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3 open minutes with Tom Gallagher

PD Editor Walt Cooley Published on 07 June 2011

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Per-capita fluid milk consumption in the U.S. has been in decline for a number of years. Progressive Dairyman Editor Walt Cooley recently asked Dairy Management, Inc. CEO Tom Gallagher why fluid milk consumption is in decline and what can be done to reverse the trend.

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Q. Why is fluid milk consumption declining?
A. GALLAGHER:
It’s a fact that for all but one of the last 25-plus years, per-capita milk consumption has declined. There are a lot of people who operate under the myth that the fluid market is a mature market and it’s just not capable of growing. That’s just not true.

Fluid is a growth opportunity, but it’s not going to be a growth opportunity if we don’t do the things that our competitors do, meaning have modern packages and marketing techniques. We must not try to treat it as a commodity, but provide people essentially with what they want, where they want it and how they want it. And when we do that, we will see growth.

Some say, “Water has taken our share, or this other thing has taken our share.” It’s not that they’ve taken our share because we can’t compete. We’re not doing what they’re doing.

We already have the product that everybody wants – the nutritional package.

I’ll give you an example of changing how we compete, and you’re probably familiar with this, but years ago we were the ones who went into McDonald’s and sold them on getting rid of the square cardboard container because it’s not what the consumer wanted at the food service.

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First of all, the package – kids don’t want it. It’s childish-looking. They couldn’t open it. It didn’t fit in a car’s cup holder. We told them of our study that showed if you provide milk in a round re-sealable container with low-fat flavors, they could do pretty good with sales.

Well, they did, and they made the change. Then 75,000 other food outlets like Burger King, Wendy’s, etc., made the change. Now because of that change, about 800 million units of eight-ounce milk are sold a year that weren’t being sold 10 years ago – by just finding an opportunity and providing it.

Here’s another example. On average, 50 percent of people over the age of 18 don’t drink milk, and that’s stunning. But even beyond that, half of those people who don’t drink milk say they don’t because they believe themselves or have been told by someone else that they’re lactose intolerant, and we know that those self-reported numbers are way too high.

Scientific studies show lactose-intolerance isn’t that prevalent. So a lot of people are not drinking milk who could be drinking it. They don’t have the facts in front of them.

Lactose-free milk is the one area, other than food service, that I just mentioned that actually has increased in the last year. One of the biggest things that sells lactose-free milk is the package.

A 96-ounce package (3/4 gallon), for whatever the reason, and we don’t need to go into all the details, is a key driver of sales. As companies are transitioning to that size, I expect sales to increase.

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Our competitors, they have taken our space because we didn’t get in it, and if we do the right things, this can be a growth business.

Q. Besides package design, what else can milk do to be competitive?
A. GALLAGHER:
Most fluid milk is sold in the form of white gallon and half-gallon containers at retail. Milk has been turned into a commodity product.

Milk companies are competing with each other on a price basis, on thin margins, whereas our competitors are competing with the entire beverage category on a value-added basis. I’m not saying anything negative about our industry, but that’s just the way it is.

If milk companies could be brands and really market and price as brands do on a value-added basis, then that would be a game-changer. That’s an uphill fight because we’ve spent a lot of time saying milk is milk and not marketing brands.

Generic checkoff organizations like ours did a great job in the ’80s and early ’90s with messages about milk. But at some point, there was a negative impact from those generic messages.

We inadvertently contributed to making milk a commodity. The more we talk about milk at a generic level, we undercut every brand’s ability to compete on a value-added basis.

Q. If you were a milk brand CEO, how would you provide added value?
A. GALLAGHER:
I would look at package design – different sizes and packages. I’d talk about messages that resonate with various segments of consumers like “nutrient-rich” or cost per nutritional unit or calorie as compared to water or soda.

Milk also has a really great documented story on sustainability. I would use that in my marketing to connect with that 10 to 20 percent of consumers that are interested and motivated by sustainability. I’d probably talk about the local nature of the farm and the farmer.

Q. I recently saw a commercial for soy milk. In it the company claims they had a dairy farm family try their product and like it so much they switched from cows’ milk. Is this a good example of a competitive beverage stealing market share?
A. GALLAGHER:
First, the label soy “milk” is just a travesty of justice. Soy milk, coconut milk and all these other milks – if they’re going to go out there and exist, they shouldn’t be able to have the name milk.

Second, a large percentage of consumers, near 40 percent, believe that soy milk is milk. Soy is a bean. However, they really think that it’s milk.

This is a specialty, upper-crust income niche market. But it’s a market that if dairy marketed to effectively, we could replace or not lose as much to them, because right now the consumer isn’t sure what they’re actually drinking.

We have coming out of the cow what everyone else is trying to formulate and put into a bottle. Right now they’re doing a much better job of marketing.

Q. You’ve been working with McDonald’s for the past year. Do they think fluid milk can be marketed to adults or just kids?
A. GALLAGHER:
As I worked with McDonald’s in the early days, we talked to them about having a 12-ounce or 16-ounce size of milk available. They wanted to go with the smaller size; others followed suit. Their issue with the larger size is two-fold.

First, they’ll have two package sizes, and they’re worried about refrigeration space. The other is the right price point. They just don’t want to have to fuss with that in their system, and their attitude is an adult can grab two of the kid sizes if they want white milk.

Now, what we’re also doing, which I think is really important in additional milk, is to help McDonald’s and other companies develop new dairy-based specialty beverages, which is a high volume category for them.

And they have a major growth effort in this category, so when you think of McDonald’s, don’t just think of the eight-ounce round re-sealable, think about how much milk there is in their coffee and how much milk there is in some of their other specialty drinks.

Remember that about every four days, people go through McDonald’s a hundred million times. If you add in Burger King and Wendy’s and the rest, there are a lot of milk-related transactions, if you can offer just a cup full of milk in milk-based beverages.

Q. Relative to fluid milk consumption, where does increasing fluid milk consumption rank in your organization’s priorities?
A. GALLAGHER:
Fluid milk is an opportunity if we would all step forward and do what needs to be done. I think it’s as high an opportunity as exists.

However, fluid milk consumption is a middle-tier opportunity when compared to some of the other successful things DMI has been engaged in, such as turning around the pizza category or focusing on export markets or even expanding the yogurt market. So I guess I’m giving you two answers.

I see fluid milk right now as the untapped gold mine, but you’ve got to do things to tap into the gold mine. Until we all agree to deal with specific issues, it’s just not going to happen.

We can’t pretend that it’s an issue of, “Gee, if we just message the consumer better or if they’d just understand that there’s nine essential nutrients, they’ll all drink more of it even when their kids are at school getting a package that they don’t like, while seeing competitors produce neater packages and marketing messages and such.”

We’re focused on the lactose-free market, which we believe is a massive growth market and another value-added area, and then we’re also focused on milk as a complement in specialty beverages. We’d love to do more, but you’ve got to do it in sync with the industry.

Q. What are the first steps the industry needs to take to move towards unlocking the gold mine?
A. GALLAGHER:
I think, first of all, the generic checkoff-funded groups like mine need to try to not overstep. We can do research on what consumers want and we can do formulations for consumers and we can do the nutrition and claims research and more, but we overstep when we start giving broad-base messages.

Then the brands step in and say, “Well, now that that message is out there, what can I do? You guys just took the vitamin D story or you guys just took this story or that one.”

We can support brands with some of the other things that I mentioned, but we shouldn’t be doing what brands can do best.

Q. In your opinion, what’s the most important dairy industry issue today?
A. GALLAGHER:
Here’s what I think we all have to consider: You have studies like the Bain Report that say there’s 15 billion pounds of unmet demand in the world, and there are similar studies about unmet cheese demand – estimated at another 2 billion pounds.

So producers are told on one hand that there’s billions and billions and billions of pounds of unmet demand, if we’d just provide the consumer what they want, where they want it and how they want it. Then farmers, on the other hand, are told at different times, “You guys are overproducing or underproducing.”

It’s not logical to them nor to any rational business sense when you put those two statements together: “There’s billions of pounds out there that we could sell, but you guys over here are producing too much milk?”

The issue, really, is in the middle with the infrastructure and government policy. There are very good reasons why manufacturers and processors and co-ops don’t take the risk that goes along with providing the unmet demand the world has.

That’s the spigot. That’s what causes milk production at times to be viewed as too much or too little.

However, to be clear, nobody in the middle is a bad actor or trying to not improve sales. We are working with the middlemen through the Innovation Center for U.S. Dairy.

If we can all agree on big opportunities, go do the research that needs to be done and support them, then they will be able to develop and capture those opportunities so that everyone in the chain, particularly my stakeholders, the dairy farmer, benefits. PD

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