California Makes a Strategic Plan for Marketing Dairy Into 2020

John Talbot, CEO California Milk Advisory Board

Editor’s note:  John Talbot was named CEO of the CMAB three years ago, coming from a global marketing position for California Almonds.  Earlier in his career he held marketing posts for Proctor & Gamble, PepsiCo and E & J Gallo Winery.  He holds degrees from the College of Wooster in Ohio and Northwestern University.

As a state marketing order, the California Milk Advisory Board’s (CMAB) mission is to increase demand for dairy products made with California milk. While guided by an annual marketing plan, every five years we take a step back to formulate a longer-term view of the evolving market place and where our priorities should be placed.

2017 CMAB Executive Committee
BOARD LEADERSHIP FOR CMAB
Dairy farmers provide the leadership for the California Milk Advisory Board. Shown here are members of the executive committee. Top row from left: Renae De Jager, Chowchilla; Chairman Dante Migliazzo, Atwater; and Kirsten Areias, Los Banos. Seated from left are Treasure Tony Louters, Merced; Secretary Essie Bootsma, Lakeview; and Vice Chairman Josh Zonneveld, Laton. Not shown is Ron Koetsier, Visalia. -CMAB photo

The CMAB spent the last 10 months raising questions and challenging assumptions during one of the most tumultuous times in our industry’s history, all in the quest of setting a clear, long term direction for the organization. Our purpose was to do a deep dive into the state’s dairy industry situation and understand the trends and change forces that may affect us and to do a thorough assessment of our strengths and opportunities, ultimately framing our understanding of the market and setting our objectives and strategies for the future.

One of my favorite business adages is that you’re always in the first year of a five-year plan. While that notion may question the value of doing long range planning, consider the sage words of Dwight D. Eisenhower, “In preparing for battle I have always found that plans are useless, but planning is indispensable.”  Just taking the effort to think five years out helps you ask questions not normally raised and challenge assumptions not normally considered. The key is we must be open minded and flexible to our everchanging environment, adjusting course as needed.

THE SITUATION

An exhaustive situation assessment evaluated consumer behavior, food and health trends, industry size and growth, segment and category dynamics, key domestic/international market opportunities, and California economic/regulatory issues. In summarizing the situation, we ended up with starkly contrasting conclusions in what we called the California Conundrum. While there are substantial economic challenges in the short term, there are also significant growth opportunities in the longer term.

The short term is shrouded in the painful acknowledgments of the lowest milk pricing in seven years and the loss of 85 dairies over the last year and a half. Confounding matters, we have drought, rising production cost and environmental regulations making profitability more volatile. Plus, the demand for land for higher value crops is impacting resource allocation and production capacity. The disheartening result is milk production was down -3.4% in 2015 and -1.1% in 2016. This was after 16% growth over the prior 10 years.

After a banner year in 2014, many have asked how could things have gotten so bad, so fast? Whether we like it or not, we are now inextricably linked to the global dairy economy. Between the significant drop in China demand for milk powder, the Russian embargo, and dropping of EU production quotas, a global dairy supply glut emerged driving global dairy pricing lower and throwing global dairy trade into disarray.

The conundrum here is that long term market growth potential is strong in both domestic and international markets. Dairy is very much on-trend when we look at consumer attitudes toward health and nutrition and we see solid growth opportunities for dairy in usage occasions like breakfast, healthy snacking, ethnic foods, and eating out. And unlike recent years, processing capacity in California is up as well.

REFRAMING EXPECTATIONS

As we looked at these global events and the state’s dairy economic situation, we developed a conservative forecast for a continued decline in California milk production over the next five years. This meant resetting expectations for what the California dairy industry will look like in 2020.

If current trends continue, California will be a smaller industry, but we can be a more profitable one at the same time. The key question becomes, how? The simple answer is higher milk prices. While this is something largely driven by global supply/demand mechanisms out of our control and beyond our responsibility, there are things we can do to help the cause. We started by identifying three fundamental keys to success: driving demand for value added California dairy products, working collaboratively to mitigate risks and doing more with less.

CALIFORNIA EQUITIES

CMAB Real MilkOur single greatest asset is the Real California Milk (RCM) seal, currently found on 644 million retail packages sold annually. Those products can be found in every region of the U.S. and while we have our strongest presence in California and the West we are also seeing strong distribution growth in other regions as well.

Not only do we have strong physical presence of the RCM seal, we have done a great deal to bring meaning to the seal. The new Return to Real Food campaign is resonating well with consumers interested in getting back to basics and looking for more wholesome natural foods to feed their families. This integrated campaign spans TV advertising, digital advertising, social media, and public relations.

Our efforts over the years have significantly increased key consumer attitudes toward California dairy products throughout the country. In the last ten years, awareness of the RCM seal has almost tripled. Consumer perceptions of the quality of California dairy products has doubled and now surpasses our closest competitor. And loyalty in purchasing products with the seal has also doubled.

The strength of the seal not only covers the domestic market but also our key export markets – Mexico and Asia. Affinity for products from California is high in both Mexico and Asia where consumers have very positive associations with the state and believe that these products are naturally of higher quality than others.

MARKET OPPORTUNITIES FOR GROWTH

One of the most important trends supporting continued growth in a variety of dairy categories is consumer interest in nutrition. Dairy is poised for significant development when you look at the importance of healthy beverage and snacking options, functional foods, strong interest in protein, and the growing acceptance of dairy fats.

Looking to the export market, the chart below done by McKinsey identifies the regions of the world that don’t produce enough milk domestically to meet the needs of the people living there. Subsequently, they must import additional dairy products and McKinsey estimates that collectively there will be a need for 66 million tons of new milk to satisfy this demand in 2020. That’s three and a half times what we currently produce in California.

CMAB Chart Projected Milk Deficit

OBJECTIVES AND STRATEGIES

Given the contrasting assessments between the state dairy economy and global growth opportunities, we find ourselves a bit conflicted. Short term pain is clearly negating potential long term gain so we need to be very sensitive to the current economic challenges while building a path to future growth. To this end, we put together five key objectives for the CMAB over the next five years.

  1. Drive consumer demand for California dairy in select regions of the U.S.
  2. Build scalable market development programs in select international regions
  3. Stimulate product innovation and consumer interest in key growth areas
  4. Increase marketing program impact and efficiency
  5. Improve the environment for producer viability and growth

DRIVE DEMAND

Consumer dynamics are evolving at a faster pace than ever before. The ethnic complexion of the U.S. population is changing dramatically and the rise of the Millennial mindset is impacting the food industry in significant ways.

As consumer behavior evolves, so too does the way they communicate and the way they are willing to be communicated to. To stay relevant then, we need to constantly monitor consumer perceptions and attitudes while evaluating the best means of reaching them.  The variety of marketing tools at our disposal is growing and the mix of the tools we employ will evolve based on effectiveness and efficiency.

 

Most importantly, there is a massive consumer conversation going on around food, both online and off. People want to know where their food comes from, how it’s made and what’s in it. There is a myriad of concerns about artificial ingredients, food processing, as well as an animated debate around what is healthy and what is not.  There is misinformation, conflicting information and consumers don’t know what to believe. We can’t afford NOT to be in this conversation.

The RCM seal is our most important tool in consumer communications. At the surface, it is a simple visual element representing the source of the milk, but at a deeper level it holds an enormous amount of information, association and emotion. Through our Return to Real Food campaign and related communications programs we will continue to add value to the seal by giving it meaning and purpose.

We’ll focus our communications efforts on engaging consumers with products and topics related to our three most promising market and category opportunities – breakfast, healthy snacking, and ethnic foods. We will also work to reframe the dairy health story, bringing greater emphasis to the importance and nutritional value of dairy fats.

 

Having a strong sustainability story has become critical in the consumer products world and California has a great story to tell. We want to further communicate California’s role as the leader in sustainable dairy practices – capturing not only the extensive environmental regulations and restrictions our producers must work within, the toughest in the nation, but also the leadership the industry has exhibited over the past 20 plus years.

INTERNATIONAL MARKET DEVELOPMENT

With limited resources, we need to be “selective” in the markets we choose and how we prioritize and fund them. Our market priorities – U.S., Mexico, South Korea, Vietnam, Singapore and China – are based on a combined assessment of volume opportunity, market access issues, consumer readiness and current distribution. Next is the idea of building “scalable market development programs,” starting with small programs in markets with strong opportunities, figuring out what works, then scaling up those programs and gradually expanding them to other regions.

The other key effort here is to create opportunities to engage California processors with the international trade. The export business can be intimidating to small and large processors alike so through trade shows and trade missions we are finding ways to connect processors with international buyers and simplify the logistical complexities. An example is a consolidator program where we have partnered with a shipping company willing to help connect processors with buyers and handle the logistics of combining orders to fill containers and get them shipped.

PRODUCT INNOVATION

While dairy is well-positioned to capitalize on consumer trends and growth opportunities, it will require deep consumer understanding and product innovation to catch their attention. Most importantly is to do whatever we can to stimulate processors to innovate and develop new products. Our focus is around high potential growth segments like breakfast, healthy snacking, and ethnic foods. While we don’t get involved in the actual product development work, we do provide research, market data and insights necessary to get the process moving and then help directly by supporting product introduction and marketing.

IMPACT AND EFFICIENCY

The strategies here are largely operational in nature but none the less very important to being successful in our new reality. We need to continue to reduce non-demand oriented activities and programs, minimize inefficiencies and insure we allocate funding to our largest opportunities and highest priorities.

One of the biggest opportunities we have as an industry is to foster stronger communication and collaboration across all dairy organizations. We no longer can afford to operate independently. The issues are too great, the risks too high and the resources too few. We would like to see the industry come together and establish an industry-wide planning process to identify issues/opportunities, align priorities, synchronize activities and minimize redundancies. We also believe there is an opportunity to consolidate industry events and conferences. Bringing more industry members into fewer events not only saves time but insures more people are better informed.

PRODUCER VIABILITY AND GROWTH

While the industry is volatile, long-term opportunities abound. Working collaboratively across the industry to educate producers and processors about these opportunities and helping to minimize the impact of environmental/regulatory issues will be essential. And, realizing this is a highly complex matter, we need to push the industry toward the development of higher value-added products. This is certainly not an area where we can expect significant change in the short term, but over the long term, we need to try to reduce our dependence on the low-end commodity products that weigh down milk pricing.

CONCLUSIONS

This has been a tough year for the California dairy industry. Production is down, pricing hit a seven-year low, we’ve lost 85 dairies in the last year and a half and producers are having trouble seeing a profitable road ahead. With no other input in the equation it’s easy to understand why we keep seeing more “for sale” notices. While our production forecast is admittedly conservative, if supply and demand equilibrium returns to the global market (as many industry analysts predict) there could also be a resurgence in milk production. Regardless, the industry is well-positioned for long term growth. Dairy fits well with consumer trends in health and nutrition, lifestyle changes are opening new categories for growth and California has tremendous equity from a provenance perspective. We may be a smaller industry but we can be stronger and more profitable. To do so, we need to strive to be the Gold Standard in consumer preference and trust, assume the retail and food service leadership we know is ours, become the undisputed leader in sustainability and food safety, and capitalize on growth opportunities in the international market.