usa dairy distribution dm2009
TRANSCRIPT
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IBIP Dairy Analysis in the United States & ChinaBy: DeSutter, Erickson, Liu, & Witchek (April 2010)
II. INDUSTRY ANALYSIS
A. Competition1) United StatesWith at least 67 fluid milk companies in the United States (Mantra, 2010) battling to sell
the 189,320 million pounds of milk produced in 2009 (Miller, 2010), competition is stiff. In
America, milk and cheese each claim 37 percent, or $16.6 billion, of the total $44.9 billion
United States dairy market. From 20082013, this industry is calculated to grow at a rate of 4.6
percent, leading the market to a value of $56 billion by 2013. Ranked by total profits, the United
States claims four of the top ten dairy manufacturers in North America (MarketLine, 2010)Kraft Foods, (3rd), Dean Foods Co. (5th), Land OLakes (6th), and Dairy Farmers of America
(7th). Kraft Foods dominated the dairy industry with 13.0 percent of the United States market
share, followed by Dean Foods Company at 4.40 percent, and Dairy Farms of America taking
2.70%. Meanwhile, other dairy companies accounted for the remaining 79.90% of value
(Datamonitor B, 2009).
Overpowering the other dairy industries, Kraft Foods, Inc generated $42,201.0 million in
sales from its five product lines, including snacks, beverages, cheese, grocery, and convenient
meals with 98,000 employees (Datamonitor C, 2010). Dean Foods, the second leading milk
corporation in the United States, who earned $12,454.6 million with 25,800 workers
(Datamonitor B, 2009). Headquartered in Northfield, IL, Kraft Foods also stands 3rd in the dairy
industry for the global marketplace. In their dairy enterprise, the company primarily produces
natural, processed, and cream cheeses through key brands such as Kraft, Velveeta, Cracker
Barrel, Breakstones and Knudsen cottage cheese and sour cream. Despite the intense dairy
competition that may lead to future loss of revenues and strict government regulations, Kraft
Foods has a strong brand image and powerful distribution networks throughout the country
(Datamonitor C, 2010).
Extensive multi-category distribution resources and consumer awareness are Krafts key
strengths. Warehouse delivery and direct store delivery are the two distinct operations of the
distribution sector, and the company owns 303 allocation centers in North America, and grocery
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stores account for 81.9 percent of distribution in the total dairy market. Consumer advertising in
broadcast and prints, outdoor and on-line media, customer incentives like coupons and contest,
and trade promotions are heavily utilized to support their distribution efforts. As of October
2008, Kraft Foods was honored for its growth and innovation with the 2008 Most Innovative
Company award from Consumer Goods Technology magazine, which is an audience of 35,000
consumer goods executives and research advisory boards positioned by industry analysts and
executives (Datamonitor C, 2010).
While the United States dairy market is fairly easy to enter as a small enterprise, entering
the mass market is difficult, with the industry being highly fragmented with the majority of the
enterprise ran by regional and national players. In the United States, dairy retail is concentrated,
as differentiating products such as milk and butter is difficult, although cheese and yogurt are
more specialized. Because consumers tend to purchase the least expensive products, especially
in the milk market, the dairy market is significantly price sensitive. As dairy items become more
individualized, such as organic yogurts and other premium products, there is less emphasis on
price and more attention to specific attributes. Still, price is the main focus of competition
between Americas leading dairy companies (Datamonitor B, 2009).
2) ChinaOf the $17 billion dairy market in 2008, milk sales were the most lucrative, generating $10
billion, which consists of 58.8 percent of the overall market value. Looking ahead, the market is
expected to grow at a rate of 7.1 percent annually until 2013, which is expected to have a value
of $24 billion by the end of the five year period. Currently, there are three major companies
dominating the dairy industry in China today: Bright Food Group with 12.30 percent of the total
share, China Mengniu Dairy Company Limited with 10.50 percent, and the Yili Group
accounting for 10.00 percent of all sales, with the remaining 67.20 percent claimed by smaller
domestic businesses (Datamonitor A, 2009).
Leading the way, the Bright Food Group is a Chinese-based conglomerate essentially
focused on manufacturing and marketing dairy products, as well as rice and wine. The two main
players in their dairy market are Bright Dairy & Food and Shanghai Yimin Group, in which the
subsidiaries are concentrated on milk production, developing dairy products, and promoting
nutritious healthcare foods. Sterilized and pasteurized milk, yogurt, UHT pasteurized milk, milk
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powder, butter, and cheese are their most commonly manufactured products (Datamonitor A,
2009).
Although there is no recent financial information available for the Bright Food Group, the
China Mengniu Dairy Company (Mengniu) generated $3.4 billion in revenues by the end of
2008, an 11.9 percent increase from 2007. With twenty plants in China, Mengniu has 23,500
employees and primarily distributes its products in Hong Kong and Macau. Liquid milk, ice
cream, and other dairy products constitute of the companys three segments. In the liquid milk
category, the brand comprises of UHT milk products, milk beverages, and yogurt (Datamonitor
A, 2009).
While entering the dairy market is fairly easy as a small enterprise, consumer companies
must be substantial and have an integration strategy in order for them to supply the Chinese mass
market industry. Despite the diversity of the dairy companies and products, rivalry is strong
because there are many players who do not take advantages of these differences and appear very
similar to one another. Because there is a wide selection of food and drink that can be utilized by
in analogous ways to dairy products, consumers can easily replace these goods with subsequent
alternatives if milk prices rice too high. As a result, the dairy industry is highly price sensitive,
as consumers have substantial buying power, especially in the milk industry (Datamonitor A,
2009).
With the top three dairy companies operating 32.8 percent of the market value, the Chinese
dairy market is fragmented. Compared to the smaller domestic players, these leading companies
have a strong brand image and more butter and yogurt products, with an emphasis on gaining
customer loyalty. The key to gaining devoted Chinese dairy consumers is price. With the
intense price competition, scale economies in production are especially important, since having
safe supply and distribution cold chains are critical to avoid wastage costs, which can be a
challenge for the less powerful dairy companies (Datamonitor A, 2009).
B. Consumers1) United StatesOf the total global dairy market value in 2008, the United States accounted for 16.0
percent of the entire industry, while all of Asia-Pacific constituted of 17.8 percent overall. Being
a highly developed nation, supermarkets and hypermarkets account for 81.9 percent of the total
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distribution channel in America. The remaining 18.1 percent is allocated through specialist
retailers, convenience stores, or additional networks (Datamonitor B, 2009).
With the three-a-day milk plan enforced by the United States government, consumers are
already highly aware of the importance of dairy and naturally enjoy its variety of flavors,
although there is always room for growth. As the third most populous country on the planet,
America has 295,734,100 hungry citizens each day. Of these consumers, 20.2 percent are
children ages 0 to 14, who have the potential to consume at least one milk carton (1/2 pint)
through their national school lunch program. According to the Child Nutrition Act, six percent
of all sales in the United States account for federal school programs. With the International
Dairy Foods Association goal of providing quality nutritional meals that are popular and fit
school budgets, the National School Breakfast Program feeds ten million children each day, and
the National School Lunch Program feeds over thirty million students per day. As a result, each
of these meals is required to offer fluid milk, and yogurt and cheese are also favorites (IDFA,
2010).
Of all dairy products consumed by Americans in 2004, 32 percent was fluid milk. In
fact, 30 percent of that figure was claimed by two-percent milk, 15 percent fat-free milk, 15
percent by one-percent milk, and 3 percent from flavored milk. The average American drinks
11.5 gallons of milk per year, while Chicagoans consume an estimated 8.7 gallons (Hutjens
2005).
2) ChinaAlthough consuming dairy products in China is not as common as it is in the United States,
the government is still trying to ensure all its citizens, especially children, are consuming at least
one 8 oz. glass of milk per day. With the Asia-Pacific region consuming 17.8 percent of
worldwide dairy products, China leads overall, representing 34.1 percent of the entire market
share. The Chinese consumers mainly obtain their dairy through independent retailers, who
account for 57.1 percent of the national distribution. Following in their footsteps are specialist
retailers with 19.9 percent, convenience stores with another 11.0 percent, and additional sources
with 12.0 percent (Datamonitor A, 2009).
Since China is the most populated country in the entire world with a population of
1,338,612,968 (July 2009 est.), the potential for dairy consumers is enormous. Of this vast
amount, 19.8 percent are children 0 to 14, who especially need milk more than any other age
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group. In a 2005 study conducted by the Ministry of Agriculture, Chinas per capita milk
consumption is only 47.74 pounds, which is one-fifth of the worlds average. In rural areas, the
scenario is even worse, as urban residents consume 54.56 pounds of milk on average compared
to the farming communities who only drank a shockingly low 4.4 pounds of milk in 2005. The
survey also revealed that while Chinese babies are as healthy as American babies for the first
year, they grow slower after this point, especially during adolescence (Xinhua, 2007).
But there is hope for the future. As of 2005, Chinas total milk production reached 26.85
million tons, and is projected to skyrocket by 2020 as the worlds third leading producer with
more than fifty tons or thirty kilograms per capita. Most importantly, the Dairy Association of
China is starting a milk program for 8,862 primary and middle schools in fifty-two cities nation-
wide, which will cover more than 1.9 million students (Xinhua, 2007). While it is a start, the
program began nearly ten years ago, and only 1.7 percent of all elementary students are covered.
Forty-two milk firms serve as designated suppliers, in which one Chinese jin (half a kilogram) is
offered to children at breakfast at a rate thirty percent lower than the market price (Xiang, 2010).
C.Substitutes1) United StatesIn the mind of the American consumer, there are many ways to meet dairy requirements
on a daily basis: food, beverages, or additional ingredients in home-made meals. As a result of
the wide variety of substitutes, it is simple for consumers to replace dairy products with
alternatives when prices get too high. Because consuming dairy products is an essential part of
most diets in the United States and the rewards of obtaining calcium are highly promoted, it is
unlikely they will be replaced. Still, the risk of substitutes is ranked as moderate (Datamonitor
B, 2009).
Drinking milk is essential to ensure strong bone health, healthy skin, a robust immune
system, and prevention of illnesses such as hypertension, dental decay, hydration, respiratory
problems, obesity, osteoporosis, and some forms of cancer (RuralTech, 2010). According to a
report by Dr. Michael Hutjens at the University of Illinois, Americans consumed 532 pounds of
milk equivalents as of 2004. More specifically, cheese is the number one dairy product for
consumers at 38 percent, followed by fluid milk at 32 percent, then butter at 13 percent, and ice
cream at 8.5 percent (Hutjens, 2005).
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In addition to the four grades of milk: skim, one percent, two percent, and whole, there is
also the revolutionary idea of flavored milk, which is just starting to gain popularity. According
to Dr. Hutjens, there are forty-five flavors of fluid milk, including, mint, coffee, and fruit
concoctions such as coconut and cherry chocolate (Hutjens, 2010). There also other dairy
substitutes which satisfy equivalent nutritional requirements such as the calcium pill, soy milk,
organic milk, cloned milk, and even juices such as Minute Maid with calcium additives (Swiss
Valley, 2010).
Although Americans often consume milk or dairy products in their daily lives, the
Chinese do not. According to the 2005 report by the Ministry of Agriculture, a startling fact was
revealed. While the Chinese consider milk as a kind of breast-feeding supplement for babies,
drinking milk as an adult is thought of as childish, ignoring its nutritional value (Xinhua, 2007).
Instead, a typical diet in China consists of a carbohydrate source or starch accompanied by side
dishes of vegetables, meat, fish, rice, noodles, and dumplings. While many of these courses are
low in fat and high in vitamins and protein, they do not contain any dairy components. As for
beverages, the Chinese consume water, tea, coffee, juice, soft drinks, beer, and wine before they
drink milk. When fluid milk is consumed, soymilk is often more popular than cow milk, and
fresh, dry, or long-life milk is available at convenience stores as well (China Highlights, 2010).
Another substitute for fluid milk such as skim, one percent, and whole is milk tea, which
originated in Hong Kong itself. Milk tea consists of black tea sweetened with evaporated milk,
and is usually part of an afternoon meal in Chinese culture (Bubble Tea Supply, 2003).
III. SUPPLY CHAIN
A supply chain consists of all stages involved directly or indirectly in fulfilling a
customer request. The supply chain not only includes the manufacturers and suppliers but also
retailers and customers themselves with in each organization. A supply chain is an integrated
system wherein a number of various business entities (i.e. suppliers, manufacturers, industrial
customers, distributors, retailers) work together to address issues of both materials flow and
information flow. This process contains standard description of management process and a
framework of relationships among the standard processes. The integrated supply chain network
model is developed to capture the complexities of a multi-product, multi-echelon, multi-country,
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Crop
ProductionMilk
ProductionProcessing
Packaging
Distribution
and
Transportation
Retail Outlets
multi-period planning problem for the optimal choice of facility locations, capacity and
technology used (K. Venkata Subbaiah).
A dairy industry supply chain includes six components: crop production, milk
production, processing, packaging, distribution and transportation, and retail outlets. The dairy
supply chain, as all other agri-businesses, is complex. Technically the dairy chain starts at raw
milk production and ends when other processors, institutions and consumers utilize products that
were created in the value chain.
Crop production is the part of the dairy supply chain that grows crops such as corn,
alfalfa hay and soybeans to feed dairy cows. Much of dairys feed supplies are grown right on
the farm by dairy farmers; the rest is purchased from other farmers that specialize in growing
feed crops. Next is the milk production which involves dairy farms, where cows are housed, fed
and milked. About 98 percent of all U.S. dairy farms are family-owned and operated
(USdairy.com). Dairy farms and farmers are often organized into associations and cooperatives.
There are more than 1,000 processing plants across the country turning milk into cheese, yogurt,
ice cream, powdered milk and other products. Almost a third of all milk, 53 billion pounds, is
processed and packaged as fluid (or bottled) milk. Processors range from small companies with
a single processing plant to large multinational organizations. (USdairy.com)
The next step in the dairy supply chain is the packaging. Bottled milk is typically done
by the dairy processor. Both paperboard and plastic containers are designed to keep dairyproducts fresh, clean and wholesome on their way to the consumer. Transportation and
distribution work together. This tends to be one of the biggest issues for less developed
countries. Keeping milk safe and temperature controlled is crucial when transporting milk.
Companies deliver milk from the farm to the processor, and dairy products from the processor to
the retailer, often in insulated tanker trucks and refrigerated trucks. Finally from convenience
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stores and neighborhood groceries, to large discount stores and warehouse outlets retailers
provide consumers with convenient access to nutritious dairy foods.
What is unclear to many is that in the dairy supply chain from the moment a farmer
decides to produce milk until the product reaches the consumer, people and the environment are
involved. It is the people who decide to farm in, work in, supply to, buy from and be a processor
in the dairy supply chain. In the final instance, it is the consumer who decides to buy and
consume the end products flowing from this chain at a suitable outlet and at an acceptable price.
As such, dairy products compete with a vast variety of other food products for a share of the
consumers.
Urbanization, policy, institutional and technological changes have been the dominant
drivers of structural transformation over time in the dairy supply chain. The structure of the
supply chain determines the fairness of distribution of value added in the chain. This structure
also decides the capability of the different role players in the supply chain to influence their share
of the value added (K. Venkata Subbaiah).
As consumers habits and decisions are not static, they impose urgency for change in the
supply chain in order to have their ever-changing needs met. However, this ever-changing
demand has a direct effect on the people within the supply chain since they will have to change
or adapt accordingly. In most instances, change is accompanied by a cost factor, induced by
research, retraining, relocation, etc.
In several less developed countries small and medium processors and dairy retail outlets
are making inroads, but dairy products are temperature sensitive and this creates extra cost.
Extension on and improved policing of milk hygiene regulations amongst beginner and
commercial farmers will upgrade the quality and milk volume that are tendered to be processed.
Research on maintaining the cold chain in an economical way in the case of small and medium
producers, distributors and small processors can strengthen their competitiveness and market
growth.
There are thousands of players that contribute to a successful and safe dairy supply chain.
On paper this supply chain may not seem complicated, but to safely produce billions of pounds
of milk a year every player must be positively contributing to this supply chain. As the world
population continues to grow, this supply chain will have to continue to provide a safe and
affordable way for everyone to have access to wholesome milk.
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IV. MARKETING
A. Distribution
1) United StatesIn the United States dairy industry the leading distribution channel is by far Supermarkets
and Hypermarkets. In 2008, these accounted for 81.9% of the total value. Specialist retailers
made up 7.3%, convenience stores were 6.5%, and everything else came in at 4.3% (Datamonitor
2009).
When looking specifically at Milk, Supermarkets and Hypermarkets still make up the
leading group at 78.7% of the total market value. Convenience stores are at 8.3%, specialist
retailers are at 7.4%, and all others make up 5.6% (Datamonitor 2009).
Since milk spoils so easily, it needs to be distributed as quickly as possible. In the past
milk was delivered to households daily, but economic pressure made this much less popular and
in many areas this service is no longer available. People buy it chilled at grocery stores,
convenient stores, or similar retail outlets. It is now mostly served in plastics, but before that is
was sold in wax-coated paper containers, and even before that it was distributed in glass bottles
(Milk, Answers.com 2010).
In the United States, glass milk bottles have been mostly replaces by plastic jugs and milk
cartons. Gallons are sold in jugs and half-gallons are either in jugs or paper cartons. Milk has
also recently seen a rise in the popularity of small resealable bottles that could fit into a cup
holder. The individual serving sizes also now come in a wide variety of flavors. School lunches
typically use milk cartons and come in sizes of a half-pint (Milk, Answers.com 2010).
As far as packaging is concerned, milk is pumped into the coated paper cartons or the
plastic bottles and then sealed. These are then stamped with a sell by date to make sure the
retailers do not keep the milk on the shelves too long and risk an unsafe product. When the
cartons or bottles are put in protective shipping containers, these are kept refrigerated. They are
shipped to distribution warehouses in refrigerated trailers and kept in refrigerated display cases
when they are out in the individual markets (Milk, Answers.com 2010).
2) China
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In Chinas dairy industry the leading distribution channel in 2008 were Independent retailers.
These independent retailers accounted for 57.1% of the total market value. Specialist retailers
made up 19.9%, convenience stores were 11%, and everything else came in at 12% (Datamonitor
2009).
When looking specifically at the Milk market, independent retailers still make up the
leading group at 55.3% of the total market value. Specialist retailers are at 26.1%, convenience
stores are at 11.6%, and all others make up 7 % (Datamonitor 2009).
In urban areas the proportion of milk sales through modern retail channels has been on
the rise in recent years. The modern retail channels have become popular with many dairy
companies because unlike dairy distributors, these channels have lower prices, greater variety,
and even have chilled storage facilities that are necessary for many of the milk products (The
Milk and Dairy Market in China 2008).
Some dairy distributors have even left the market after having their profits squeezed by
dairy manufacturers and modern retailers. This is more common in large cities such as Beijing,
Shanghai, Chengdu, and Guangzhou. Prices in the larger cities have been rising at a slower rate
and entry and promotion fees from modern retailers cut into the dairy companies margins (The
Milk and Dairy Market in China 2008).
The channels of distribution are more fragmented in the regional cities and rural areas
due to having traditional shops instead of modern retailers. This causes greater challenges with
price management and logistical arrangements (The Milk and Dairy Market in China 2008).
Recently retail infrastructure has been improving in these regions. Modern retailers are
opening more stores in these regions since the first and second tier cities have become saturated.
Dairy companies will benefit from this, but the industry participants still are finding it difficult to
enter the rural retail channels due to the short shelf-life of the products (The Milk and Dairy
Market in China 2008).
Sweetened milk is popular with students of all ages and comes in small plastic bags with
a straw. Adults that do not drink at a banquet often drink milk served from cartons or milk tea
(Milk, Answers.com 2010).
B. Promotion
1) United States
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In the United States, the diary industry and milk in particular gets heavy advertising. This
was not always the case however. Milk advertising started in the middle of the 1980s and peaked
in the mid 1990s. In 1995 the Got Milk? campaign was launched and became one of the most
popular and recognizable advertisements in the United States to this day. Since the National
Dairy Board was authorized under the Dairy Act of 1983 to promote milk and other dairy
products in the market, the National Fluid Milk Board and the NDB have spent over $1.1 billion
on advertising (Milk Consumption Compared to Milk Advertising Expenditures 2009).
The main focus of the NDB has been generic, non-branded advertising for milk and
cheese, and campaigns includeMilk. It Does a Body Good (1985), and Got Milk? (1995). The
Got Milk? campaign was originally created by the California Milk Processors Board in 1994.
The FMB was authorized in 1990 to fund fluid milk promotion, but wasnt implemented until
1995. Campaigns the FMB started include National MilkMustache (1995), the MilkPEP
Internet site (2003), Milk Your Diet. Lose Weight! (2004), andBody by Milk(2006). In 1999,
the Got Milk?and Milk Mustache campaigns joined together and have been since funded by
the FMB (Milk Consumption Compared to Milk Advertising Expenditures 2009). The Got
Milk? advertisements involved celebrities posing with a milk mustache and a glass of milk.
These were usually athletes, which reaffirmed milk as a healthy beverage and still made it look
cool.
There are many focuses of milk advertising in the U.S., and one of the big ones is getting
children more excited about milk. This is done through the schools and other promotional
methods. Websites like Milkmedia.com and Milkdelivers.org help to provide ideas and strategies
to get more kids interesting in milk. They also carry out many programs that achieve this.
Milkmedia.com was founded over ten years ago and decided to take a novel approach to
advertising on milk cartons. Instead of educational cartoons on the milk cartons they decided to
use popular entertainment characters that kids really cared about such as Disneys Doug,
Teenage Mutant Ninja Turtles, and Batman. These cartons and posters were successful and milk
consumption rose as much as 34% in the schools were these were used. They have also started a
program called Milk Rocks! This campaign focuses on promoting increased milk consumption
and positive life-long eating habits. It is not only an in-school program, but also is digital and is
involved in nationwide concerts. It is taking milk marketing to unprecedented levels (About
Milkmedia 2010).
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There is also plenty of room for milk consumption to grow, and marketers are beginning
to try and enter these new markets. 80-90% of milk is purchased for in-home consumption, but
milk only accounts for 3-5% of restaurant beverage sales. With the increasing consumer demand
for healthy beverages, restaurants and foodservice operators can capitalize on milk and excited
new flavored milk products. In-restaurant promotions can increase milk sales 52% with children,
and 35% with adults, according to a MilkPEP study. Adding milk to a "combo meal" grew milk
sales 57% in a business and industry outlet; 47% in a hamburger chain; and 19% in a
combination with donuts. Also, suggestive selling, which involves servers asking customers if
they'd like to order milk with their meal, and point-of-purchase materials also helped increase
milk sales in test cases (Milkdelivers.org 2010).
Studies show that consumers are open to ordering milk in restaurants, need a reminder of
milk's availability in restaurants, view flavored milk as a "treat" beverage when eating out, and
ordered milk in addition to other beverages. Money spent on food at away-from-home locations
has surpassed money spent on food consumed at home, and this gap continues to widen
(Milkdelivers.org 2010).
Some fast food restaurants have already begun to capitalize on the growing demand for
milk products outside of the home. Wendys hasannounced the expansion of its Kids Meal
Choices Menu with two deli sandwiches and a low-fat yogurt and granola cup, and consumers
can substitute 2% white milk or 1% chocolate milk for the soft drink. Wendys also introduced
milk in grab-and-go plastic containers in 2004 as a substitute for soft drinks and since that time,
milk sales have averaged about 750,000 units per week. McDonalds has begun to offer eight-
ounce "Milk Jugs," featuring Ronald McDonald surfing on a wave of milk, are in 13,500
locations as part a Happy Meal; low fat white and chocolate Milk Jugs are also available. Since
launching Milk Jugs, McDonald's increased its sales to more than 4 million units per week,
compared to 625,000 previously (Milkdelivers.org 2010).
The dairy industry is constantly trying to come up with ways to increase its popularity
and relate to the youth of the country. In 2008, the California Milk Processor Board sponsored a
high school competition to develop new ideas for the Got Milk? campaign. We are for the
first time with White Gold trying to speak directly to teenagers, said Steve James, executive
director at the milk board in San Clemente, Calif. The inspiration for that campaign, and the
contest, is the fact that as teenagers leave the sphere of influence of the home, and the jug of
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milk on the kitchen table, what happens to consumption is not a pretty sight, he added. The
reference was to how they eschew milk for soft drinks, energy drinks and other nondairy
beverages. It would be good for us, and good for them, to get some native intelligence, to help
us resonate ever truer with our teen audience. They are a mysterious demographic, James
added, and we want to reach them with an authentic voice in an authentic way. (Todays
Lesson: Selling Teenagers on the Benefits of Milk 2008).
The Omnicom Group, the agency that created Got Milk? for the California Milk
Processor Board in 1993 has developed a new approach to milk marketing for 2010. Instead of
exaggerating the perils of running out of milk, they are now shifting their focus to a comedic
look at the perils of never running out. They have created a milky magical land known as
Mootopia, and it will be the center for their latest series of advertisements. These will be
centered on the goodness of milk and comical complications that will arise in Mootopia such as
the men being so strong that arm wrestling cannot solve any arguments, the womens hair is too
shiny that it bothers people, and dentists being out of work since everyone has perfect teeth
(Californias Dairy Industry Takes Old Questions to New Extreme 2010). They will have these
ads on TV, on a website, and also begin to advertise via Facebook. Using social media seems to
be the new strategy in reaching todays youth.
2) ChinaIn China, the Milk Industry is going through a difficult time. Industry leader Sanlu went
bankrupt due to the melamine crisis and the problems have not seemed to end. Consumer
confidence in Chinas milk has been shattered and food safety is the marketers chief concern.
Because of the melamine scare, infant formula companies have upped their spending on
advertisements from a combined Rmb 1 billion for September, October and November of 2007
to Rmb 1.4 billion for the same three months last year, according to CTR. Most local brands cut
spending on ads. Media tactics have changed, says Jason Yu, GM of TNS Worldpanel China.
I suspect local brands are using money for PR or crisis management, rather than spend huge
amounts on TV because they know that wont work. The focus of the advertisements has
changed from product benefits such as vitamins and nutrients and now is focused on product
safety. If you look at international brands, their advertising is based around their imported milk
powder, says Kelvin Gin, director of Synovate in Shanghai. Local brands say their product is
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natural, and they have government certification. Consumers are looking for reassurance. (Sector
Insight China Loses Market Share to Foreign Brands 2009).
For many regional brands, the crisis has been more of an opportunity. Feihe formula,
registered in the U.S., has tripled and Weichuan, a Taiwanese company has recently begun to
promote its baby formula in China. Ausnutria, a Chinese brand that gets its milk powder from
Australia has had its shares quadruple in smaller cities. This is because it is branding itself as
foreign, and many Chinese firms are starting to adopt this marketing tactic (Sector Insight
China Loses Market Share to Foreign Brands 2009).
Since the melamine crisis, Chinas top dairy processors have been doing whatever it can
to restore consumer confidence in their supply chains. Market leader Mengniu sent 500 million
New Year text messages to people in China assuring them of their milk safety. They also have
created an easy-to-use website that elaborately details their supply chain. Chinas second largest
dairy producer, Yili, has begun a nationwide campaign with the slogan Milk You Can Trust.
Chinas dairy sales actually rose 12.4% in the first quarter of 2009, showing signs that the
industry is on its way back (Marketing milk: one year on from melamine in China 2009).
Government support has also extended to publicity campaigns. An official at the
Chongqing Dairy Industry Office reveals government funds have been marked for milk
promotion. Local TV has been alerted to make programs and news reports showing the reform
of the local dairy industry and health benefits of milk, the official says (Marketing milk: one
year on from melamine in China 2009).
Even though celebrity endorsers of the melamine tainted milk brands have been publicly
criticized (Best Milk Advertising Spokepersons? 2008), the China Health Promotion Foundation
was able to recruit another famous celebrity to help stabilize faith in the dairy industry: Jet Li.
Advertising boards have gone up around first and second tier Chinese cities showing that Li
loves milk, and companies are hoping that this will be a way to reclaim consumers (Best Milk
Advertising Spokepersons? 2008).
China is also trying to reestablish is own name as a reliable international company. The
country is launching a Made in China, Made with the World campaign to help improve the
image of the countrys products. They are using 30-second commercials to show that Chinese
products are made with and inspired by worldwide partners. I think it's reasonably sophisticated
for western audiences. I think it has a modern feel," said Tapio Christiansen, an international
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media consultant. He says the commercial is necessary after melamine tainted milk produced
in China killed at least six Chinese children and made hundreds of thousands sick. "I think they
did a pretty decent job in trying to potentially dispel some of the perceptions that some in the
West have about Chinese goods," he added (China Launches Ad Campaign to Improve Product
Image 2010).
V. REGULATORY AND LEGAL ENVIRONMENT
The dairy industry has been under the spotlight for putting lives in danger due to the
recent food safety issues which have been weighing down the whole industry. In the context of
this paper, we will be discussing the change in the regulatory and legal environment after food
safety incidents pertaining to dry milk and how the responses have differed in China and the US.
Below is a list of a brief overview of the recent milk industry incidents occurring in both
China and US, occurring in chronological order:
1) Melamine was found in milk and infant formula which was the cause of 6 deaths and300,000 victims. Melamine was introduced in the milk supply due to protein standards
that was too adhered to for nutritional purposes. Due to its odorless and colorless form,
melamine was added to the watereddown milk supply in order to boost the protein level
of milk to lower the cost of production and maintain price competitiveness.
2) The most recent case of dry milk recall within the US happened in January 28th 2009.Plainview Milk Products Cooperative had issued a recall due to the concerns of
Salmonella present in the milk powder they distribute. This recall had involved
coordination between organizations in the federal, state and local levels.
3) February 2010 saw tainted supply of milk powder in China once again resurfacing in themarket because suppliers had thought that the uproar had died down and had thought to
make use of the expiry date of the remaining milk powder which was nearing.
These three food safety incidents occurring in the milk industry had far reaching effects on
consumers of dairy products. International trade aggravated the spread of the effects, as
traceability and monitoring of milk powder supply outside of the country affected is a tedious
and tricky task. Within the scope of this paper, we will first discuss how these recent events have
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impacted the food regulators within China and US and the food additive labeling requirements of
these two countries. We will first discuss the legal and regulatory ramifications after the Chinese
milk powder incident, and then move on to discuss the issues of the US Salmonella incident.
The Chinese government has been highly criticized for the milk powder incident and they
have vowed to put in measures in an attempt to overhaul the image of food safety in China. The
Chinese government has been working with the food regulatory agencies to set standards within
the dairy industry, and at a larger scale, the food industry, to ensure similar occurrences are
avoided. However, due to the scale of the industry in China and the governments unwillingness
to clamp down on the companies because it might impede the progress and expansion of the
industry, there has been a second occurrence of milk containing melamine surfacing in the
market.
The Chinese government started out by worked on stepping up their inspection program
within the dairy industry. They aim to establish 400 testing centers in the span of 2 years, and
create links between the local, state and federal agencies so that monitoring and tracking dairy
supplies will be easily accounted for in the future. Acceptable melamine standards were also set
at 1 milligram per kilogram in powdered infant formulas. In the wider scope of the problem, the
Chinese government has established the National State Council Food Safety Commission, which
is the highest level consulting and coordinating organization for food safety issues within the
country. They will be the guiding hand coordinating the food safety work in the food industry,
coming up with the laws pertaining to food safety and making sure the agencies within the food
safety network are sticking to their responsibilities. The organizations which they will be
overseeing include: The Ministry of Health (MOH), the Ministry of Industry and Information
Technology (MIIT), the Ministry of Agriculture (MOA), the State Administration for Industry
and Commerce (SAIC), the General Administration for Quality Supervision, Inspection and
Quarantine (GAQSIQ) and the State Food and Drug Administration (SFDA).
On June 1st, 2009, China released a Food Safety Law (more popularly known as The Food
Law) which emphasizes new obligations which food companies have to abide by. These
obligations include responsibilities pertaining to certification of manufacturing and production
by the governing bodies, quality inspection and record keeping of details of their procurement,
joint liability of food safety and recall system put in place that would restrict the distribution and
sales of the company and enforce punitive measures if laws have been violated. In the context of
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a dairy company, the dairy company would have to check the certification of the raw milk
supplier before purchasing their milk. On top of that, they would have to keep records of the
certification as well as permits of the company they purchased from. These certifications and
permits have to be administered by GASIQ, SFDA, and SAIQ. These procedures are to
supplement the recall process. Further, celebrities who endorse food products will also be more
careful because of the new joint liability clause. It states that organizations involved in the supply
chain of the food production, including any celebrities who appear in advertisements and
promotions pertaining to the affected product will suffer the consequences as well. Therefore,
celebrities will now think twice about endorsing a milk product die to the public trust entrusted
to them and the food safety aspect of the product.
For the dairy industry in US, non fat dry milk (milk in powdered form) comes usually in
two forms: regular and instant. The US dairy industry has a labeling standard of either US Extra.
The US Extra grade earned after laboratory testing shows that the powder has a sweet and
pleasing flavor, natural color and satisfactory solubility. Dry milk has to conform on certain
aspects: Physical appearance has to have a uniform white to light cream color; flavor shall be
sweet and pleasing, having chalky, cooked, feed or flat flavors to a certain degree; bacterial
estimate of no more than 10,000 per gram standard plate count; moisture content of not more
than 4.5%; coli form count not more than 10 per gram; milk fat content of not more than 1.25%;
scorched particle content of not more than 15mg; soluble index of not more than1.0ml; titratable
acidity of not more than 0.15% and dispensability of not less than 85.0%. Inspection is done
pertaining to every aspect of the milk product: from the milk supply, the processing plant and
equipment, operating procedures, packaging and the instant milk itself. These stringent standards
are strongly upheld so that there will be no Salmonella contamination.
Moving on, we will now discuss the emphasis placed on labeling in China and US food
industry. Chinas newly implemented Food Law states that products cannot claim to prevent or
treat diseases; clearly state if ingredient(s) in the product should not be consumed by certain
people; misleading advertisements are also prohibited; and only authorized products which have
been proven to be safe and necessary in the production of the product may be listed as a food
additive.
On the other hand, US have long been a strong advocate for nutritional labeling. FDA has
recently sent out warning letters to food companies warning them to provide accurate labeling,
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especially towards trans fats claims, health claims or food labeling directed at children due to the
3-A-Day-Dairy proposition. Nutrient content claims, an example to be 0 grams of trans fats,
has to be backed up by nutrient tables. Further, only approved health claims can be made, unlike
claims that can heal or treat illnesses. All claims on labels have to hold true to their labels.
VI. RISK FACTORS
Before deciding which country we would like to launch our milk product, there are
certain risk factors to be taken into consideration. In this section, an analysis of the decision to
launch the product in either China or the US would ultimately help us out with our decision
making process.
We have identified factors specific to the countries and general ones too. Starting off with
China, there are risks associated with the weak legal environment, the fragmented milk supply,
unfavorable business environment towards foreign companies, consumer confidence in milk and
dairy products.
In order for a business to start up without a hitch, a legal framework is crucial. Currently,
China still has room for development in the legal department. It will be pretty much uncertain
how our company will develop into the China market without a fundamentally strong legal
framework. China is known to have weak judges; in any case if our company is embroiled in a
legal battle concerning our products, it will definitely impede the progress and expansion of ourcompany. Therefore, in order to be successful in China, we have to know do our groundwork
well and be connected to skilful lawyers who will be able to help us out in situations like that. If
not, the future of our company will be detrimental even before we start out in China.
The fragmented milk supply in China is another key issue to look at. Due to the existence
of many small dairy cooperatives and farms, the supply of milk would come from many varying
milk stations and it would make traceability of our milk very difficult. If we were to acquire our
own land and get our milk supply from our own cows, then it would be tricky because land in
China is owned by the government. It is further aggravated by how domestic companies are
given preferential treatment to the point that they are given unfair advantage over foreign
companies. One example would be the subsidies which the Chinese government is giving the
Chinese dairy producers to assist them in their recovery from the tainted milk supply. Therefore,
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in order to rake in the profits, we have to take these resistive factors into consideration to plan for
our mode of entry and success in the industry.
On top of that, there might be advertisement restrictions which might impede our growth
or even entry into the dairy industry. The Chinese government is trying very hard to make a
comeback in the dairy industry and rebuild confidence in their food products, especially milk
produced by domestic companies, hence they might even censor foreign companies
advertisements in order drive foreign companies out of their market.
Along the lines of food safety, there have been a reoccurrence of the tainted milk selling
in the market; hence consumers might decide to stay away from milk in order to stay safe.
Consumer confidence is definitely lacking in the domestic milk supply, therefore an introduction
of our product line might not garner a good amount of demand to generate a profit margin.
As for the US, the risk factors to take into account would be: the saturated US market.
Currently, there is an oversupply of milk in the US and this excess supply has led to falling
prices that suppliers can sell their milk at. Further, there is very little room for growth in the US
market because the US market is definitely more mature than the Chinese market. This would
impede the growth of the product we are launching.
There are also some factors which we have to consider as a dairy company no matter
whether we were in China or the US. Milk has been one of the main sources of calcium; but due
to the increase in substitutes which have the ability to replace milk (such as calcium pills), there
might be a chance that the demand for milk declines. In addition, there is a risk that the prices of
raw milk will fluctuate in the future which will affect future plans of the company.
VII. CRITICAL SUCCESS FACTORS
There are several factors that come into play when introducing an American company,
especially one that has had food safety problems in the past. The idea of building the
infrastructure and securing resources in China can be very beneficial in the long run. However,
there is an immense amount of work that goes into starting the operations and making the
company cost efficient.
The most important factor that needs to be successful with our product in China is the
trust of the Chinese consumer when it comes to buying an American company. Over the past
few years China has had several issues with their milk industry and the safety of their products.
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Thousands of infants were hospitalized and some died because of unsafe milk powder. This
scandal has been going on for years and more children have become sick while more tainted
products are discovered. The job of Deans milk is to reassure the consumers in China that their
milk is safe and the best on the market. Since Deans is an American milk product it has very
high food safety standards and the Chinese consumers have a company they can trust.
Through rigorous adverting Deans will have to continue to assure the Chinese consumer
that their milk does not only have great health benefits, but that their milk is safe and follows US
standards. Deans has done a great job in the US by showing how much fun milk is to drink.
They will have to continue this trend through advertisements in China.
The milk industry has exploded in the US in the past twenty years with the help of the
Got Milk campaign. Several other advertising campaigns have been launched to make
consumers aware of the health benefits of milk and the easy access of many flavored milks. By
adding flavors to milk it makes them more tasty and appealing to the consumer. Children have
shown that they enjoy these flavorful makes anytime of the day. A current campaign in the US
is for people to drink milk throughout the day and not just at a meal. These flavored milks have
helped this campaign and would show success for the milk industry in China. Deans flavored
milks have always been geared towards the US consumers; however, they will have to conduct
extensive research to develop other flavored milks that will appeal more to the Chinese
consumer.
I have mentioned food safety and advertisement to help promote Deans milk, however,
this whole process begins with the cows. Right now a majority of cows in China are from New
Zealand and only produce 8,000 pounds of milk; however, US cows produce on average 20,000
pounds of milk. To be profitable Deans needs to import cows to China that produces these high
numbers of pounds per cow. Cows are already very expensive to breed and develop, so it is very
important that they are producing large amounts of milk. This could also become a huge market
in the US for producing cows on a mass scale and exporting them to China. (Hutjens, 2010)
Right now in the US milk is almost considered a necessity in everyones diet. This has
developed because of the health benefits that are publicized and the fun look milk has been
given. The goal is that Deans milk will become popular in the wealthier families in China, and
then become a staple in the Chinese consumers diet. This will then begin to spread to the
middle class and then allow everyone an affordable and safe milk product in their lives.
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The government has a huge role in business in China. For Deans to be able to set up
large factories and distribution centers they need land and the trust of the government. Land and
the location of the land tend to be the biggest issue. Cows can be raised in several different parts
of China; however, where exactly they will be raised can affect their outputs. The location of
Deans factories will also factor into their profitability and easy access of getting their products
to the consumer. I believe Deans need to prove to the government that they are a safe company
who is in China to raise the food safety standards of the milk industry. They need to forecast that
they are in China for the consumer number one and number two they are in China for the profit.
The move of having Deans in China will make China look better because it shows they are
doing everything possible to solve these melamine and food safety issues (Hutjens, 2010).
VIII. RECOMMENDATIONS
For our recommendation we decided to look at in which country the dairy industry would
be more attractive. We looked at both China and the United States from the standpoint of a major
dairy manufacturer in the United States, such as Dean, and chose Milk as our product. After
careful deliberation, we have decided that we would choose to introduce our product into the
Chinese market. Currently there is relatively little competition, there is little consumer
confidence in Chinas internal dairy industry, we have available methods of distribution, and also
we have reliable marketing tactics based on what has been successful in the United States
market.
First of all, the current dairy industry in China is very weak. Industry leader Sanlu went
bankrupt with the Melamine scandal and New Zealand international company Fonterra left the
country because of their association with Sanlu and the money they lost. Current companies in
China are struggling to gain market share since the consumers image of safety within the dairy
industry have been shattered again and again. Foreign investment in the industry has been scared
away and is not looking to come in any time soon. Because of all of this, the threat of
competition in the China dairy industry is at a low. There is a great deal of room for a company
to come in and dominate if it can figure out a way to gain consumer confidence and reliability in
safety. With the China diet constantly adapting more western-style foods and tastes, it is
inevitable that the small Dairy industry in China will continue to grow. As more people become
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aware of the health benefits of milk in China, there is enormous room for growth in milk
consumption. To be able to enter the market now, establish a quality brand name, and obtain
leading market share would be a lucrative investment that has a huge potential due to the facts
that the industry is destined to grow and China is the worlds biggest country.
Chinese consumers have been turned off by the dairy industry recently because of the
repeated melamine scandals. This is why the most important focus for the implementation of our
milk is food safety. We need to figure out a way to enable the Chinese consumers to trust our
product. We are an American company and we believe that in this case it works to our benefit,
since consumers have lost all faith in Chinese companies. We can come in as experts in the
industry, citing many years of experience and no melamine-scale scandals as evidence. Our
company will enter China and begin the dairy process to produce our milk from the ground up.
Since we are a large company already, we have enough capital to invest a couple years into
developing our supply chain in China to make sure we get it right the first time. Any mistake in
food safety at this point would be game over. We will need to obtain the land to create large
dairy production facilities. We will bring in farmers from the U.S. and have them train the locals
that we hire for our farms. Also, we will import cows to our production facilities since the cows
in America produce over twice as much on average as the Chinese cows. Once we have our
process intact, we will have checks at each stage of the process to insure that the quality is up to
our highest standards in America and also to oversee and supervise each area of the process.
When the milk is put into containers and dated, then we can ease up on our oversight of the
process and use local transportation and distribution to take the milk to the areas in which we
decide to sell it.
As far as the distribution of our milk goes, we have thought of a way to introduce our
product to the market where we feel it will impact the most and also inspire confidence in our
product. The target market we want to reach first is the children and teenagers in China. We want
to put the product in a place that they already have confidence in, and also a place that can seem
cool or hip. We want to take advantage of the fact that these little emperors have financial
power and can influence the way of the market. The fast food company KFC has seen huge
success in the Chinese market. It is known to be an American brand, yet it is fashionable, cool,
and well distributed throughout China. We want to convince KFC to start carrying our milk
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product in their stores in China and begin a campaign with them to promote milk as the perfect
complement to a meal. To get KFC to go along with this we will give them exclusive milk rights
in their stores in the U.S. and persuade them that milk should be offered in the states.
McDonalds andWendys have already launched successful milk campaigns in the States, and
KFC needs to be a part of this, especially with the growing trend of health consciousness in the
U.S. We will show them the need to offer milk in America and leverage offering them cheap
rates and exclusivity if they go along with our China plan. When KFC begins to sell milk in
China, combined with our promotions directly towards our target market, we will begin to create
a demand for this new product. Once demand increases we will begin to distribute our milk to
other Chinese Stores such as McDonalds or Starbucks, and also to trusted retailers. By
continuing the trend of supplying our product only at reliable food establishments we can inspire
greater confidence due to product association. After we gain sufficient market share and a
widespread company image we can begin massive distribution throughout China. The staggered
approach we will take also allows us additional time to continuously develop our production
while the market demand grows.
It is important that we use prior knowledge in determining how to effectively market our
milk product to China and a good way to do this would be to look at what has been successful in
the U.S. market. Much of China already knows that milk is considered a healthy beverage since
the government has been trying to implement the one glass a day plan. It is more important than
ever that we market our product with a focus on food safety. Since we want to establish our
product as reliable, a good way to do this would be to associate it with other things that the
Chinese trust in. Our advertisements will reflect this because we will be promoting the milk with
popular brands like KFC. One of the most successful U.S. milk advertisements was the Got
Milk? campaign and the milk mustaches on celebrities, athletes in particular. This will also be a
huge part of our marketing campaign. It will establish reliability since it is being promoted by
trusted celebrities; it will hit our target market of the youth hard since we will use people popularwith them, and it will also create a healthy perception of milk since we will focus on using
athletes. Big billboards and posters of athletes such as LeBron or Kobe holding a glass of our
milk and having a milk mustache will create a buzz. A tagline for our product and exclusivity
added such as: only available at KFC, will cause even more interest. Another important part of
our campaign is to cater our milk towards the Chinese consumers tastes. Before we enter the
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market and while we are developing our milk production facilities, we will conduct market
research on the population of the larger Chinese cities to develop flavors and varieties of milk
that will reflect the popular opinions. We can implement a few western tastes and also enter the
market with eastern-specific tastes. Each KFC will offer a wide variety of milks so that there is
something for everyone. The most important part, however, is large scale advertising to make the
milk seem cool and exclusive, and also to associate it with trusted brands and celebrities. If this
is achieved we will successfully obtain the youth segment of the Chinese market, and from there
we can hopefully enter a wider market and a wider target population. In the long run we could
develop into the industry leader and the exclusive vendor at certain popular establishments, and
even change the way that the country of China consumes milk.
Dairy Assemble!
Pictured from left to right, Kristin DeSutter, Meiling Liu, Andrew Erickson, & George Witchek
enjoy a fresh glass of milk straight from the Huaxia Dairy Farm outside Beijing.
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