Continued high prices have halted the baby steps milk was taking in terms of overall volume growth, but the impact has not been drastic. Tea and bottled water are among the beverage categories that continue to do very well.  Meanwhile, in the arena of school milk and vending, the industry has reworked flavored milk to meet nutrition guidelines.

Milk is selling pretty well, despite prices that are about 20%-30% higher than a year and a half ago. Refrigerated iced tea sales continue on a sharp upward curve, with the most recent figures showing 17% dollar growth and 13% unit growth for the 52 weeks ended Dec. 2.  Refrigerated coffee seems to be doing just as well, if not better.  Bottled water sales continue to grow, and bulk sizes may be the best place to be right now. Even juice is not doing too badly.

All in all, the beverage segment offers a lucrative selling environment for dairy processors. The breadwinner milk has become a hot commodity in the last two years, and the (partially) resultant high milk prices have not turned off consumers to any great degree. The other beverage arenas that dairies partake in offer some opportunities for some icing on the cake.

Many factors are at work in floating, or sinking the various beverage categories, but the most important one may be the deepening of consumer nutrition concerns. We’ll look at juice, tea and water in a bit, but let’s kick things off with milk, and start by taking a look at the numbers.

Dollar sales soaring

One of the most telling statistics comes from Information Resources, Inc.’s quarterly reports which indicate that in the 13-week period ended Sept. 30, dollar sales of lowfat and skim milk were up 22.3% while unit sales dropped just 1.46% from the same period the year before. For all milk, for the same time frames, dollar sales jumped 18.5 % while units slipped 3%. These figures come from IRI’s F/D/Mx measurements which are provided by scanners in food stores, drugstores and mass merchandisers other than Wal-Mart.

For the 52 weeks ended Dec. 2, IRI’s scanners tallied more than $7.7 billion in lowfat and milk sales, for an increase of 12.3% over the same period a year before.  Unit sales dipped 1.2% for the same period.

There is no arguing that the retail price increases have been significant. Bob Yonkers, economist with the International Dairy Foods Assn. (IDFA) recently cited U.S. Bureau of Labor Statistics, indicating that for October the average retail price of a gallon of whole milk was around $3.43, or about 10.6% higher than in 2006. For the month of September, the reported price was about $3.84 per gallon, the highest ever and 26% higher than last year, Yonkers said. 

When Dairy Foods visited the milk segment a year ago, unit sales and consumption figures were a bit more upbeat. The price spikes had only begun, and the milk category was beginning to show some measureable growth, a holy grail that industry groups had been pursuing for years. Key leaders in milk promotion say no one could have anticipated the sustained high prices, but they are encouraged by its apparent resilience in the competitive beverage category.

“It’s a tough category, and higher prices have only made it tougher,” says Kurt Graetzer, CEO National Fluid Milk Processor Promotion (MilkPEP) board. “But there are worse things than a higher price. Milk’s a lot more elastic than we thought it was.”

Graetzer says part of the reason for that might have to do with a shift in consumer attitudes about milk.

“The thinking is changing from ‘what can I take out of my diet to lose a few pounds,’ to ‘what can I put into my diet to be healthier.’”

So, the same messages about milk being part of a healthy diet seems to still resonate with consumers as they did a year or so ago. The difference may be that the good feelings about milk are now mitigating the potentially drastic impact of the considerable increases in retail prices, where those good feelings had been pushing milk toward incremental volume growth.

Looking at the long-term picture, and how this period of high prices fits into the big picture, Yonkers, and other economic analysts who focus on the dairy industry say the emergence of a true global market may be impacting the way the milk market behaves in the U.S.  It appears that the usually volatile cycle of domestic production and price has changed.

Tom Gallagher, CEO of Dairy Management, Inc.,  says the discussions about price and impact are in and of themselves often misinterpreted.

“Our view of price is that when people say the price is too high it is a misstatement. The issue isn’t the price as much as it is the price volatility,” Gallagher says.  “Typically with consumable goods other than gasoline, you don’t see a whole lot of price volatility. But with milk you can see it go anywhere from $2.50 a gallon to $3.50 or even to $4.75.”

As for the potential for this to change, Gallagher points to recent comments from Peter Vitaliano, an economist with the National Milk Producers Federation.

“Peter’s analysis is that the strengthening of the global market provides an underlying strength in domestic market so that after this period of high prices we may not have the sharp declines that we had after the high prices in 2004.”

Penny Baker, dir. of marketing at Smith Dairy, Orrville, Ohio, says higher prices have had some impact at Smith.

“Our overall volume has been adversely affected by the higher prices at retail,” Baker says. “I think it’s something that’s affecting most processors, from the data that I’ve seen.

“We do a fair amount of branded and private label and both have been declining to some extent.”

With a mature product like milk, in a competitive category like beverages, an important ingredient for growth is always innovation.  Value added products, like lactose free milk and organic milk continue to grow sales by both dollar and volume measures. 

Smith Dairy produces private label, and co-packed organic milk from its Orville dairy plant.

“We’re seeing some pretty good growth there,” Baker says.

Making hay the natural way

Dairy processors have continued to move away from milk made with the help of rBST in the past year, with supermarket giant Kroger announcing last year that it would go completely r-BST free in 2008. New to the scene in the U.S. is A2 milk. There are now many facets to niche milk, but as Baker’s comments indicate, organic milk continues to thrive.

Depending upon what numbers you look at and what kind of channels you’re talking about, organic milk grew something like 12%  to 30% last year.

When Dairy Foods addressed organic milk in last year’s Milk and Beverage Outlook in Feb. 2007 there were questions about whether the broder marketing of no-rBST milk, and a swelling supply of raw organic milk would cut into sales or lower the price of organic milk.  It doesn’t appear as if either has taken place.

All these different types of “better” milk attract people who expect more from their food, and ultimately, most of them buy organic, says George Siemon,  CEO with Organic Valley, La Farge, Wis.

“I think it still reflects a wider awareness on the part of consumers about an ever-widening number of issues related to how their food is produced,” Siemon says.  “The next one, I think is animal welfare issues. We are also going to see fair trade as an issue. I’ve also always felt that there are a good number of people who have come to organic milk because of the rBST issue.”

Organic Valley is the largest organic cooperative in the U.S., and one of the top two organic milk brands. Its chief rival is the Horizon Organic brand which is produced by WhiteWave of Boulder, Colo.

Reports to investors from parent company Dean Foods indicate that the influx of additional raw milk in 2007 impacted Horizon most significantly as it is the market leader in organic milk. But WhiteWave spokesperson Sara Loveday, says there has been a silver lining as  well.

“The increase in supply allowed us to innovate with products like Milk Plus DHA Omega-3, the first national organic milk to market fortified with DHA Omega-3, and Lactose Free milk which will launch in February.”

The new products are indicative of an overall trend of Organic milk marketers adding  extra value to their milk lines. Organic Valley have each introduced lactose-free organic milk in the past year. Both leaders also offer some products in aseptic packaging.

Organic milk is always priced higher than conventional milk, but with the sustained high price of milk overall, the differential between organic and conventional has shrunk. Could it be that the lower differential has helped organic sustain its growth?

“When conventional milk went up higher last summer we didn’t see a noticeable surge in our sales,” says Organic Valley’s Siemon, “But this fall we’ve had higher sales than expected, so now I think that this is coming home to roost.”

When traditional dairy companies like Smith Dairy and Shamrock Farms (which introduced a line of organic milk last year) jump into the market, it might be seen as an indication that organic milk has hit the mainstream. The same might be said when major retailers pump up their private label organic offering. It has now been more than two years since Wal-Mart jumped into private label organic milk, and many other major retailers including Kroger, Costco, Whole Foods and Publix are also in the mix.

Siemon says the expansion of private label organic milk could be beneficial to the overall mission of converting more farmland to sustainable farming, but it must be approached cautiously.

“I think some of it has been a bit too aggressive, honestly, and we do some private label too,” he says. 

“It needs to be handled differently than with conventional. For one thing, with private  label often the source of the milk can change frequently, and organic consumers want to know about the source. Also contracts have to be handled differently than a 30-day order which is typical in conventional.  It now takes 12 months to convert to organic, so you might need a 15-month lead time in order to increase milk supply.”

There is innovation outside of organic too. A2 milk has been introduced in the U.S. The milk, taken from selected herds with a predisposition for a specific type of protein composition, is said to be easier to digest. Sun Milk, which uses sunflower oil to replace the saturated fat in milk, is now also on the market in the U.S. and in Canada.

Most recently, Minneapolis-based Kemps worked with Canadian-based Ocean Nutrition to develop a line of milk fortified with Omega 3s.

Kemps Plus Healthy Lifestyle Milk and Kemps Plus Healthy Kids Milk both contain 32 mg of MEG-3 brand Omega-3 EPA/DHA, from fish oil, per 236 ml serving.  Each serving of Kemps Plus Healthy Lifestyle also contains 50% more calcium than regular 1% milks, whereas each serving of Kemps Plus Healthy Kids contains 50% more calcium than regular 2% milks and is an excellent source of Vitamin C.  These new products rolled out last month in grocery stores throughout the Midwest. 

Meanwhile, under the what-is-it category, Nestle is introducing Sjora a beverage fountain product for QSRs that want to offer a healthier alternative to CSDs and fruit drinks.  The company says Sjora is a “light-tasting, very refreshing” beverage that blends about 10%  milk and 5% juice. Flavors include tropical pineapple and mango peach, in regular and diet varieties.

Milk isn’t the only beverage around of course, even for dairy processors. Looking at the broader beverage picture there is plenty of excitement. 

For the really long term, Beverage Marketing Corporation recently made its annual projections for five-year compound annual growth for beverages. Bottled water and tea continue to get the nod as the fastest growth areas, while the carbonated soft drink segment is expected to lose out. Milk is actually projected to grow slightly, just a fraction of a percentage point more than juice. The good news for juice is that some growth is expected.

Bottled water is facing some challenges right now, due to environmental concerns about the packaging, of all things. Beverage Markets’ projections may reflect this pressure, as the five year projection of 7.8% is less than the growth five years prior which was 9.7%.

The substantial growth of tea is projected to accelerate from 2006 to 2011, with a compound rate of 4% projected.

Juice from the fruit

Juice is important to dairy both as a product in most dairy processors’ portfolios and as a competitive beverage during the morning meal occasion.  There’s no disguising the fact that 2007 was not a good year for orange juice. Supply issues were certainly at work, along with subsequent higher prices. Dollar sales for the 52 weeks ended Dec. 2 were up 3.7% according to IRI’s calculations, but units were off a whopping 14.4% for the same period, compared to a year before.

Quarterly data from IRI however shows that juice blends, cranberry juice and cranberry juice cocktail did well in recent quarters, and there is growth among many brands.

Several trends are driving growth in the juice segment, and many of these were noted in a recent category review in the January issue of our sister publication  Beverage Industry. 

 In 2007, many juice products touted their 100% juice content. This represents the consumer trend toward better-for-you beverages. A Euromonitor report on the juice category published in July forecasted strong growth for 100% juice brands through 2011, while fruit-flavored drinks, which contain no juice, are slated for a continued slip in the future.

Among brands, Ocean Spray, Lakeville-Middleboro, Mass., continued to ride the antioxidant wave, releasing 100% Cranberry & Pomegranate in 2007. Concord, Mass.-based Welch’s also extended its 100 percent fruit juice line with new White Grape Cherry, Tropical Passionfruit, Kiwi Strawberry, White Grape Pomegranate and Raspberry Lime juices. Juice producers continued to roll out organic options.

The vitamin boost naturally occurring in fruits and vegetables is not enough for some consumers. Companies are responding by fortifying juice with additional ingredients to make it even healthier. In 2007, juice drinks were launched with added fiber, plant sterols and probiotics.

Talk about category crossover! Sparkling juices are sweeping into the space vacated by carbonated soft drinks. PepsiCo’s Izze brand has made inroads in school lunchrooms recently. Additionally, Apple & Eve introduced Fizz Ed. The product is an 8.5-oz can of 70 percent fruit juice and 30% sparkling water. The line is available in Red Raspberry, Pomegranate Cherry, Orange Mango and Green Apple.

“Fizz Ed is a new ‘un-soda’ that is nutritionally packed and pure and natural, with no added sugars,” explains Jeff Damiano, director of marketing for Apple & Eve, Roslyn, N.Y. “It is under 100 calories in an 8.5-oz serving. It addresses obesity issues because it has only natural sugars and no high fructose corn syrup. It has been well-received by school foodservice.”

Time for tea

You might say that 2007 was the year of the Iced Tea, at least until 2008 unfolds.

Ready-to-drink teas may be served cold, but the category is on a hot streak. It is the only category in 2007 that continued building on past year increases. In 2005, the category reported a 12.8% increase, in 2006 it was a 22.6% jump and last year sales jumped more than 28%.

Whether it’s the healthy benefits of tea or the plethora of varieties and flavors, consumers are flocking to the category. Introductions include a new “blue” tea as well as a wide variety of flavors to complement the white, green, black and red variations already on the market.

While the focus had shifted to green, red and white teas, a few companies reintroduced their traditional black tea lines. The category’s No. 2 brand, Lipton, was re-branded as Pure Leaf and rolled out in six options of black tea in addition to green and white this spring. In April, Snapple re-branded its Classic Black Tea range with Earl Grey, English Breakfast and Orange Pekoe varieties. The brand holds the No. 3 position on IRI’s top 10 canned and bottled tea with its extensive lineup of plain, sweetened and flavored white, green, diet green, red and classic black teas.

Flavors also extend the reach of tea. The category’s No. 1 seller, Arizona iced tea, blended its teas with 50% juice for a new option. Debuting in late 2006, Arizona offers Apple, Pomegranate and White Grape Green Teas. In May, Kraft introduced Tazo Iced Teas in White Cranberry, Berryblossom White, Diet Green Mojito and Diet Giant Peach. Bethesda, Md.’s Honest Tea’s newest addition Pomegranate White Tea with Acai combines trendy high-antioxidant ingredients.

Also combining traditional flavors with tea, Sweet Leaf, Austin, Texas, rolled out new packaging for its Tea and Half and Half line of tea mixed with Lemonade. Relative newcomer Pom introduced Pom Tea, which blends its Pom Wonderful pomegranate juice with green and black tea. The line extended from its initial reusable single-serve glass to a larger jug due to its popularity.

Honest Tea expands its line of organic, ready-to-drink teas with the addition of two flavors to their popular line of 64-oz. multi-serve bottles. Moroccan Mint Green Tea and Mango Acai White Tea are now being offered along side Just Green and Just Black. With eight servings per bottle, this new line is not only cost-effective for a tea-lover, but reduces packaging, and gives consumers, especially families, a healthier alternative to most multi-serve beverages on the market.  The company has also rolled out one of the many new beverages that blur the lines of distinction between beverage categories. Honest Ade is a citrus-based thirst quencher that comes in a 16-oz plastic bottle. They offer twice the fresh-squeezed flavor with half the sugar of most bottled lemonades. The beverages are sweetened with natural organic cane sugar rather than high fructose corn syrup and contain 50 calories per serving.

Chilled coffee

In the ready-to-drink coffee sector, Starbucks’ Iced Coffee is the dominant leader and continues to innovate. Its competitor, Caribou Coffee, is getting into the mix with an RTD deal with Coca-Cola. In addition to other entries and popular favorites, the category reported a nearly 20% increase in sales according to IRI data.

Seattle’s Starbucks has built a brand that is nearly synonymous with coffee. It also has expanded this appeal with its RTD options that have a stronghold on the market. Starbucks’ Frappuccino, Doubleshot, Iced Coffee and Doubleshot Light hold four places on IRI’s Top 10 RTD coffee list. Together, the brands, which are made through a venture with PepsiCo, boast $233 million in sales in a category where sales total $254 million.

Competitor Coca-Cola is still building its RTD coffee portfolio. In addition to the cola/coffee fusion soft drink, Coca-Cola Blak, the company released Godiva Belgian Blends nationally last summer. The product blends coffee with indulgent flavors such as French Vanilla, Dark Chocolate and Milk Chocolate and is now the No. 6 brand, according to IRI data.

In November, Coca-Cola announced a partnership with Caribou Coffee and will launch the products this summer. The line of RTD iced coffees is positioned as premium and will be available in Regular Iced Coffee, Vanilla Iced Coffee and Iced Coffee Plus Espresso.

What to do with soft drinks?

The better-for-you beverage trend may not have worsened the slump carbonated soft drinks have been experiencing, but it has not helped either. Combined data from IRI and ACNielsen show the category dropped 3.8% for the year ended in July 2007. Overall, the CSD category saw few new product introductions as traditional CSD manufacturers focused on expanding their portfolios in energy drinks, juice, water and tea. Out of the vast lineups from Coca-Cola, PepsiCo and Cadbury Schweppes, only 14 brands showed positive gains in 2006. In terms of new products, Coca-Cola and PepsiCo released mostly no-calorie formulations.

Coca-Cola reported small gains worldwide, but North American case volume declined 2 percent from the prior year. Trademark Coca-Cola, Sprite and Fanta had 3 percent gains globally, while in North America, CSD/energy drink hybrid Vault, Fresca and Fanta reported gains.

Part of Coca-Cola’s focus was the development of its Coca-Cola Zero brand. The no-calorie soda is formulated with a blend of sweeteners, aspartame and acesulfame potassium to taste more like trademark Coca-Cola than Diet Coke. 

The Coke Zero line was also extended last year, with the addition of Cherry Coke Zero and Vanilla Coke Zero.  The company also re-introduced regular Vanilla Coke, which had been pulled from shelves at the end of 2005. Another addition to the portfolio was Diet Coke Plus. Boasting the same taste as the No. 1 diet CSD, Diet Coke Plus has added vitamins and minerals.

PepsiCo experienced single-digit declines for flagship Pepsi and Mountain Dew, but that was offset by single-digit increases for its Sierra Mist lineup.

Pepsi also unveiled a massive marketing and repackaging campaign at the start of 2007. Aimed at attracting a younger demographic, Pepsi-Cola cans, bottles and cups received new graphics every few weeks. The graphics, some designed by celebrities, were to change 35 times during the year to reflect images of sports, music, fashion and cars.

Bottled water and the environment

Bottled water has been making headlines lately. And not for new high-priced, ultra-premium brands, but for fears that bottled water’s popularity could impact the environment. Some are concerned that the increased popularity of petroleum-based packaging is more often clogging landfills than being recycled.

Additionally, bottled water made headlines this summer when PepsiCo’s Aquafina brand responded to criticism regarding its source by labeling its bottles as “From a municipal or public source.”

Yet, consumers seem unaffected by the buzz. The overall bottled water category reported $5 billion in sales and nearly a 10% increase, according to Chicago-based IRI, for the 52 weeks ending Aug. 12, 2007. The convenience/ PET still water category alone was up more than 13%

While the category has grown, issues have attracted public attention. The International Bottled Water Association, Alexandria, Va., responded to the packaging criticism with full-page ads in The New York Times and San Francisco Chronicle. The ads explained the benefits of water, how America’s on-the-go lifestyle has grown bottled water and the need for recycling programs.

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