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The Milk Industry Marketing Analysis

The Milk Industry Marketing Analysis

Running Header: American Dairy Farms: Endless Transformations of Marketing and Management Strategies American Dairy Farms: Endless Transformations of Marketing and Management Strategies Jason L Ambrosino MKTG600 Executive Summary Dairy farms have been a symbol of Americana since its inception, but dairy farmers, particularly local dairy farmers, have faced an uphill battle since the industrial revolution. A brief history of dairy farming reveals the transformations of an industry that was once a backyard chore, and how it has become the mega business that it is today.

While over regulation in both Federal and State levels had reduced the importance of marketing within the dairy industry for over half of the twentieth century, the elimination of government subsidy increases and the entry of new milk substitute products has forced the industry to seriously focus on marketing strategies. Cooperative giants within the dairy industry were responsible for one of the most memorable marketing campaigns, which is still widely publicized today: “Got Milk. As the cooperatives consolidated into larger mega-cooperatives, to include Dairy Farms of America, the advertising and marketing expertise has led to substantial profits for distributors DEAN and BORDEN farms. Local dairy farmers are at a significant disadvantage in the modern milk age, but if they embrace the niche markets created by the larger factory farms and big business dairy they can maximize their profits and survive regardless of the low ball prices processors continue to demand.

American Dairy Farms: Endless Transformations of Marketing and Management Strategies Nothing provides a more nostalgic memory than American dairy farming, from the yesteryear of the family cow, to the modern factory farms responsible for the milk in the cartons, dairy has been a vital importance in American culture, economy, and even politics. As Americans began to specialize and the industrial revolution came into its full force, the family cow began to disappear and dairy, as a cash crop, became ever more prominent.

As farms began to specialize in the production of dairy, specifically in the production of milk, local marketing became an important aspect in operating a successful dairy business, most often accompanied with delivery in glass bottles with a friendly man in a white suit. As competition among local operators increased, the price of the everyday staple plummeted, eventually leading to a thinning of local dairy farms but also leading to a coalition of farmers, responsible for many of the common slogans and advertisements such as “Got Milk” that have become an important part of Americana.

While the dairy farmers’ coalition remains, most local farmers have given way to larger factory farms either through partnership or buyout; which has also led to a change of both business operational and marketing strategy. A look into the history of American Dairy farming and the corresponding transformations it has undergone also provides a cross cut of many marketing strategies and techniques that have undergone their own transformations to best accomplish their primary goal: Sell more milk.

Milk has long been the hallmark product of dairy farmers, but just as most local farms have transformed into larger factory farms, capable of producing more product at significantly cheaper costs, some dairy farms have focused on differentiation and specialization either in the sense of producing an organic product, capable of obtaining top market dollar, or have adjusted their manufacturing process to specialize in the production of alternative dairy products such as cheeses and yogurts, creating new American markets and capturing higher profits where none previously existed.

The History of American Dairy Farming It is no surprise that dairy farming has been a staple of society for thousands of years, and as stated before, in most cases a family may have owned only a single cow to sustain their needs. Such was the norm within the United States from its inception through the majority of 1800’s. Often families would end up producing more milk than they could consume, the excess milk would be bartered in the city to those who did not have the space or ability to care for and own their own cow, this process amounted to simple bartering.

In these simpler times little marketing was needed for families to off load their unused product in exchange for a needed commodity. Towards the end of the 1800’s all of this changed as pasteurization and mechanical milking mechanisms began to enter the market. Additionally, cities were becoming denser, demand was increasing, and opportunity was ripe for the advent of dairy farming as a cash crop commodity (Fairvue Farms, 2008).

Over the past 100 years American dairy farms have undergone a huge amount of change to include: a significant reduction in the number of cows, a six times increase in each cows production, greater total annual milk production, significant decline in the number of dairy herds, a large increase in the number of cows per herd, a shift of cows from the north and east to the west, a significant decline in the total per person consumption of milk fluids but an equal increase in the consumption of cheese.

All of these changes amount to significant changes in both marketing and the related management of dairy farming (Coppock, 2000). Large dairy farms remained a rarity however; with only a handful being operational prior to 1900 in the Northeast, servicing mainly the large industrial areas of New York City, Boston, and Newark, NJ. As local dairy farmers began to specialize in the production of milk, competition began to increase. And, with that competition, became the obvious need for the cooperation between farmers in order to maintain a fair price to both consumers and producers.

In 1922 congress passed the Capper-Volstead Act which encouraged the formation of farmer co-operatives and many dairy co-operatives were born based on these early subsidies. Co-ops have played a major role in the American dairy industry, and remain a powerful and sometimes controversial marketing and management technique still prominent today. Most co-ops remained local coalitions of dairy farmers. But, as the 1950’s approached, these cooperatives encompassed more and more farms, eventually leading to state central cooperatives and even regionally centralized.

In 1950 there were 2,072 cooperatives, in 1998 the figure was recorded at 230 and since 1998 and the rise of the Dairy Farmers of America (DFA) that number has dwindled even more. While the number of collective farms and cooperatives have decreased as time has elapsed, the amount of milk marketed by the cooperatives has increased from 53 to 87% over a 40 plus year span. Much of the controversy surrounding DFA and other large co-ops is the fact that 50 of the largest cooperatives market over 85% of American milk (Coppock, 2000).

Dairy Farmers have long faced wavering prices for their commodity; in one historical instance independent dairy farmers dumped milk down storm drains to offset surpluses in an effort to stabilize pricing. Most recently in 2009, local independent farmers were forced to sell off thousands of head of dairy cattle for half their value to the meat market in order to continue paying on their mortgages and hope to overcome serious shortfalls in the cost of production verse the sale price received per gallon.

In addition to these radical attempts at price stabilization, most cooperatives began to focus on marketing in the 1980’s and because the marketing would be beneficial to all dairy farmers the expense of the advertising would also be passed to all. In 1984, a mandatory check-off of $. 15 cwt of milk was designated for promotion; up to $. 10 of this amount had the option of being designated for local advertising agencies and no less than $. 05 was provided to national agencies. Since 1984, all dairy farmers have been forced to contribute to the promotion of milk and other dairy products (Coppock, 2000).

Also in the 1980’s, both cooperatives and milk handlers began to offer incentives to milk producers to ensure the quality of their product through the use of indicators such as bacteria counts and somatic cell counts. The same incentives were expanded to upgrading and maintain equipment that would ensure quality such as inline coolers and sanitation measures; together these incentives have resulted in significant improvement in product quality and consistency over the past 30 years (Coppock, 2000). Marketing Milk As stated, the marketing of milk has adapted as the industry as a whole has changed.

But the marketing of milk and the adaptations thereof, highlight important principles that have played a part in the development of both the manufacturing and marketing of American dairy products, especially milk. Several time periods can be highlighted that identify distinct changes in the milk market and the marketing of said milk. These time periods include 1890-1929 – industrial revolution, 1930-1949 – Depression & War Time, 1950-1979 – stabilization and improvements, 1980-Present – Factorization and consolidation. 1890-1929: Industrial Revolution

While marketing techniques and principles as we identify and know them today did not factor into the production of milk at this early time, they were not necessarily absent from existence. The governmental regulations, subsidies, and pricing structure as we know it today did not exist in this initial period of milk marketing. In fact, the market was operating in a near perfect “free market” scenario at this early time. Local communities were supported by local farms, and the larger cities were supported by multiple farms; supported by a new concept of cooperatives which would be fully endorsed by congress towards the close of the 1920’s.

Milk needed little marketing as most sales were completed within days of milking due to the lack of refrigeration mechanisms and the real potential for spoilage (A Brief History of The Vermont Dairy Industry, 2008). Most dairy farmers were self sustained farmers not only harvesting milk from cows but also responsible for the harvesting of wheats and grains, as well as the providers of meat. While early milking devices began to populate the dairy industry as early as the late 1890’s they did not become mainstream until the late 1920’s.

The 1890-1929 periods provided the building blocks and a gate way to an actual dairy industry as population centers became more focused in industrial centers and a greater amount of product was desired within those population centers. Additionally, the increase in demand, and the lack of sanitary production methods, to include the lack of reliable refrigeration would eventually lead to additional government regulation in future decades (A Brief History of The Vermont Dairy Industry, 2008). 1930-1949: Depression & Wartime

As the great depression ensued, additional government regulation in regards to both subsidized commodities, and sanitation guidelines (as spurred by the creation of the FDA) had an effect on the dairy market. Initially, economic collapse led to consumers simply not having the purchase power to afford dairy products, pricing plans negotiated between independent farmers, cooperatives, processors, and dealers were no longer honored and as a result prices plunged and the Federal government had to step in to both stabilize prices and prevent future collapse.

In 1933, Congress passed the Agricultural Adjustment Act which helped to stabilize dairy prices. The act established a licensing system for milk marketing and the supporting of milk prices; eventually transformed into the federal milk marketing orders which are still utilized today (Bailey, 1997). States also enacted price floors that established minimum pricing that milk would be sold for. The government would quickly become a farmer’s greatest customer and dairy farmers were now expected to produce significantly more amounts of milk in order to meet Government needs and requirements set by different “New Deal” social programs.

Dairy farms became heavily subsidized while in parallel, large improvements and processes and equipment were being made. By the onset of the war, dairy farms had been revolutionized with new milking equipment, higher demand, greater output per head of livestock, and a new expectation of production that would spur the future commune dairy farmer. Most state and federal regulations that exist today still have their origins during this period of time.

While it is clear that both the Federal and State Government’s sought to enact legislation in order to help and protect the dairy farmer, most of the legislation, expected to be temporary at the time, would become permanent fixtures that significantly affect dairy farmers even today (Coppock, 2000). As the United States became increasingly affected by WWII, dairy – like all consumer goods, was out produced by war time production requirements. A great amount of milk was converted into powdered milk for delivery to Troops over-seas and was also rationed out in the states.

As troops returned home and new money was injected into the economy, as well as the family farm, the dairy industry took on an entirely new face that would carry it through the next thirty years (Jeffords, 2010). 1950-1980: Stabilization and Improvements The time period between the 1950’s and the 1980’s saw real corporate growth and the true demise of the small dairy farmers. New milking techniques and machinery significantly increased the total amount of milk received per cow er milking session, improved refrigeration and holding tanks allowed milk to stay fresh longer and led to inter-state and cross country sales of milk, and new fertilization and insemination techniques led to better stock; dairy farmers who were unable to keep up with the new trends were quickly forced out of a growingly competitive market (Sustainable Table, 2010). After WWII, the dairy industry experienced significant change. Mom and Pop grocery stores, which traditionally carried the local labels of milk, came under increased pressure from larger retail grocery stores.

Chain stores sought out large quantities of uniform quality milk and dairy products, which by nature favored large suppliers; this large demand would foster in the cooperative mass collection, distribution, and processing manufacturing processes used today. As the economy developed, chain grocery stores exploded and with it so did the demand for large processor milk. Most communities were used to having one or two bottling facilities that would service their county, but with the advent of big business dairy, most of these were forced out of business, as well as small mom and pop shops that favored local milk.

As it became easier to transport milk across the country, states as well as local communities, created market boundaries in the form of sanitation regulation that would keep “foreign” milk out. The entire era was marked by increasing regulation, as counties would pass regulation, leading to state regulation, leading to federal regulations, which eventually led to a spike in court cases and would make milk and dairy the most over regulated commodity within the American economy (Coppock, 2000).

As big business milk began to compete with local milk, marketing local milk over cooperative “foreign” milk took on a new importance. Rather than expend any significant capital, which would be wasteful and futile at best, local milk producers choose to seek out barriers to entry, which were marginally successful through regulations as mentioned above. In addition to entry barriers, local producers differentiated themselves by offering delivery of their product, hence the nostalgic picture of the milk man carrying the milk filled glass bottles.

While regulation was successful in somewhat limiting the sale of non-local milk, the competition amongst local farms was fierce. Branding became an important aspect of local dairy operations, and today both the milk bottles and the associated bottle holders that milk was delivered to at each residence, which would bear the name of the dairy farm and a memorable logo, are precious antiques often sought out by collectors.

Some dairy farms would offer variations of the bottled milk that were unique to their farm, such as “cream top,” a variety of milk in which the cream portion of the milk has been separated and left on the top of the bottle, then spooned over morning fruits and cereals, the remainder of the bottle would amount to skim milk, a healthier drinking milk that was gaining in popularity through the 1960’s. The milkman became a staple of the 1950’s and 1960’s and is still a reminder of simpler more personable times (A Brief History of The Vermont Dairy Industry, 2008).

Unfortunately, new products and manufacturing processes in the 1950’s and 1960’s, such as the creation of hydrogenated vegetable oil (artificial cheese), would lead to a significant decline in the demand of milk production. It would be expected that with a decrease in demand the price of and subsidies for milk would also fall, but because of immense regulation the subsidies provided for milk continued to increase each year, encouraging dairy farmers to maintain production and leading to vast stores of milk products that were to be distributed as government surplus (1960’s Food Co-operatives).

As milk prices tumbled, local producers and distributors would need to create cooperatives within their communities to decrease competition and increase profits. Those who remained independent would be forced to subsidize their local milk sales with sales to the big processors, where they received a fraction of what they would receive per gallon when selling milk independently. Luckily for the dairy industry, the 1970’s “naturalist” movement led to an abandonment of the new artificial products and a return all natural “real” foods, to include cheese and yogurt.

Since the 1970’s, in addition to increasing government surpluses, the annual demand for milk products has significantly increased annually. The slight repression in the dairy industry in the 1960’s led to the bankruptcy of many local farms and processors that were just holding on. By the conclusion of the 1970’s nearly all dairy farmers were forced to subsidize their sales with sales to major producers; only the strongest and largest dairy farms remained going into the 1980’s.

The average dairy farmer only maintained 100 head of cattle, and while over 80% of dairy farms were locally led, those dairy farms would only produce a fraction of milk compared to the larger factory farms that were developing in order to meet the needs of the big box super markets (Sustainable Table, 2010). 1980-Present: Factorization and Consolidation In 1980 there were 117,313 farm members in milk cooperatives, down from 561,065 in 1964. While initially, this decrease would suggest a decrease in production, the opposite is actually true.

Because of improvements in milking mechanisms, the introduction of hormones, breeding improvements, and other technological advances, by 1980 a cow was capable of producing four times the amount of milk that it would have been able to produce only twenty years prior. Additionally, new milking mechanisms led to the expansion of farms and a general increase in the number of heads a farmer could reasonably manage, in some cases over 1000 head per farm.

The natural tendency was for the bigger farms to continue to increase in size and production, while the smaller farms continued to exit the dairy industry. A marketing strategy remained relatively unneeded as milk had little to compete with, most milk was purchased through coordinated efforts with local cooperatives, and the price was established and set by a combination of demand, but more importantly annually increasing subsidies. This all changed however once the perpetually growing subsidies were frozen at the end of the 1980’s.

Increasing demand and marketing dairy became much more important in order to maintain continued profit growth in future years. It quickly became clear that to dairy producers that a marketing strategy must be embraced which encompassed and benefited all aspects of the dairy industry. Because most dairy farmers were already in cooperatives, it made little sense for cooperatives to market against one another. Instead, the dairy industry as a whole simply ear marked additional funds from the base price of milk to pay for future advertising (Bailey, 1997).

Dairy farming really came into public consciousness in the early 1990’s, 1993 to be exact, with the introduction of the “Got Milk” campaign. The staple product quickly became associated with a catchy slogan, often accompanied by a “Milk Stache” that truly helped to drive sales. The “Got Milk” slogan was not the unilateral marketing approach that was taken to market milk and in 1996 when Dairy Farmers of America consolidated some of the largest producers and cooperatives it injected true corporate America into the dairy industry.

Several marketing strategies were embraced to include the promotion of nutritional values, appeals to the organic market, and the use of social media and the internet (Dairy Marketing Strategy). The “Got Milk” campaign however, has been the corner stone marketing campaign of the dairy industry. The campaign proved that any product, even a staple household commodity, can be reinvented with a successful marketing campaign.

It became “cool” to drink milk as celebrities like Michael Jordan, Brett Favre, and even Bugs Bunny, showed off their milk stache on Saturday morning cartoons. But Children were not the only target audience; the nutritional advantages were focused towards middle age adults and seniors, while the body building capabilities and the use of attractive celebrities played to the teenagers and twenty some-things concerned with image (Gilbert, 2004). Dairy farms have continued to dwindle to only 50% of what they were even in 1980, but production continues to increase.

In 1996, when DFA consolidated several regional cooperatives local dairy farmers were left with little recourse but to submit to DFA’s demands, accept milk prices as offered and participate in the cooperative, who was effectively a mouthpiece for the middle man producer DEAN dairy, which is estimated to produce 80% of the dairy products consumed in the US today. While the small dairy farmer has given way to larger factory style dairy farms, much has evolved within the industry to include marketing strategies.

To date DFA in coordination with several other large cooperatives have built a very valuable “Dairy” and “Real” brand that has expanded to encompass cheese, chocolate milk, yogurt, ice cream, and variety of additional dairy products (Sustainable Table, 2010). The online portal Dairy Management Incorporated, which manages the dairy check-off program (marketing program) leads to 13 separate websites that in some way promote a dairy product. Factory farms have also led to the creation of new niche markets within dairy farming that can be exploited by local farmers.

Much like the “microbrew” craze of the past decade, more and more consumers are interested in purchasing locally manufactured goods, and while milk is too bland of a product to compete against large producers, even in the organic market, cheese and yogurt is not. Dairy farmers who have shifted production to cheese have been able to multiply profits by nearly 10 times what they had been realizing with milk sales alone; milk sales alone have actually led to net losses over the past five years.

Controversy will continue to surround the DFA, DEAN foods, and other large distribution and production facilities, but much like the Mom and Pop shops, which have also seen a slight come back over the past five years, local dairy farmers must adjust their marketing strategies and product lines if they hope to stay alive. Pressure from alternative product choices such as soy and almond milk will continue to put pressure on the milk industry and over the past five years the sales of liquid milk have plummeted. While the sale of stock cheddar, which actually controls the commodity price of milk, has continued to rise (Fairvue Farms, 2008).

Local dairy farmers have a unique opportunity to maximize on a niche market which is continually expanding in search of new “micro cheeses” and yogurts produced locally. References A Brief History of The Vermont Dairy Industry. (2008). Retrieved March 31, 2011, from Vermont Dairy: http://www. vermontdairy. com/dairy_industry/history Bailey, K. W. (1997). Marketing and pricing of milk and dairy products in the United States. Ames, Iowa: Iowa State Press. Coppock, C. E. (2000). History of Dairy Production from 1900-2000. Retrieved March 31, 2011, from Selected Features of the US Dairy Industry from 1900-2000: http://www. coppock. om/carl/writings/History_of_Dairy_Production_From_1900_to_2000. htm Dairy Marketing Strategy. (n. d. ). Retrieved from Ehow: http://www. ehow. com/info_7785519_dairy-marketing-strategy. html Fairvue Farms. (2008). THE HISTORY OF U. S. DAIRY FARMING – THEN AND NOW . Retrieved March 31, 2011, from FAIRVUE FARMS, A Family dairy in CT: http://www. fairvuefarms. com/historydairy. htm Gilbert, S. R. (2004). IMPROVE THE MARKETING OPPORTUNITIES FOR SMALL AND MEDIUM. Maine Department Agriculture, Food and Rural Resources. Jeffords, J. F. (2010). Milk Pricing and Vermont Dairy Industry, history of dairy pricing. Burlington: University