Independent’s Day
by James Dudlicek
Boosted by infrastructure upgrades, Foster Farms Dairy thrives by giving like-minded customers topnotch service.
It’s a quintessential full-line dairy processor, offering some 1,200 SKUs of every product from milk and ice cream to shake mix and powder.    Approaching seven decades of operation, Modesto, Calif.-based Foster Farms Dairy is enjoying a production boom after five years of plant improvements that have allowed the company to broaden its product offerings, bring more 
processes in-house and streamline its manufacturing flexibility. With $340 million in annual sales, it would seem California’s largest independent dairy processor is on the right track.
“It really comes down to quality of the product, quality of service and value,” says sales manager Dennis Roberts. “The key in this day and age is service making sure the customer is served.”
Length and Breadth
Foster Farms Dairy serves a broad area from its headquarters hub in Modesto, along with a plant in Fresno a couple of hours south. Its products are distributed in nearly the entire San Joaquin Valley, from Redding to the north, all the way down to Bakersfield.
And by virtue of its location in one of the richest milk-producing areas in California, the company faces much competition. “We have several local dairies we compete with, and of course we have Dean Foods, which has Berkeley Farms,” says president Jeff Foster. “The competition is pretty strong in California. We tend to service the majority of the independent grocers here in the Central Valley. That’s pretty much our customer base.”
Foster Farms considers the swath it cuts a plus. “One of the advantages we have is our distribution coverage,” Roberts says. “We tend to have a larger distribution area than our competitors.”
All the better to provide a larger audience for the company’s expanding product line, which has growth more diverse over the past five years as plant improvements have enabled it to increase production and bring more processes in house.
“Last time you were out here, we had just the fluid milk operation and the drying/butter operation,” facilities manager Larry Diggory says, referring to Dairy Field’s 1999 visit to Foster Farms’ Kansas Avenue facility in Modesto. “In the last five years, we’ve built a cottage cheese department that was moved from the McHenry Avenue plant over to here. High-tech machinery and bigger vats were all added to give us the capability for more volume. At our other location, we were fenced in — we couldn’t make any more. Now we have plenty of capacity to go out and get new business for our cottage cheese.
“Added next to that is our ice cream facility and our brand-new cold box, which gives us an opportunity to go out and get the private label business, add more flavors and run more efficiently in our ice cream department. We’ve also extended our cold box to our dry/corrugated area. We have first-in/first-out flow-through racks put in to handle the cottage cheese and private label. We have actually grown our corrugated business at this facility in the last five years.”
Foster Farms has made ice cream since the 1960s, but the recent plant improvements have made it possible to nurture this end of the business, Foster explains.
“Ice cream has been our biggest growth area,” says Dan Conrad, director of ice cream and new business opportunities. “Our growth last year was 60 percent, and annualized growth in the last two years has been 35 percent in our primary target area.”
Frozen products should continue to be a key focus of growth for the company. “We didn’t have the capacity at the plant. That was our biggest limiting factor,” Conrad says. “With the completion of the new plant, we now have the ability to manufacture a broader range of SKUs and package sizes. That, in combination with going out and developing partner relationships with branded companies like Dreyer’s and Nestlé, we’ve added to the product breadth.”
Foster Farms’ product line features fluid milk products in various sizes and flavors, ice cream, cottage cheese, sour cream, butter, condensed milk and dairy powders. In fact, the only thing the company contracts out is yogurt, Foster notes.
The company does some foodservice and private label business but prefers to emphasize branded production. “At this point it’s less than 10 percent of our total business,” Conrad says. “We get opportunities all the time and we are looking at them, but to this point we’ve elected to not be in the low-margin/high-volume business.”
Customer Satisfaction
In an age of industry consolidation, both in dairy and retailing, Foster Farms sees California’s independent grocers as the backbone of its customer base.
“It’s an interesting dynamic,” Foster says of large-scale grocery consolidation. “Ultimately, it helps us build stronger relationships with our core customers. Retailer consolidation has been around for a while and will continue. We have the growth of Wal-Mart in California over the next several years bringing more super-centers. It allows us to continue to build our relationship with our core customers, the small independent.”
Conrad elaborates. “Our key strength is customer diversity,” he says. “You’re going to see shifting trends all the time. Obviously, the independents are under pressure. A lot of them are developing niches in specialized areas, which they’ll continue to thrive in. Some will struggle. The fact that we don’t have all of our business in that one segment is one of our key strengths.”
No one single customer makes up more than 5 to 10 percent of Foster Farms’ total sales business, minimizing exposure to consolidations and closings, Conrad notes.
And that’s without doing business with Safeway, the grocery giant based just two hours away in the San Francisco Bay area. Foster Farms does business with Ralph’s, a California supermarket chain owned by Cincinnati-based Kroger, along with regional convenience and drug stores.
The majority of Foster Farms’ support programs are newspaper advertisements done in conjunction with its grocer partners.
“We have great relationships with customers,” Conrad says. “We have the ability to partner with them and work together to bring in more products and products they’re looking to develop to build their business or build our business. That’s a key opportunity. We’re doing that more and more. It definitely pushes you toward more value-added items.”
Developing more value-added products will help Foster Farms maintain an edge against its competition. While that’s a challenge, its speaks to the flexibility that the company strives for in constantly upgrading its plant operations.
“I think we have to look at what other products we can make within the walls of our plant that complement our current business, and what other products we can put in our distribution system to complement it,” Conrad says. “How can we add value for the consumer? How can we add value to our routing? Those are keys for long-term continued growth.”
Growing and Growing
Flexibility, service and value are common themes in discussions with the Foster Farms management team about the company’s future growth.
“We certainly have to provide the product that consumers are looking for,” Foster says. “Above all, we have to bring quality and value to the consumer, and also provide the customer with great service. If we can provide these things, that’s how we’re going to continue to grow our business.”
Roberts adds: “It really comes down to understanding what the consumer’s needs are and what they’re looking for, whether it’s school milk sizes, portion control, sugar content or flavors.”
Keeping up with all these demands has its challenges, not the least of which is undulating raw costs. Helping Foster Farms to a certain extent is its vertical integration; the company maintains six dairy farms with 5,500 cows, which produce about 10 percent of the required volume of raw milk (the rest comes from cooperatives throughout the Central Valley).
“Our integration helps us when we have rising-price scenarios,” Conrad says. “It helps to balance out some of those swings in our business.”
But Foster Farms managers seem to be resigned to the market’s wild ride. “I don’t know that you can handle it,” Foster says, prompting laughter from the rest of the team. “Every month it seems to swing back and forth. A lot of it is education — making sure we educate and communicate with our customers, let them know what’s happening, what’s coming up and keeping them informed.”
Roberts reiterates the importance of communication. “The biggest thing that’s helped smooth it out is letting the customer know ahead of time this is coming and why it’s coming,” he says. “They’re looking for more answers from us now than they have in the past.”
That helps Foster Farms be a better partner with its customers to jointly help educate consumers about dairy issues, Foster says.
Beyond that, the aforementioned consolidation also presents challenges to doing business in such a vast marketing area.
“That’s been a major challenge for us over the last several years,” Foster says. “Just look at the environmental pressures that are out there today, like rising fuel prices. With the distribution channel we have, our logistics are stretched from northern California all the way down to southern California. We’ve prided ourselves on being efficient producers and distributors of products. It makes it difficult to continue to have an efficient network if we’re continually faced with rising prices.”
The industry’s maturity also is a factor, Conrad says. “You see pricing pressures, competitive pressures. If we take a customer from somebody, they have to fill that plant volume, so they become really aggressive trying to come back to get that customer,” he says. “It becomes key to develop value-added products.”
Competition, in turn, drives the company toward further automation, Foster says. “That is what our focus has been for the last several years in the plant. That will be our focus in the years to come — how can we further automate our plants? We feel we’re fairly automated today,” he says. “But to continue that automation process, what other mechanical devices are out there that we can put in our plant that will help us lower our costs and ultimately lower our customers’ costs?”
Securing the skilled labor required for dairy processing is yet another hurdle, Foster says. “The pool of employees isn’t there like it used to be,” he says. “With unemployment down, it makes it difficult to find people to come to work.”
But once they’re here, Foster Farms managers say employees ought to hit the ground running. “Our management philosophy is one of empowerment,” Foster says. “You’ll find that from the top all the way down. We pride ourselves on having employees who feel empowered to do what they think is in the best interest of the organization. And along with empowerment comes responsibility — taking responsibility and ownership for the product they produce and the job that gets done.”
Foster Farms has about 800 employees among its manufacturing, distribution and administrative facilities in Modesto and Fresno, along with distribution centers around the state. Foster notes there are fewer than 50 at the corporate end.
“There is very little bureaucracy here,” he says. “We have a very lean organization. Any one of my direct-reports certainly has the authority to make decisions without coming to me. That’s the kind of environment we want to have throughout the organization.”
This lack of bureaucracy is reflected in the managers’ business cards, most of which do not reveal their corporate titles.
“We kind of joke about it, but we don’t necessarily have titles here,” Foster says. “Larry [Diggory] is the facilities manager, but Larry does everything from production to sales to transportation. Ralph [Matile] is our transportation manager, but he’ll do sales and get involved in production. We tend to cross over into each other’s areas to help where we need to.”
Efficiency as an avenue to driving down costs goes a long way toward conquering the challenges of doing business. “Whether it’s in distribution modeling, routing programs, becoming as efficient as you can, squeezing every nickel out of the plant,” Conrad says.
Foster jumps in: “— without compromising quality and service. Those are two of our key points of differentiation. We have a quality product and we provide a great service to our customers. So we’re trying to make sure we’re efficient, we’re cost-effective and we don’t compromise either one of those two core values. It’s difficult moving forward, because there is a cost to service.”
Moving Forward
What’s next in store at Foster Farms? As far as bricks and mortar are concerned, the company expects to complete a new administrative office complex next year at the Kansas Avenue plant location. More freezer pallet space is also planned.
Operationally, the company is exploring entry into extended-shelf-life processing, to augment its HTST operations. “Our thought process is with single-serves becoming a bigger line for us, more of a focus is put on having that extended shelf life and extending the product breadth,” Foster says. ESL products would help the company expand its geographic marketing area and be a plus for the growing school milk channel, he says.
The wealth of health research surrounding dairy products is something Foster Farms is hoping to soon incorporate into its marketing efforts. “There are very good programs out there on a national level like 24/7, as well as some of the school education programs,” Roberts says. The company is investigating the use of health-claim labeling for some of its products.
Having nearly completed about five years’ worth of improvements, where will Foster Farms be in another five years down the road?
“We expect to be a more diversified company; we expect to be a larger company,” Foster says. “At the same time, we expect to stay focused on our core values — the quality of product and service we provide to our customers.”
Roberts adds: “It touches a little bit back on the management style question. That’s one of the advantages we have over a lot of the other competitors out there — the way that we operate. We’re very quick to react to customer needs. I think that’s important in moving forward.”
Technology will play a larger role in logistics, says Ralph Matile, director of transportation and branch operations. “I see more technology, different ways of looking at our business,” he says.
“The old 200-cases-a-load probably isn’t going to make much sense anymore. We’ll be a little more sophisticated as far as the tools we use see how we measure up.”
Conrad sums up: “I think one of our key strengths is that we are a large company with resources but with the ability to act quickly and decisively.”
That sentiment is at the core of what Foster says he thinks is the most unique aspect of Foster Farms Dairy. “I believe it’s our ability to react, whether it’s react to change or a request by a customer or consumer, to just respond and be flexible while still providing a value to both the customer and consumer,” he says. “That flexibility, that nimbleness that we have, truly sets us apart from a majority of our competitors.”