Congress's "fiscal cliff" deal on New Year's Day included a nine-month extension of the expiring U.S. farm bill, preventing retail milk prices from doubling to $7 or more in 2013. That's a great relief for milk producers, but the last-minute reprieve shouldn't blind them to the fact that they have already fallen off their own cliff.
Demand for milk has been in a free fall for decades. U.S. milk consumption has dropped 36% since the 1970s. The dairy industry's plight is a cautionary tale for other industries whose core product falls out of favor or is under attack by activists. It illustrates the dangers of focusing on just one highly commoditized product, ignoring market trends, and trying valiantly to sell what you make rather than to make what people want.
All the milk mustaches in advertising history can't disguise the fact that milk is no longer the drink of choice—not for teens and 20-somethings, or people with busy lifestyles, or aging baby boomers, or the elderly. With per-capita U.S. milk consumption down 36% between 1970 and 2011, an industry trade group spokesman recently admitted something everybody already knew: The dairy business is in trouble.
Yet the industry has nobody to blame but itself. It's in trouble because it has focused on cows instead of consumers. For decades its strategy has been to make dairy operations more efficient. It has succeeded: From 1970 to 2006, as the number of cows declined 25%, output per cow more than doubled. But while dairy companies focused on squeezing more milk out of fewer cows, they largely ignored the fact that demand was getting squeezed as well. By the early 1980s, per capita consumption of soft drinks eclipsed that of milk. The kids who had enjoyed four-ounce cartons of milk with their school lunches became the Pepsi Generation who preferred more refreshing soft drinks; later generations discovered vitamin water and sports drinks. Rising milk prices, health advocates who questioned milk's calories and nutritional value, and activists concerned about bovine hormones further soured sales.
Meanwhile over the past 40 years new milk-based or milk-like products such as yogurt, soy milk, , and meal replacements became wildly popular. The original 1963 members of the Pepsi Generation are now 60-somethings with fragile bones, who need calcium and vitamin D but don't want milk. The 20-somethings who have graduated to and bottled water also drink Muscle Milk after a workout and snack on Greek yogurt. Their frail octogenarian grandparents drink Ensure.
In their dogged focus on selling more milk, dairy companies largely overlooked these highly profitable markets, even though they had the lock on the basic ingredient for many of them. Instead, companies like (which owns Yoplait) are reaping riches from the $1.5 billion-a-year Greek yogurt craze. The $2 billion market for —powered drink mixes, liquid shakes, edible bars that replace prepared meals and the like—belongs largely to Abbott and Mead-Johnson, both pharmaceutical and medical companies. CytoSport makes Muscle Milk, marketed to fitness enthusiasts to help repair muscles and recover from exercise.
Milk producers also failed to put milk in packages pleasing to on-the-go consumers. In fact, it took them decades to redesign and move away from those messy gable-topped cartons. Shapely one-serving milk bottles that consumers can easily pick up at a convenience store and drink from on the run are a relatively new offering.
In response to competitors that are draining away their business, milk producers have clung stubbornly to their "Got Milk?" campaign, a failed attempt to make milk drinking hip. They've clung to their "Real" badge while deriding highly popular soy milk and other milk-like products as "imitation milk."
What should they have been doing all these years? First, they should have redefined themselves as a dairy-based nutrition provider rather than as a milk business. Other companies, such as United Parcel Services and IBM, successfully stepped back and redefined what businesses they were in to create value-added services that built on their core products. UPS is not just a package shipper; it's a logistics manager. IBM doesn't just sell computers and software; it helps companies make their businesses more competitive with consulting and information technology services.
Had it defined itself as a nutrition provider rather than a milk producer, the dairy industry could have shifted its focus from production to marketing. Milk companies could have been faster to recognize the opportunity to create milk-based beverages that met growing consumer demand for more refreshing drinks. They could have added popular, high-margin products such as yogurt and nutrition shakes to their portfolios, to insulate themselves from swings in the demand for milk, instead of letting companies like General Mills move in.
Milk producers also should have embraced grab-and-go packaging long ago, to move milk beyond the breakfast table. They should have formed strategic partnerships with other companies, as Campbell's Soup did when it partnered with the Coca-Cola Company to distribute V8, and as Pepsi did with CytoSport to deliver Muscle Milk.
Can the industry turn over a new leaf? In a time when many are pondering resolutions for the new year, the milk business needs to do some serious soul-searching. Maybe its resolutions will be to listen more; to focus on others rather than on itself; to find new ways its products can help people improve their nutrition and live better lives.
But as long as it continues its narrow focus on cows and production, its outlook will continue to sour.