innovations, two new cheese-friendly sandwiches — Wild Mountain Chicken and the Wild Mountain Bacon Cheeseburger. Boasting a slice of colby-jack cheese, along with a hot and smoky Southwestern pepper sauce, both sandwiches have been featured menu items at the chain’s nearly 6,000 stores nationwide.

In another successful partnership, the American Dairy Association, the product-marketing arm of the national Dairy Checkoff program, has joined forces with Pillsbury to create a special cheese category as part of the 41st annual Pillsbury Bake-Off Contest. This year, the Bake-Off featured its first ever “America’s Greatest Cheese Recipe Awards” for the best recipes made with cheese.

Consumers were encouraged to submit their favorite recipes, as long as they included a minimum of two different kinds of cheese and at least a cup and a half of cheese. Four winners were selected and awarded $5,000 each for their “unique use of cheese.”

These kinds of initiatives, coupled with extensive investments in R&D and the new trends in healthy eating have cheese processors feeling pretty confident these days. Not only do they believe their product is one that consumers value highly, but they also feel it has the kind of intense loyalty that will keep people coming back for more even when the price is slightly higher than normal.

“Cheese is a product that hits a lot of the important consumer purchase hot buttons from the standpoint of ease-of-use, convenience and value,” says Davis. “Even though it may become a little more expensive in the short-term, we still have every reason to remain bullish.”  df

Top 10 Natural Chunk Cheese Brands*
	$ Sales(In Millions)	% Change vs. Year Ago	Dollar Share	Unit Sales (In Millions)	% Change vs. Year Ago
Total Category	$2,062.2	7.6%	100.0%	725.6	5.3%
Private Label	807.5	7.4	39.2	307.2	3.3
Kraft	217.3	5.8	10.5	101.6	7.9
Tillamook	137.2	-0.1	6.7	31.1	-1.6
Kraft Cracker Barrel	98.8	3.9	4.8	33.9	4.2
Land O’Lakes	57.9	20.2	2.8	23.5	7.9
Heluva Good	41.4	30.5	2.0	18.1	25.6
Cacique	40.6	-11.4	2.0	11.6	-12.1
Cabot	40.0	7.1	1.9	16.0	2.1
Polly O	38.4	14.7	1.9	11.5	17.1
Precious	34.6	-3.9	1.7	7.0	-4.4
* 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.
Top 10 Natural Shredded Cheese Brands*
	$ Sales (In Millions)	% Change vs. Year Ago	Dollar Share	Unit Sales (In Millions)	% Change vs. Year Ago
Total Category	$1,852.2	5.6%	100.0%	784.9	4.0%
Private Label	797.1	4.5	43.0	351.0	0.2
Kraft	495.1	8.4	26.7	208.9	9.8
Sargento	221.6	-1.5	12.0	89.5	-1.6
Crystal Farms	70.4	10.9	3.8	28.2	12.3
Borden	63.1	28.9	3.4	33.4	31.0
Kraft Classic Melts	33.3	-1.3	1.8	14.4	0.0
Kraft Free	28.0	7.1	1.5	10.6	9.2
Di Giorno	25.4	-4.4	1.4	7.5	-5.8
Sorrento	15.8	-11.1	0.9	6.2	-11.5
Stella	12.0	6.1	0.7	3.9	0.8
* 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.