Shining star: as health messages and foodservice success stories gain momentum milk could be the bright spot in the beverage market this year

Dairy Foods,  Feb, 2005  by David Phillips

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Ten years from now those in the industry may look back on 2004 and recall the first time they saw a bright, backlit McDonald's menu board promoting milk in the McDonald's Milk Jug.

Will 2005 have the same resonance? Some in the industry believe 2005 could be made equally memorable as the year that school milk programs learned a lesson from Ronald McDonald.

Another take on 2004 might be that it was the year when the dairy industry convinced American consumers that they can lose weight while drinking milk. Recollections of 2005 will undoubtedly include the new USDA Dietary Guidelines, which may have the effect of a government stamp of approval on the industry's 3-A-Day promotion.

The stars may be lining up, and milk could be the shining star of the beverage category this year.

A year ago, Dairy Foods forecasted a wild ride for milk sales (and for the entire beverage industry) in 2004. And we had no idea that milk prices would jump like they did and that McDonald's and Wendy's would be so successful in their serious efforts to sell more milk. Last year we also noted that it had been more than a year since the Los Angeles Unified School District has restricted sales of soft drinks in its schools. Many are still wondering when dairy processors will take advantage of this opportunity, and some disagreement is brewing over what should be done about it.

Carb-counting dieters were rocking the boat in 2004, but in 2005 trend spotters are reporting a tremendous hissing sound as the low-carb balloon deflates. Organic dairy is hotter and more competitive than ever.

We'll talk about what the industry promotion groups have planned, look at some product and business launches that will impact beverage sales in 2005, and make some bold predictions, but first let's look at the most recent numbers.

Ups and downs

The most complete picture of overall milk sales comes from USDA, and the most recent full-year numbers available are for 2003. Sales were down 0.5% after having gained about the same amount in 2002. Up and then down.

More recent numbers are offered by Information Resources Inc., Chicago. IRI's numbers reflect supermarkets, drugstores and most mass merchandisers, but do not capture foodservice, convenience stores or Wal-Mart.

For the first three quarters of 2004 unit sales of milk slowed significantly while dollar sales grew (by as much as 12.6% in the 13 weeks ended June27) as the escalating price of raw milk was passed on to consumers. Dairy processors may well remember 2004 as a year when raw milk prices rocketed out of a year-long slump to the point where they impeded efforts to sell more milk.

Flavored milk has been such a strong performer in recent years, that some in the industry speculated it might be able to float the entire category. But with Americans paying closer attention than ever to carbohydrates and calories, flavored milk sales stagnated and then shrank in 2003 and 2004.

Milk's not alone in facing a hard battle for share of stomach. For the past two years, other beverages, including soft drinks and juice, have been losing out to the most basic bottled beverage of all--water. In 2004 sales of bottled water continued to grow and outpace those of other beverages.

Unit sales of carbonated soft drinks were oft between 2.7% and 5.8% in the first three quarters of 2004. Unit sales of refrigerated juices and juice drinks were down 2.9% to 3.3% during the same period. Both of these categories suffered losses without any significant changes in consumer prices.

Once again, most of these figures are from IRI and do not capture foodservice or convenience store sales. To illustrate the importance of that, USDA numbers for 2003 show an increase in flavored milk sales compared to the decreases seen in IRI scanner data. But even USDA's numbers show growth that was less pronounced than in previous years.

Another telling figure that the industry often frets about is per-capita consumption. The USDA tracks this figure from 1980 forward. Total annual milk sales have declined from 233.7 lbs per person in 1980 to 185.9 lbs in 2003. When this data was looked at last year, it appeared that per-capita shrinkage was slowing. The number dropped to 188.5 from 189.6. But from 2002 to 2003 it dropped from 188.5 to 185.9. And with the spike in milk prices experienced last year, it's a safe bet that per capita-figure will drop again when the 2004 statistics are revealed.

Vending sales showed a bit of twinkle in 2003. With the same number of machines in operation as 2002 (roughly 80,000) sales increased both in terms of units and dollars. Dollar sales, at $493 million, were higher than they have been in the past 10 years and nearly $50 million higher than in 2002.

The most promising numbers in 2004 came from an arena where milk sales are typically hard to quantify--food service. In particular, McDonald's, of Oak Brook, Ill., and its nearest competitor in the burger business, Wendy's of Dublin, Ohio, worked with Dairy Management Inc., to implement a program that repackaged the milk itself and the in-store presentation of milk. The results were flabbergasting.