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Economics with Ken Bailey
By Ken Bailey
University of Missouri-Columbia
Extension Dairy Economist
Fluid Processors Missing Opportunities
The National Academy of Sciences (NAS) issued a stunning report last month that concluded Americans are not getting enough calcium in their diets. That lack of calcium can lead to the brittle bone disease known as osteoporosis. Bones need calcium and phosphorus to remain healthy. Milk provides these two minerals in approximately the same ratio as found in bone. The NAS suggests increasing the recommended daily allowance of calcium in the diet. Translated into everyday language, American's should drink one more glass of milk per day.

This could have tremendous implications for the U.S. dairy industry. If just 20 percent of the population were to drink one extra glass of milk per day, that would represent a 19 percent increase in annual fluid milk sales (up 10.6 billion pounds a year). Imagine what that would do to the farm price of milk!

But the reality is that American's have been turning away from milk in the last two decades, purchasing other beverages such as soda, fruit juices and bottled water. These products use high dollar advertising programs and slick packaging that appeals to consumers. Unless decisive actions are taken, American consumers could react to the NAS report by purchasing calcium pills from their local health food store or buying calcium-fortified orange juice rather than drinking more milk. This report should serve as a wake up call to the U.S. dairy industry, which has witnessed a steady decline in market share over the past 25 years.

Trends in Fluid Milk Consumption
Fluid milk sales increased just 5.7 percent over the last twenty years, from 52.5 billion pounds in 1974 to just 55.5 billion pounds in 1996. Plain whole milk sales declined precipitously over this period, but was more than offset by a sharp rise in lowfat and skim milk sales. Clearly American consumers became more fat conscience during this period, resulting in greater sales of lower-fat products. But did Americans switch to new low fat products, or did we lose some consumers and gain others?

Although total fluid sales gained slightly during this time period, sales on a per capita basis actually fell. As the population increased throughout the period 1974-96, Americans consumed less dairy products (see chart). Again, the rapid decline in whole milk products and the rise in lower fat products are apparent.

Fluid milk competes with other products within a beverage market. Products such as soft drinks, fruit juices and bottled water competes with milk for a share of the consumers dollar in a retail environment consisting of supermarkets, convenience stores, and vending machines. Milk's share of the consumer's stomach has been losing ground to other beverages. According to the Milk Industry Foundation, a trade group that represents 85 percent of the nations fluid processors, milk's share of the beverage market in 1996 was just 10.2 percent, down from 10.7 percent in 1989. That compares to 28.9 percent for soft drinks, 12.0 percent for coffee, 11.2 percent for beer, 6.7 percent for bottled water, 5.0 percent for tea, 3.7 percent for juices, 3.1 percent for powdered drinks, and 19.2 percent for water and other beverages. Declines in beverages such as milk, coffee, beer, and juices were offset by gains in soft drinks, bottled water, and tea.

Role of Advertising
The milk industry has historically relied on producer-funded generic advertising programs in order to conduct research and develop advertising and promotion programs. These programs in the past were funded by a producer check off. Dairy producers would elect to have a nickel check off taken off their milk check in order to fund a regional advertising and promotion program. These programs became mandatory in the mid-1980s as surplus government stocks created an economic burden for taxpayers. Congress created a mandatory check off program in the amount of 15 cents per cwt. in order to fund a comprehensive research, education, advertising and promotion program. The hope was that an effective program would increase the consumption of milk and dairy products and reduce the amount of surplus products moving into government storage.

The producer-funded check off program is managed today by Dairy Management Inc (DMI). That organization was formed out of a merger between the National Dairy Promotion and Research Board, and the United Dairy Industry Association. They direct all research and promotion programs, as well as the popular advertising program, "Got Milk." Fluid milk processors also became interested in generic advertising and created the National Fluid Milk Processor Promotion Board and created their own program called MilkPEP. They created the now famous "milk mustache" commercials.

But are these generic advertising programs effective? Are they resulting in increased sales in milk and dairy products? That question is asked each year by the Congress, which requires the USDA to report on the effectiveness of the producer-funded check off program. Their response is that yes, per capita fluid milk sales have declined, but they would have been even worse without advertising and promotion programs.

That answer, while adequate in government and academia, doesn't work in the real world. The name of the game in retail is to increase sales over a year ago. Products that show steady declines get replaced with other products. The real message here is that milk sales need to be going better.

My interpretation is that both of the advertising programs have been very effective in heightening consumer's awareness of milk and have made a positive image for milk. But for some reason, that has not yet translated into greater retail sales.

Strategic Thinking Project
The good news is all doesn't look as grime as the statistics might suggest. The are a number of industry sponsored efforts underway that are likely to have a positive impact on fluid milk sales.

In early 1995, staff from the MIF, DMI and MilkPEP formed the Fluid Milk Strategic Thinking Project to help milk companies better compete with other beverages and ultimately increase fluid milk sales. Consumer research conducted by both MilkPEP and DMI identified seven core barriers to consumers drinking milk. The first four barriers (no. 1-4 below) are being addressed by the combined advertising, promotions and public relations programs in existence via MilkPEP and DMI. Barriers no. 5-7 became the focus of the strategic report.
  1. Health concerns over fat.
  2. Milk is not a modern/contemporary drink.
  3. Milk is only for kids
  4. Milk is usually associated with high fat snack foods and in traditional in home meals.
  5. Milk is not convenient or readily available for consumption outside the home.
  6. Milk packaging, when compared to that of other beverages, is not attention getting, attractive, convenient, or consumer-friendly and does not promote portable consumption.
  7. With only one predominant flavor, milk does not provide consumers with a variety of taste options and choices like other beverages. Also, the appearance and color of skim milk is an inhibitor to selling to those that want to switch to a low-fat alternative.

I got really excited when I read this report because it identified head on many of the problems with fluid milk that I have personally experienced. The packaging is rather boring and bland. How many consumers walk right past the milk case because of this? And milk does only have one flavor. The report noted that Snapple has more than 54 flavors on the market that appeal to diverse consumer tastes.

Portability is also a problem. Many consumers want a single serving container with a resealable cap; something that may also fit into the cup holder in many of today's family cars and vans. The report also notes that milk sales are overly dependent on one channel of distribution, the grocery store. Milk sales should be diversified into more convenience stores, food service, vending machines, drug stores, mass merchandisers, etc.

I was also glad the report noted that skim milk has a problem. I use skim milk every morning in my bowl of cereal. Yes, it does look blue and it does appear to be missing something. I'd sure like to have a richer, better tasting product that is also low fat.

The task force then identified five recommended actions to help increase fluid milk sales. They are:

  1. Reposition Skim Milk-whiten skim milk to improve its appearance and consumer appeal. Transition from the name "Skim Milk" to "Fat Free Milk" in order to sell consumers better on the primary benefit of the product.
  2. Better Labels-put consumer-meaningful language on the label to help sell the product.
  3. Upgrade the Packaging-add attention-getting graphics and color to labels, and develop single-serve containers that are more portable, easy to open, and resealable.
  4. Increase Product Availability-using better labels and packaging will help increase distribution through convenience stores and other channels of distribution.
  5. Offer Greater Variety of Flavors-provide consumers with expanded options of flavors to choose from. Providing only white milk and basic chocolate cause consumers to look to other beverages for variety.

The MIF has been working with the dairy industry to phase in new labeling standards. Gone will be the old terminology of 1%, 2% and skim. In will come more meaningful terms like "low fat" or "fat free." MIF has also recommended that better labels be designed with more consumer meaningful language such as "Excellent Source of Calcium," "Excellent Source of Vitamin D," and "Good Source of Vitamin A." Other beverages are already doing this. Minute Maid Premium orange juice carries a label, "Calcium rich, as much calcium as milk."

They also recommend removing claims such as "Pasteurized" and "Homogenized" that aren't meaningful to consumers and moving "Grade A" and the ingredient statement to a side panel on the carton.

Conclusions
Industry appears to be listening to the strategic thinking project and is developing new products. MMI, a dairy cooperative in Strongsville, Ohio, jointly developed a new product with a regional affiliate of DMI. They developed a fresh milk product called "Moo Koolers" that comes in 8 and 12 oz. single serve round packages. It has a really graphical label with a cow wearing sunglasses. And, they used focus groups to develop flavor names such as Vanilla Zilla, Choco Boom, Orange Slide, Choc Kool, and Strawberry Blast. This product was introduced in the first half of 1996 in Ohio.

Many dairy farmers have questioned the effectiveness of their advertising checkoff dollars. There is no doubt that advertising programs have paid off in terms of raising consumer's awareness of milk and overcoming some obstacles to greater consumption. But that has not been enough to increase fluid milk consumption! That's because consumers have been disappointed with the product on the shelf. However, DMI, MilkPEP and the MIF have shown true leadership via the strategic thinking project that could turn this industry around. Those ideas can stimulate the dairy industry to make significant changes that can lead to greater fluid milk consumption. That in turn will lead to higher farm-gate milk prices. The strategic thinking project shows what can happen when people cooperate and work together. Dairy farmers and their cooperatives, fluid milk processors, and grocery stores and other retailers need to all be working together to solve this problem.

Ken Bailey E-mail: ssbailey@muccmail.missouri.edu


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