This fall, trucks pulled in and out all day at the HP Hood dairy processing facility in Winchester, Va. In addition to milk tankers unloading milk and cream, the other trucks belonged to construction workers who are installing a second aseptic processing line in the plant.

Hood plans to spend approximately $100 million on capital projects this year, including this new line. The processing and packaging equipment will allow the Lynnfield, Mass.-based dairy processor to keep up with product demand from existing customers and will give it additional capacity to secure and service new business.

Hood is a full-line dairy products manufacturer. It processes HT/ST and UHT milks, flavored coffee creamers, other Grade A products (including Greek yogurt and sour cream) and ice cream. It cuts and wraps its own branded cheeses and manufactures shelf-stable (aseptic) dairy and nondairy beverages for customers.

The company has been instrumental in developing and expanding the categories of flavored coffee creamers and dairy-based dips. It is investing heavily in new equipment and technologies. It is working toward achieving zero-waste-to-landfill in all plants as well as pursuing other sustainability projects. Company executives are active participants in trade associations that share technical knowledge and promote the dairy industry. For all of these reasons, Dairy Foodshas selected HP Hood its Processor of the Year.

On a rainy day in October, Chairman John Kaneb and Executive Vice President Jeff Kaneb flew from their Boston-area corporate headquarters to Winchester. (Jeff is one of two sons who are officers of the company. Gary Kaneb is Hood’s CFO.) I asked John what he wanted to accomplish on this trip. “I want to shake as many hands as possible,” he said. It was people, not processing, that was the center of his attention on this plant visit.

Hood management takes to heart the wisdom of another Bostonian, former Speaker of the House Tip O’Neill, who famously said “All politics is local.” No manager can run a business from a distance. You have to be visible to employees and engage them in conversation.

The Kanebs make it a point to visit every plant over the course of the year. They get out in the field to connect with the line employees and to tell them that what they do every day is important work and work that they value. When I asked Senior VP of Operations Scott Blake what makes a good plant manager, he told me it’s not only technical knowledge but rather the ability to communicate with staff and to tell them what is expected of them.

The Winchester facility is the flagship in Hood’s network, which consists of 14 other processing plants in California, Connecticut, Maine, Massachusetts, New Hampshire, New York, Pennsylvania and Vermont. It built Winchester on a green field in 2000 and later bought an existing dairy plant in Sacramento, Calif., where it installed an aseptic line to serve customers in the Western states. In 2012, capital investments totaled $45 million. Hood plans to spend approximately $100 million this year and will invest $140 million in 2014, much of it on the Oneida, N.Y., plant which manufactures ESL fluid milk and cream products. Since buying HP Hood in 1995, the family has reinvested well over $1 billion into the company and its manufacturing plants.

A four-point plan

The backbone of Hood’s growth strategy is to invest in the manufacturing of long-shelf-life products, said Jeff Kaneb. Extended-shelf-life milks and coffee creamers have a code date of up to 120 days, allowing them to be transported long distances and still stay fresh in a retail store under refrigeration. Aseptically processed and packaged beverages stay fresh for up to a year without refrigeration.

The dairy processor follows a four-point business strategy in which it manufactures and sells:

  1. Company-owned brands
  2. Licensed brands
  3. Private-label brands
  4. Co-packed brands

The Kanebs see growth in the specialty products business, especially licensed and co-packed beverages. Hood leverages its expertise in processing with the innovations of its customers. Take for example, Kellogg Co. and its new dairy-based shake and drinks sold under the Special K brand. Kellogg’s To Go, sold in 10-ounce aseptic bottles, contains water, nonfat milk, whey protein concentrate and soy protein isolate.

Hood casts a critical eye on the production of its own branded foods and beverages. When it can’t add value, it will outsource production, as it did with its new chocolate-coated ice cream squares called Harvey Bars (after Harvey Perley Hood, who founded the company in 1846). Hood doesn’t make cheese, either. Rather, it buys cheese from suppliers and cuts and wraps it under the Heluva Good! brand at a facility in New York.

Looking for opportunities

Before Hood develops a product, “we get grounded in the consumer,” said Jim Walsh, the executive vice president of sales. “We ask: What happens if the market changes? What about competition and commodity prices? Can [the product] be adapted?”

Greek yogurt is a great example of how Hood approaches a dairy category. It conducted consumer research, drew on insights from others (like the Innovation Center for U.S. Dairy, Rosemont, Ill.) and talked with customers to gauge the marketplace for new products. Hood managers were ready to capitalize on the popularity of Greek yogurt, but one question they had to answer was: Should we make a branded or a private-label product?

After weighing the costs and benefits of producing a Hood-branded Greek yogurt, it decided to pursue private-label accounts. That way it would not incur the sales and marketing expenses associated with promoting its own brands.

Walsh characterized the company’s entry to the Greek yogurt market as “the perfect storm. We wanted in, our customers wanted in and consumers want the product.”

Once it made up its mind, Hood invested in equipment and technology to manufacture Greek yogurt at a plant in New York. “We had to practically re-tool the plant,” Walsh said. The operations, research and development, and quality teams brought it altogether without compromising taste, he said. “We delivered commercial product eight months from the time we made the decision to go.”

“Speed is our hedgehog principle,” he said, referring to a concept from author Jim Collins (“Good to Great” and other titles). Speed without compromising quality is what separates Hood from competition, Walsh added.

Hood calls itself the largest supplier of private label Greek yogurt in the country. The demand for Greek yogurt won’t end any time soon, in John Kaneb’s view. He outlined the three phases of new products: First there is more demand than supply. Then there is a balance and finally excess capacity. “We are still in the first phase,” he said. “But we’re about to enter phase two and phase three is visible on the horizon.”

Baileys Coffee Creamers have to be one of the biggest successes in Hood’s recent history. The nonalcoholic product combines Hood’s expertise in product development, consumer insights, manufacturing and marketing. Jeff Kaneb and Vice President of Marketing Chris Ross convinced Diageo, the brand owner, that there was a market for dairy-based, flavored coffee creamers. Hood has added flavors and expanded distribution every year. According to Information Resources Inc., Chicago, Baileys is the third best-selling brand in the refrigerated coffee creamer category. Sales increased 23% in a year.

John Kaneb said that the Baileys products helped “legitimatize the dairy in the flavored coffee creamer category.”

Licensed brands offer opportunity for growth, Kaneb said. Other licensed products include Lactaid (lactose-free dairy products), Hershey’s Milk and Milkshakes, You-hoo, Blue Diamond Almondmilks, FiberOne Cottage Cheese and Southern Comfort Egg Nogs.

Both parties win in the licensing relationship, the Kanebs said. The licensor receives royalties and Hood gains sales. Hood supports its licensed products with advertising and marketing dollars.

“We treat a licensed brand like it’s our own. Partners trust us to manage the brand. It’s all about trust in quality and execution,” said Jeff Kaneb.  Hood applies this same philosophy to its private label and co-packing partnerships.

Teamwork on sustainability

Just as products come together through the teamwork of various departments, so do achievements in sustainability. Another Kaneb son, Chris, is involved in this area.

A foodservice account asked Hood to reduce and remove material from a single-serve plastic bottle, said Mike Suever, the senior vice president in charge of R&D, engineering and procurement. Working with the account and its suppliers, Hood removed resin from the bottle, sourced a recyclable sleeve label, used a thinner gauge of plastic wrap and specified a lighter gauge of cardboard in pallet stacks. The customer was so satisfied with this solution that it is requiring other suppliers to follow suit.

Suever organizes quarterly town hall-style meetings of plant personnel to share best practices. A lot of the ideas deal with the support infrastructure, like air compressors, ammonia systems and boilers, he said. By finding ways to run the equipment at peak efficiency and sharing this knowledge, all plants can reduce their use of water and energy and extend the usable life of a machine.

At these teleconferences, participants hear from their peers and ask questions. Bringing employees into the discussion “enhances the speed to implementation,” Suever said. They see that the practices are not complicated to implement.

Hood’s goal is to achieve zero landfill waste throughout its entire system. Today at least one plant is there and others are close to it. But Hood has found that in some places, local regulations stymie the best of intentions. In some locations, ordinances prevent transferring solid waste out of the county of origin to regional recycling facilities. Until those rules are re-written, “we have to back up and start over” on its zero-waste goals, Suever said.

The dairy processor is using alternative energy at some plants. This spring it worked with the town of Agawam, Mass., to turn an undevelopable capped landfill into a solar farm. On the 8-acre parcel near its plant, it installed 7,200 solar panels that generate 1.8 megawatts, enough to satisfy 10% to 15% of the plant’s weekday electrical needs and 100% of its weekend needs, Suever said.

As an active member of the Innovation Center for U.S. Dairy, Hood learned about UV sterilization of milk. It took that principle and adapted it to sterilize rinse water for bottles used for ESL beverages. Ultraviolet sterilization reduces operations and maintenance costs by eliminating the need for a boiler to heat the water because the process sterilizes water at ambient temperature.

Water is the new focus in Hood’s sustainability efforts. Suever said he is undergoing “a mental shift” from “water management” to “water stewardship.” Water, especially potable water, is a finite resource, he noted. Hood will be benchmarking its use of water and how its business partners use the resource, too. The company will be examining the water use policies of all of its suppliers, not just dairy farmers. In the future, supplier selection will be based on how suppliers use water to produce their products.

Industry participation

Industry associations can be powerful allies to business. Successful businesses do more than pay annual membership dues; they play active roles in these trade groups.

 “Associations have been helpful to us,” John Kaneb said. Jeff is on the board of the International Dairy Foods Association and chairman of the Milk Industry Foundation. Walsh is chairman of the Milk Processor Education Program’s Refuel with Chocolate Milk committee. Gary Kaneb is an active participant in many of the MilkPEP sponsored marathon and Ironman events as a member of Team Refuel.

“When the Kaneb family moved into the milk business, the industry gained some very savvy and committed people at HP Hood,” said IDFA CEO Connie Tipton. “Both John and Jeff Kaneb have made an imprint on our organization through their dedication to making a difference and providing strong leadership.”

She said John led a committee of CEOs from milk, ice cream and cheese member companies to find a consensus on reforming the Federal Milk Marketing Order system that paved the way for IDFA’s policy position.

“Jeff has been involved on the board and now serves as chairman of the Milk Industry Foundation, plus he’s devoted shoe leather to walking the halls of Congress on dairy policy issues many times,” Tipton said.  “Everyone who works at HP Hood reflects that commitment with a focus on improvement and growth. They have definitely made the International Dairy Foods Association stronger.”

Dairy Management Inc. CEO Tom Gallagher said John Kaneb “was instrumental when we first started to create the Innovation Center for U.S. Dairy. He shared the vision dairy farmers had for the industry coming together to work on pre-competitive priorities, and he backed that up with the commitment of his personal involvement as well as that of his staff at HP Hood. As a result, HP Hood not only has been able to use the innovation insights to further its own business, but also has been a major contributor to the benefit of the whole industry.”

What’s next

In recent years, Hood has launched new foods and beverages including frozen Greek yogurt, ready-to-drink dairy-based coffee beverages, and new flavors and formats in cultured dairy and frozen novelties. But like other dairy processors, Hood finds that federal Standards of Identity for dairy foods along with milk pricing through the Federal Milk Marketing Orders are stifling innovation.

As Jeff Kaneb succinctly pointed out, “Consumer preferences are changing more rapidly than ever, but the rules our industry lives by are three-quarters of a century old.”

After I toured the high-speed processing lines in the Winchester plant where dairy and nondairy beverages were being bottled at dizzying speeds, I asked the Kanebs if they consider themselves dairy processors or food manufacturers. They emphatically said “dairy processors.” John said he sees a “re-awakening” of the importance of protein in the diet and said that he hopes the industry will use this interest in protein to arrest the decline in fluid milk sales.

“Milk is the total package,” he said, adding that the industry “must highlight the positive attributes of milk and not assume that ‘everybody already knows that.’” He said his wife raised all six of their children on Hood milk, long before he bought the company.

 With annual sales of $2.3 billion and capital expenditures totally millions of dollars every year, Hood’s commitment to the dairy industry is clear. The Kanebs have owned this 167-year-old business for just 18 years, but it has a growth strategy and the manufacturing infrastructure in place to succeed for years to come.