usa dairy distribution dm2009

8/2/2019 USA Dairy Distribution DM2009

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IBIP Dairy Analysis in the United States & ChinaBy: DeSutter, Erickson, Liu, & Witchek (April 2010)

II. INDUSTRY ANALYSIS

A. Competition1) United StatesWith at least 67 fluid milk companies in the United States (Mantra, 2010) battling to sell

the 189,320 million pounds of milk produced in 2009 (Miller, 2010), competition is stiff. In

America, milk and cheese each claim 37 percent, or $16.6 billion, of the total $44.9 billion

United States dairy market. From 20082013, this industry is calculated to grow at a rate of 4.6

percent, leading the market to a value of $56 billion by 2013. Ranked by total profits, the United

States claims four of the top ten dairy manufacturers in North America (MarketLine, 2010)Kraft Foods, (3rd), Dean Foods Co. (5th), Land OLakes (6th), and Dairy Farmers of America

(7th). Kraft Foods dominated the dairy industry with 13.0 percent of the United States market

share, followed by Dean Foods Company at 4.40 percent, and Dairy Farms of America taking

2.70%. Meanwhile, other dairy companies accounted for the remaining 79.90% of value

(Datamonitor B, 2009).

Overpowering the other dairy industries, Kraft Foods, Inc generated $42,201.0 million in

sales from its five product lines, including snacks, beverages, cheese, grocery, and convenient

meals with 98,000 employees (Datamonitor C, 2010). Dean Foods, the second leading milk

corporation in the United States, who earned $12,454.6 million with 25,800 workers

(Datamonitor B, 2009). Headquartered in Northfield, IL, Kraft Foods also stands 3rd in the dairy

industry for the global marketplace. In their dairy enterprise, the company primarily produces

natural, processed, and cream cheeses through key brands such as Kraft, Velveeta, Cracker

Barrel, Breakstones and Knudsen cottage cheese and sour cream. Despite the intense dairy

competition that may lead to future loss of revenues and strict government regulations, Kraft

Foods has a strong brand image and powerful distribution networks throughout the country

(Datamonitor C, 2010).

Extensive multi-category distribution resources and consumer awareness are Krafts key

strengths. Warehouse delivery and direct store delivery are the two distinct operations of the

distribution sector, and the company owns 303 allocation centers in North America, and grocery


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stores account for 81.9 percent of distribution in the total dairy market. Consumer advertising in

broadcast and prints, outdoor and on-line media, customer incentives like coupons and contest,

and trade promotions are heavily utilized to support their distribution efforts. As of October

2008, Kraft Foods was honored for its growth and innovation with the 2008 Most Innovative

Company award from Consumer Goods Technology magazine, which is an audience of 35,000

consumer goods executives and research advisory boards positioned by industry analysts and

executives (Datamonitor C, 2010).

While the United States dairy market is fairly easy to enter as a small enterprise, entering

the mass market is difficult, with the industry being highly fragmented with the majority of the

enterprise ran by regional and national players. In the United States, dairy retail is concentrated,

as differentiating products such as milk and butter is difficult, although cheese and yogurt are

more specialized. Because consumers tend to purchase the least expensive products, especially

in the milk market, the dairy market is significantly price sensitive. As dairy items become more

individualized, such as organic yogurts and other premium products, there is less emphasis on

price and more attention to specific attributes. Still, price is the main focus of competition

between Americas leading dairy companies (Datamonitor B, 2009).

2) ChinaOf the $17 billion dairy market in 2008, milk sales were the most lucrative, generating $10

billion, which consists of 58.8 percent of the overall market value. Looking ahead, the market is

expected to grow at a rate of 7.1 percent annually until 2013, which is expected to have a value

of $24 billion by the end of the five year period. Currently, there are three major companies

dominating the dairy industry in China today: Bright Food Group with 12.30 percent of the total

share, China Mengniu Dairy Company Limited with 10.50 percent, and the Yili Group

accounting for 10.00 percent of all sales, with the remaining 67.20 percent claimed by smaller

domestic businesses (Datamonitor A, 2009).

Leading the way, the Bright Food Group is a Chinese-based conglomerate essentially

focused on manufacturing and marketing dairy products, as well as rice and wine. The two main

players in their dairy market are Bright Dairy & Food and Shanghai Yimin Group, in which the

subsidiaries are concentrated on milk production, developing dairy products, and promoting

nutritious healthcare foods. Sterilized and pasteurized milk, yogurt, UHT pasteurized milk, milk


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powder, butter, and cheese are their most commonly manufactured products (Datamonitor A,

2009).

Although there is no recent financial information available for the Bright Food Group, the

China Mengniu Dairy Company (Mengniu) generated $3.4 billion in revenues by the end of

2008, an 11.9 percent increase from 2007. With twenty plants in China, Mengniu has 23,500

employees and primarily distributes its products in Hong Kong and Macau. Liquid milk, ice

cream, and other dairy products constitute of the companys three segments. In the liquid milk

category, the brand comprises of UHT milk products, milk beverages, and yogurt (Datamonitor

A, 2009).

While entering the dairy market is fairly easy as a small enterprise, consumer companies

must be substantial and have an integration strategy in order for them to supply the Chinese mass

market industry. Despite the diversity of the dairy companies and products, rivalry is strong

because there are many players who do not take advantages of these differences and appear very

similar to one another. Because there is a wide selection of food and drink that can be utilized by

in analogous ways to dairy products, consumers can easily replace these goods with subsequent

alternatives if milk prices rice too high. As a result, the dairy industry is highly price sensitive,

as consumers have substantial buying power, especially in the milk industry (Datamonitor A,

2009).

With the top three dairy companies operating 32.8 percent of the market value, the Chinese

dairy market is fragmented. Compared to the smaller domestic players, these leading companies

have a strong brand image and more butter and yogurt products, with an emphasis on gaining

customer loyalty. The key to gaining devoted Chinese dairy consumers is price. With the

intense price competition, scale economies in production are especially important, since having

safe supply and distribution cold chains are critical to avoid wastage costs, which can be a

challenge for the less powerful dairy companies (Datamonitor A, 2009).

B. Consumers1) United StatesOf the total global dairy market value in 2008, the United States accounted for 16.0

percent of the entire industry, while all of Asia-Pacific constituted of 17.8 percent overall. Being

a highly developed nation, supermarkets and hypermarkets account for 81.9 percent of the total


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distribution channel in America. The remaining 18.1 percent is allocated through specialist

retailers, convenience stores, or additional networks (Datamonitor B, 2009).

With the three-a-day milk plan enforced by the United States government, consumers are

already highly aware of the importance of dairy and naturally enjoy its variety of flavors,

although there is always room for growth. As the third most populous country on the planet,

America has 295,734,100 hungry citizens each day. Of these consumers, 20.2 percent are

children ages 0 to 14, who have the potential to consume at least one milk carton (1/2 pint)

through their national school lunch program. According to the Child Nutrition Act, six percent

of all sales in the United States account for federal school programs. With the International

Dairy Foods Association goal of providing quality nutritional meals that are popular and fit

school budgets, the National School Breakfast Program feeds ten million children each day, and

the National School Lunch Program feeds over thirty million students per day. As a result, each

of these meals is required to offer fluid milk, and yogurt and cheese are also favorites (IDFA,

2010).

Of all dairy products consumed by Americans in 2004, 32 percent was fluid milk. In

fact, 30 percent of that figure was claimed by two-percent milk, 15 percent fat-free milk, 15

percent by one-percent milk, and 3 percent from flavored milk. The average American drinks

11.5 gallons of milk per year, while Chicagoans consume an estimated 8.7 gallons (Hutjens

2005).

2) ChinaAlthough consuming dairy products in China is not as common as it is in the United States,

the government is still trying to ensure all its citizens, especially children, are consuming at least

one 8 oz. glass of milk per day. With the Asia-Pacific region consuming 17.8 percent of

worldwide dairy products, China leads overall, representing 34.1 percent of the entire market

share. The Chinese consumers mainly obtain their dairy through independent retailers, who

account for 57.1 percent of the national distribution. Following in their footsteps are specialist

retailers with 19.9 percent, convenience stores with another 11.0 percent, and additional sources

with 12.0 percent (Datamonitor A, 2009).

Since China is the most populated country in the entire world with a population of

1,338,612,968 (July 2009 est.), the potential for dairy consumers is enormous. Of this vast

amount, 19.8 percent are children 0 to 14, who especially need milk more than any other age


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group. In a 2005 study conducted by the Ministry of Agriculture, Chinas per capita milk

consumption is only 47.74 pounds, which is one-fifth of the worlds average. In rural areas, the

scenario is even worse, as urban residents consume 54.56 pounds of milk on average compared

to the farming communities who only drank a shockingly low 4.4 pounds of milk in 2005. The

survey also revealed that while Chinese babies are as healthy as American babies for the first

year, they grow slower after this point, especially during adolescence (Xinhua, 2007).

But there is hope for the future. As of 2005, Chinas total milk production reached 26.85

million tons, and is projected to skyrocket by 2020 as the worlds third leading producer with

more than fifty tons or thirty kilograms per capita. Most importantly, the Dairy Association of

China is starting a milk program for 8,862 primary and middle schools in fifty-two cities nation-

wide, which will cover more than 1.9 million students (Xinhua, 2007). While it is a start, the

program began nearly ten years ago, and only 1.7 percent of all elementary students are covered.

Forty-two milk firms serve as designated suppliers, in which one Chinese jin (half a kilogram) is

offered to children at breakfast at a rate thirty percent lower than the market price (Xiang, 2010).

C.Substitutes1) United StatesIn the mind of the American consumer, there are many ways to meet dairy requirements

on a daily basis: food, beverages, or additional ingredients in home-made meals. As a result of

the wide variety of substitutes, it is simple for consumers to replace dairy products with

alternatives when prices get too high. Because consuming dairy products is an essential part of

most diets in the United States and the rewards of obtaining calcium are highly promoted, it is

unlikely they will be replaced. Still, the risk of substitutes is ranked as moderate (Datamonitor

B, 2009).

Drinking milk is essential to ensure strong bone health, healthy skin, a robust immune

system, and prevention of illnesses such as hypertension, dental decay, hydration, respiratory

problems, obesity, osteoporosis, and some forms of cancer (RuralTech, 2010). According to a

report by Dr. Michael Hutjens at the University of Illinois, Americans consumed 532 pounds of

milk equivalents as of 2004. More specifically, cheese is the number one dairy product for

consumers at 38 percent, followed by fluid milk at 32 percent, then butter at 13 percent, and ice

cream at 8.5 percent (Hutjens, 2005).


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In addition to the four grades of milk: skim, one percent, two percent, and whole, there is

also the revolutionary idea of flavored milk, which is just starting to gain popularity. According

to Dr. Hutjens, there are forty-five flavors of fluid milk, including, mint, coffee, and fruit

concoctions such as coconut and cherry chocolate (Hutjens, 2010). There also other dairy

substitutes which satisfy equivalent nutritional requirements such as the calcium pill, soy milk,

organic milk, cloned milk, and even juices such as Minute Maid with calcium additives (Swiss

Valley, 2010).

Although Americans often consume milk or dairy products in their daily lives, the

Chinese do not. According to the 2005 report by the Ministry of Agriculture, a startling fact was

revealed. While the Chinese consider milk as a kind of breast-feeding supplement for babies,

drinking milk as an adult is thought of as childish, ignoring its nutritional value (Xinhua, 2007).

Instead, a typical diet in China consists of a carbohydrate source or starch accompanied by side

dishes of vegetables, meat, fish, rice, noodles, and dumplings. While many of these courses are

low in fat and high in vitamins and protein, they do not contain any dairy components. As for

beverages, the Chinese consume water, tea, coffee, juice, soft drinks, beer, and wine before they

drink milk. When fluid milk is consumed, soymilk is often more popular than cow milk, and

fresh, dry, or long-life milk is available at convenience stores as well (China Highlights, 2010).

Another substitute for fluid milk such as skim, one percent, and whole is milk tea, which

originated in Hong Kong itself. Milk tea consists of black tea sweetened with evaporated milk,

and is usually part of an afternoon meal in Chinese culture (Bubble Tea Supply, 2003).

III. SUPPLY CHAIN

A supply chain consists of all stages involved directly or indirectly in fulfilling a

customer request. The supply chain not only includes the manufacturers and suppliers but also

retailers and customers themselves with in each organization. A supply chain is an integrated

system wherein a number of various business entities (i.e. suppliers, manufacturers, industrial

customers, distributors, retailers) work together to address issues of both materials flow and

information flow. This process contains standard description of management process and a

framework of relationships among the standard processes. The integrated supply chain network

model is developed to capture the complexities of a multi-product, multi-echelon, multi-country,


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Crop

ProductionMilk

ProductionProcessing

Packaging

Distribution

and

Transportation

Retail Outlets

multi-period planning problem for the optimal choice of facility locations, capacity and

technology used (K. Venkata Subbaiah).

A dairy industry supply chain includes six components: crop production, milk

production, processing, packaging, distribution and transportation, and retail outlets. The dairy

supply chain, as all other agri-businesses, is complex. Technically the dairy chain starts at raw

milk production and ends when other processors, institutions and consumers utilize products that

were created in the value chain.

Crop production is the part of the dairy supply chain that grows crops such as corn,

alfalfa hay and soybeans to feed dairy cows. Much of dairys feed supplies are grown right on

the farm by dairy farmers; the rest is purchased from other farmers that specialize in growing

feed crops. Next is the milk production which involves dairy farms, where cows are housed, fed

and milked. About 98 percent of all U.S. dairy farms are family-owned and operated

(USdairy.com). Dairy farms and farmers are often organized into associations and cooperatives.

There are more than 1,000 processing plants across the country turning milk into cheese, yogurt,

ice cream, powdered milk and other products. Almost a third of all milk, 53 billion pounds, is

processed and packaged as fluid (or bottled) milk. Processors range from small companies with

a single processing plant to large multinational organizations. (USdairy.com)

The next step in the dairy supply chain is the packaging. Bottled milk is typically done

by the dairy processor. Both paperboard and plastic containers are designed to keep dairyproducts fresh, clean and wholesome on their way to the consumer. Transportation and

distribution work together. This tends to be one of the biggest issues for less developed

countries. Keeping milk safe and temperature controlled is crucial when transporting milk.

Companies deliver milk from the farm to the processor, and dairy products from the processor to

the retailer, often in insulated tanker trucks and refrigerated trucks. Finally from convenience


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stores and neighborhood groceries, to large discount stores and warehouse outlets retailers

provide consumers with convenient access to nutritious dairy foods.

What is unclear to many is that in the dairy supply chain from the moment a farmer

decides to produce milk until the product reaches the consumer, people and the environment are

involved. It is the people who decide to farm in, work in, supply to, buy from and be a processor

in the dairy supply chain. In the final instance, it is the consumer who decides to buy and

consume the end products flowing from this chain at a suitable outlet and at an acceptable price.

As such, dairy products compete with a vast variety of other food products for a share of the

consumers.

Urbanization, policy, institutional and technological changes have been the dominant

drivers of structural transformation over time in the dairy supply chain. The structure of the

supply chain determines the fairness of distribution of value added in the chain. This structure

also decides the capability of the different role players in the supply chain to influence their share

of the value added (K. Venkata Subbaiah).

As consumers habits and decisions are not static, they impose urgency for change in the

supply chain in order to have their ever-changing needs met. However, this ever-changing

demand has a direct effect on the people within the supply chain since they will have to change

or adapt accordingly. In most instances, change is accompanied by a cost factor, induced by

research, retraining, relocation, etc.

In several less developed countries small and medium processors and dairy retail outlets

are making inroads, but dairy products are temperature sensitive and this creates extra cost.

Extension on and improved policing of milk hygiene regulations amongst beginner and

commercial farmers will upgrade the quality and milk volume that are tendered to be processed.

Research on maintaining the cold chain in an economical way in the case of small and medium

producers, distributors and small processors can strengthen their competitiveness and market

growth.

There are thousands of players that contribute to a successful and safe dairy supply chain.

On paper this supply chain may not seem complicated, but to safely produce billions of pounds

of milk a year every player must be positively contributing to this supply chain. As the world

population continues to grow, this supply chain will have to continue to provide a safe and

affordable way for everyone to have access to wholesome milk.


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IV. MARKETING

A. Distribution

1) United StatesIn the United States dairy industry the leading distribution channel is by far Supermarkets

and Hypermarkets. In 2008, these accounted for 81.9% of the total value. Specialist retailers

made up 7.3%, convenience stores were 6.5%, and everything else came in at 4.3% (Datamonitor

2009).

When looking specifically at Milk, Supermarkets and Hypermarkets still make up the

leading group at 78.7% of the total market value. Convenience stores are at 8.3%, specialist

retailers are at 7.4%, and all others make up 5.6% (Datamonitor 2009).

Since milk spoils so easily, it needs to be distributed as quickly as possible. In the past

milk was delivered to households daily, but economic pressure made this much less popular and

in many areas this service is no longer available. People buy it chilled at grocery stores,

convenient stores, or similar retail outlets. It is now mostly served in plastics, but before that is

was sold in wax-coated paper containers, and even before that it was distributed in glass bottles

(Milk, Answers.com 2010).

In the United States, glass milk bottles have been mostly replaces by plastic jugs and milk

cartons. Gallons are sold in jugs and half-gallons are either in jugs or paper cartons. Milk has

also recently seen a rise in the popularity of small resealable bottles that could fit into a cup

holder. The individual serving sizes also now come in a wide variety of flavors. School lunches

typically use milk cartons and come in sizes of a half-pint (Milk, Answers.com 2010).

As far as packaging is concerned, milk is pumped into the coated paper cartons or the

plastic bottles and then sealed. These are then stamped with a sell by date to make sure the

retailers do not keep the milk on the shelves too long and risk an unsafe product. When the

cartons or bottles are put in protective shipping containers, these are kept refrigerated. They are

shipped to distribution warehouses in refrigerated trailers and kept in refrigerated display cases

when they are out in the individual markets (Milk, Answers.com 2010).

2) China


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In Chinas dairy industry the leading distribution channel in 2008 were Independent retailers.

These independent retailers accounted for 57.1% of the total market value. Specialist retailers

made up 19.9%, convenience stores were 11%, and everything else came in at 12% (Datamonitor

2009).

When looking specifically at the Milk market, independent retailers still make up the

leading group at 55.3% of the total market value. Specialist retailers are at 26.1%, convenience

stores are at 11.6%, and all others make up 7 % (Datamonitor 2009).

In urban areas the proportion of milk sales through modern retail channels has been on

the rise in recent years. The modern retail channels have become popular with many dairy

companies because unlike dairy distributors, these channels have lower prices, greater variety,

and even have chilled storage facilities that are necessary for many of the milk products (The

Milk and Dairy Market in China 2008).

Some dairy distributors have even left the market after having their profits squeezed by

dairy manufacturers and modern retailers. This is more common in large cities such as Beijing,

Shanghai, Chengdu, and Guangzhou. Prices in the larger cities have been rising at a slower rate

and entry and promotion fees from modern retailers cut into the dairy companies margins (The

Milk and Dairy Market in China 2008).

The channels of distribution are more fragmented in the regional cities and rural areas

due to having traditional shops instead of modern retailers. This causes greater challenges with

price management and logistical arrangements (The Milk and Dairy Market in China 2008).

Recently retail infrastructure has been improving in these regions. Modern retailers are

opening more stores in these regions since the first and second tier cities have become saturated.

Dairy companies will benefit from this, but the industry participants still are finding it difficult to

enter the rural retail channels due to the short shelf-life of the products (The Milk and Dairy

Market in China 2008).

Sweetened milk is popular with students of all ages and comes in small plastic bags with

a straw. Adults that do not drink at a banquet often drink milk served from cartons or milk tea

(Milk, Answers.com 2010).

B. Promotion

1) United States


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In the United States, the diary industry and milk in particular gets heavy advertising. This

was not always the case however. Milk advertising started in the middle of the 1980s and peaked

in the mid 1990s. In 1995 the Got Milk? campaign was launched and became one of the most

popular and recognizable advertisements in the United States to this day. Since the National

Dairy Board was authorized under the Dairy Act of 1983 to promote milk and other dairy

products in the market, the National Fluid Milk Board and the NDB have spent over $1.1 billion

on advertising (Milk Consumption Compared to Milk Advertising Expenditures 2009).

The main focus of the NDB has been generic, non-branded advertising for milk and

cheese, and campaigns includeMilk. It Does a Body Good (1985), and Got Milk? (1995). The

Got Milk? campaign was originally created by the California Milk Processors Board in 1994.

The FMB was authorized in 1990 to fund fluid milk promotion, but wasnt implemented until

1995. Campaigns the FMB started include National MilkMustache (1995), the MilkPEP

Internet site (2003), Milk Your Diet. Lose Weight! (2004), andBody by Milk(2006). In 1999,

the Got Milk?and Milk Mustache campaigns joined together and have been since funded by

the FMB (Milk Consumption Compared to Milk Advertising Expenditures 2009). The Got

Milk? advertisements involved celebrities posing with a milk mustache and a glass of milk.

These were usually athletes, which reaffirmed milk as a healthy beverage and still made it look

cool.

There are many focuses of milk advertising in the U.S., and one of the big ones is getting

children more excited about milk. This is done through the schools and other promotional

methods. Websites like Milkmedia.com and Milkdelivers.org help to provide ideas and strategies

to get more kids interesting in milk. They also carry out many programs that achieve this.

Milkmedia.com was founded over ten years ago and decided to take a novel approach to

advertising on milk cartons. Instead of educational cartoons on the milk cartons they decided to

use popular entertainment characters that kids really cared about such as Disneys Doug,

Teenage Mutant Ninja Turtles, and Batman. These cartons and posters were successful and milk

consumption rose as much as 34% in the schools were these were used. They have also started a

program called Milk Rocks! This campaign focuses on promoting increased milk consumption

and positive life-long eating habits. It is not only an in-school program, but also is digital and is

involved in nationwide concerts. It is taking milk marketing to unprecedented levels (About

Milkmedia 2010).


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There is also plenty of room for milk consumption to grow, and marketers are beginning

to try and enter these new markets. 80-90% of milk is purchased for in-home consumption, but

milk only accounts for 3-5% of restaurant beverage sales. With the increasing consumer demand

for healthy beverages, restaurants and foodservice operators can capitalize on milk and excited

new flavored milk products. In-restaurant promotions can increase milk sales 52% with children,

and 35% with adults, according to a MilkPEP study. Adding milk to a "combo meal" grew milk

sales 57% in a business and industry outlet; 47% in a hamburger chain; and 19% in a

combination with donuts. Also, suggestive selling, which involves servers asking customers if

they'd like to order milk with their meal, and point-of-purchase materials also helped increase

milk sales in test cases (Milkdelivers.org 2010).

Studies show that consumers are open to ordering milk in restaurants, need a reminder of

milk's availability in restaurants, view flavored milk as a "treat" beverage when eating out, and

ordered milk in addition to other beverages. Money spent on food at away-from-home locations

has surpassed money spent on food consumed at home, and this gap continues to widen

(Milkdelivers.org 2010).

Some fast food restaurants have already begun to capitalize on the growing demand for

milk products outside of the home. Wendys hasannounced the expansion of its Kids Meal

Choices Menu with two deli sandwiches and a low-fat yogurt and granola cup, and consumers

can substitute 2% white milk or 1% chocolate milk for the soft drink. Wendys also introduced

milk in grab-and-go plastic containers in 2004 as a substitute for soft drinks and since that time,

milk sales have averaged about 750,000 units per week. McDonalds has begun to offer eight-

ounce "Milk Jugs," featuring Ronald McDonald surfing on a wave of milk, are in 13,500

locations as part a Happy Meal; low fat white and chocolate Milk Jugs are also available. Since

launching Milk Jugs, McDonald's increased its sales to more than 4 million units per week,

compared to 625,000 previously (Milkdelivers.org 2010).

The dairy industry is constantly trying to come up with ways to increase its popularity

and relate to the youth of the country. In 2008, the California Milk Processor Board sponsored a

high school competition to develop new ideas for the Got Milk? campaign. We are for the

first time with White Gold trying to speak directly to teenagers, said Steve James, executive

director at the milk board in San Clemente, Calif. The inspiration for that campaign, and the

contest, is the fact that as teenagers leave the sphere of influence of the home, and the jug of


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milk on the kitchen table, what happens to consumption is not a pretty sight, he added. The

reference was to how they eschew milk for soft drinks, energy drinks and other nondairy

beverages. It would be good for us, and good for them, to get some native intelligence, to help

us resonate ever truer with our teen audience. They are a mysterious demographic, James

added, and we want to reach them with an authentic voice in an authentic way. (Todays

Lesson: Selling Teenagers on the Benefits of Milk 2008).

The Omnicom Group, the agency that created Got Milk? for the California Milk

Processor Board in 1993 has developed a new approach to milk marketing for 2010. Instead of

exaggerating the perils of running out of milk, they are now shifting their focus to a comedic

look at the perils of never running out. They have created a milky magical land known as

Mootopia, and it will be the center for their latest series of advertisements. These will be

centered on the goodness of milk and comical complications that will arise in Mootopia such as

the men being so strong that arm wrestling cannot solve any arguments, the womens hair is too

shiny that it bothers people, and dentists being out of work since everyone has perfect teeth

(Californias Dairy Industry Takes Old Questions to New Extreme 2010). They will have these

ads on TV, on a website, and also begin to advertise via Facebook. Using social media seems to

be the new strategy in reaching todays youth.

2) ChinaIn China, the Milk Industry is going through a difficult time. Industry leader Sanlu went

bankrupt due to the melamine crisis and the problems have not seemed to end. Consumer

confidence in Chinas milk has been shattered and food safety is the marketers chief concern.

Because of the melamine scare, infant formula companies have upped their spending on

advertisements from a combined Rmb 1 billion for September, October and November of 2007

to Rmb 1.4 billion for the same three months last year, according to CTR. Most local brands cut

spending on ads. Media tactics have changed, says Jason Yu, GM of TNS Worldpanel China.

I suspect local brands are using money for PR or crisis management, rather than spend huge

amounts on TV because they know that wont work. The focus of the advertisements has

changed from product benefits such as vitamins and nutrients and now is focused on product

safety. If you look at international brands, their advertising is based around their imported milk

powder, says Kelvin Gin, director of Synovate in Shanghai. Local brands say their product is


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natural, and they have government certification. Consumers are looking for reassurance. (Sector

Insight China Loses Market Share to Foreign Brands 2009).

For many regional brands, the crisis has been more of an opportunity. Feihe formula,

registered in the U.S., has tripled and Weichuan, a Taiwanese company has recently begun to

promote its baby formula in China. Ausnutria, a Chinese brand that gets its milk powder from

Australia has had its shares quadruple in smaller cities. This is because it is branding itself as

foreign, and many Chinese firms are starting to adopt this marketing tactic (Sector Insight

China Loses Market Share to Foreign Brands 2009).

Since the melamine crisis, Chinas top dairy processors have been doing whatever it can

to restore consumer confidence in their supply chains. Market leader Mengniu sent 500 million

New Year text messages to people in China assuring them of their milk safety. They also have

created an easy-to-use website that elaborately details their supply chain. Chinas second largest

dairy producer, Yili, has begun a nationwide campaign with the slogan Milk You Can Trust.

Chinas dairy sales actually rose 12.4% in the first quarter of 2009, showing signs that the

industry is on its way back (Marketing milk: one year on from melamine in China 2009).

Government support has also extended to publicity campaigns. An official at the

Chongqing Dairy Industry Office reveals government funds have been marked for milk

promotion. Local TV has been alerted to make programs and news reports showing the reform

of the local dairy industry and health benefits of milk, the official says (Marketing milk: one

year on from melamine in China 2009).

Even though celebrity endorsers of the melamine tainted milk brands have been publicly

criticized (Best Milk Advertising Spokepersons? 2008), the China Health Promotion Foundation

was able to recruit another famous celebrity to help stabilize faith in the dairy industry: Jet Li.

Advertising boards have gone up around first and second tier Chinese cities showing that Li

loves milk, and companies are hoping that this will be a way to reclaim consumers (Best Milk

Advertising Spokepersons? 2008).

China is also trying to reestablish is own name as a reliable international company. The

country is launching a Made in China, Made with the World campaign to help improve the

image of the countrys products. They are using 30-second commercials to show that Chinese

products are made with and inspired by worldwide partners. I think it's reasonably sophisticated

for western audiences. I think it has a modern feel," said Tapio Christiansen, an international


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media consultant. He says the commercial is necessary after melamine tainted milk produced

in China killed at least six Chinese children and made hundreds of thousands sick. "I think they

did a pretty decent job in trying to potentially dispel some of the perceptions that some in the

West have about Chinese goods," he added (China Launches Ad Campaign to Improve Product

Image 2010).

V. REGULATORY AND LEGAL ENVIRONMENT

The dairy industry has been under the spotlight for putting lives in danger due to the

recent food safety issues which have been weighing down the whole industry. In the context of

this paper, we will be discussing the change in the regulatory and legal environment after food

safety incidents pertaining to dry milk and how the responses have differed in China and the US.

Below is a list of a brief overview of the recent milk industry incidents occurring in both

China and US, occurring in chronological order:

1) Melamine was found in milk and infant formula which was the cause of 6 deaths and300,000 victims. Melamine was introduced in the milk supply due to protein standards

that was too adhered to for nutritional purposes. Due to its odorless and colorless form,

melamine was added to the watereddown milk supply in order to boost the protein level

of milk to lower the cost of production and maintain price competitiveness.

2) The most recent case of dry milk recall within the US happened in January 28th 2009.Plainview Milk Products Cooperative had issued a recall due to the concerns of

Salmonella present in the milk powder they distribute. This recall had involved

coordination between organizations in the federal, state and local levels.

3) February 2010 saw tainted supply of milk powder in China once again resurfacing in themarket because suppliers had thought that the uproar had died down and had thought to

make use of the expiry date of the remaining milk powder which was nearing.

These three food safety incidents occurring in the milk industry had far reaching effects on

consumers of dairy products. International trade aggravated the spread of the effects, as

traceability and monitoring of milk powder supply outside of the country affected is a tedious

and tricky task. Within the scope of this paper, we will first discuss how these recent events have


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impacted the food regulators within China and US and the food additive labeling requirements of

these two countries. We will first discuss the legal and regulatory ramifications after the Chinese

milk powder incident, and then move on to discuss the issues of the US Salmonella incident.

The Chinese government has been highly criticized for the milk powder incident and they

have vowed to put in measures in an attempt to overhaul the image of food safety in China. The

Chinese government has been working with the food regulatory agencies to set standards within

the dairy industry, and at a larger scale, the food industry, to ensure similar occurrences are

avoided. However, due to the scale of the industry in China and the governments unwillingness

to clamp down on the companies because it might impede the progress and expansion of the

industry, there has been a second occurrence of milk containing melamine surfacing in the

market.

The Chinese government started out by worked on stepping up their inspection program

within the dairy industry. They aim to establish 400 testing centers in the span of 2 years, and

create links between the local, state and federal agencies so that monitoring and tracking dairy

supplies will be easily accounted for in the future. Acceptable melamine standards were also set

at 1 milligram per kilogram in powdered infant formulas. In the wider scope of the problem, the

Chinese government has established the National State Council Food Safety Commission, which

is the highest level consulting and coordinating organization for food safety issues within the

country. They will be the guiding hand coordinating the food safety work in the food industry,

coming up with the laws pertaining to food safety and making sure the agencies within the food

safety network are sticking to their responsibilities. The organizations which they will be

overseeing include: The Ministry of Health (MOH), the Ministry of Industry and Information

Technology (MIIT), the Ministry of Agriculture (MOA), the State Administration for Industry

and Commerce (SAIC), the General Administration for Quality Supervision, Inspection and

Quarantine (GAQSIQ) and the State Food and Drug Administration (SFDA).

On June 1st, 2009, China released a Food Safety Law (more popularly known as The Food

Law) which emphasizes new obligations which food companies have to abide by. These

obligations include responsibilities pertaining to certification of manufacturing and production

by the governing bodies, quality inspection and record keeping of details of their procurement,

joint liability of food safety and recall system put in place that would restrict the distribution and

sales of the company and enforce punitive measures if laws have been violated. In the context of


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a dairy company, the dairy company would have to check the certification of the raw milk

supplier before purchasing their milk. On top of that, they would have to keep records of the

certification as well as permits of the company they purchased from. These certifications and

permits have to be administered by GASIQ, SFDA, and SAIQ. These procedures are to

supplement the recall process. Further, celebrities who endorse food products will also be more

careful because of the new joint liability clause. It states that organizations involved in the supply

chain of the food production, including any celebrities who appear in advertisements and

promotions pertaining to the affected product will suffer the consequences as well. Therefore,

celebrities will now think twice about endorsing a milk product die to the public trust entrusted

to them and the food safety aspect of the product.

For the dairy industry in US, non fat dry milk (milk in powdered form) comes usually in

two forms: regular and instant. The US dairy industry has a labeling standard of either US Extra.

The US Extra grade earned after laboratory testing shows that the powder has a sweet and

pleasing flavor, natural color and satisfactory solubility. Dry milk has to conform on certain

aspects: Physical appearance has to have a uniform white to light cream color; flavor shall be

sweet and pleasing, having chalky, cooked, feed or flat flavors to a certain degree; bacterial

estimate of no more than 10,000 per gram standard plate count; moisture content of not more

than 4.5%; coli form count not more than 10 per gram; milk fat content of not more than 1.25%;

scorched particle content of not more than 15mg; soluble index of not more than1.0ml; titratable

acidity of not more than 0.15% and dispensability of not less than 85.0%. Inspection is done

pertaining to every aspect of the milk product: from the milk supply, the processing plant and

equipment, operating procedures, packaging and the instant milk itself. These stringent standards

are strongly upheld so that there will be no Salmonella contamination.

Moving on, we will now discuss the emphasis placed on labeling in China and US food

industry. Chinas newly implemented Food Law states that products cannot claim to prevent or

treat diseases; clearly state if ingredient(s) in the product should not be consumed by certain

people; misleading advertisements are also prohibited; and only authorized products which have

been proven to be safe and necessary in the production of the product may be listed as a food

additive.

On the other hand, US have long been a strong advocate for nutritional labeling. FDA has

recently sent out warning letters to food companies warning them to provide accurate labeling,


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especially towards trans fats claims, health claims or food labeling directed at children due to the

3-A-Day-Dairy proposition. Nutrient content claims, an example to be 0 grams of trans fats,

has to be backed up by nutrient tables. Further, only approved health claims can be made, unlike

claims that can heal or treat illnesses. All claims on labels have to hold true to their labels.

VI. RISK FACTORS

Before deciding which country we would like to launch our milk product, there are

certain risk factors to be taken into consideration. In this section, an analysis of the decision to

launch the product in either China or the US would ultimately help us out with our decision

making process.

We have identified factors specific to the countries and general ones too. Starting off with

China, there are risks associated with the weak legal environment, the fragmented milk supply,

unfavorable business environment towards foreign companies, consumer confidence in milk and

dairy products.

In order for a business to start up without a hitch, a legal framework is crucial. Currently,

China still has room for development in the legal department. It will be pretty much uncertain

how our company will develop into the China market without a fundamentally strong legal

framework. China is known to have weak judges; in any case if our company is embroiled in a

legal battle concerning our products, it will definitely impede the progress and expansion of ourcompany. Therefore, in order to be successful in China, we have to know do our groundwork

well and be connected to skilful lawyers who will be able to help us out in situations like that. If

not, the future of our company will be detrimental even before we start out in China.

The fragmented milk supply in China is another key issue to look at. Due to the existence

of many small dairy cooperatives and farms, the supply of milk would come from many varying

milk stations and it would make traceability of our milk very difficult. If we were to acquire our

own land and get our milk supply from our own cows, then it would be tricky because land in

China is owned by the government. It is further aggravated by how domestic companies are

given preferential treatment to the point that they are given unfair advantage over foreign

companies. One example would be the subsidies which the Chinese government is giving the

Chinese dairy producers to assist them in their recovery from the tainted milk supply. Therefore,


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in order to rake in the profits, we have to take these resistive factors into consideration to plan for

our mode of entry and success in the industry.

On top of that, there might be advertisement restrictions which might impede our growth

or even entry into the dairy industry. The Chinese government is trying very hard to make a

comeback in the dairy industry and rebuild confidence in their food products, especially milk

produced by domestic companies, hence they might even censor foreign companies

advertisements in order drive foreign companies out of their market.

Along the lines of food safety, there have been a reoccurrence of the tainted milk selling

in the market; hence consumers might decide to stay away from milk in order to stay safe.

Consumer confidence is definitely lacking in the domestic milk supply, therefore an introduction

of our product line might not garner a good amount of demand to generate a profit margin.

As for the US, the risk factors to take into account would be: the saturated US market.

Currently, there is an oversupply of milk in the US and this excess supply has led to falling

prices that suppliers can sell their milk at. Further, there is very little room for growth in the US

market because the US market is definitely more mature than the Chinese market. This would

impede the growth of the product we are launching.

There are also some factors which we have to consider as a dairy company no matter

whether we were in China or the US. Milk has been one of the main sources of calcium; but due

to the increase in substitutes which have the ability to replace milk (such as calcium pills), there

might be a chance that the demand for milk declines. In addition, there is a risk that the prices of

raw milk will fluctuate in the future which will affect future plans of the company.

VII. CRITICAL SUCCESS FACTORS

There are several factors that come into play when introducing an American company,

especially one that has had food safety problems in the past. The idea of building the

infrastructure and securing resources in China can be very beneficial in the long run. However,

there is an immense amount of work that goes into starting the operations and making the

company cost efficient.

The most important factor that needs to be successful with our product in China is the

trust of the Chinese consumer when it comes to buying an American company. Over the past

few years China has had several issues with their milk industry and the safety of their products.


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Thousands of infants were hospitalized and some died because of unsafe milk powder. This

scandal has been going on for years and more children have become sick while more tainted

products are discovered. The job of Deans milk is to reassure the consumers in China that their

milk is safe and the best on the market. Since Deans is an American milk product it has very

high food safety standards and the Chinese consumers have a company they can trust.

Through rigorous adverting Deans will have to continue to assure the Chinese consumer

that their milk does not only have great health benefits, but that their milk is safe and follows US

standards. Deans has done a great job in the US by showing how much fun milk is to drink.

They will have to continue this trend through advertisements in China.

The milk industry has exploded in the US in the past twenty years with the help of the

Got Milk campaign. Several other advertising campaigns have been launched to make

consumers aware of the health benefits of milk and the easy access of many flavored milks. By

adding flavors to milk it makes them more tasty and appealing to the consumer. Children have

shown that they enjoy these flavorful makes anytime of the day. A current campaign in the US

is for people to drink milk throughout the day and not just at a meal. These flavored milks have

helped this campaign and would show success for the milk industry in China. Deans flavored

milks have always been geared towards the US consumers; however, they will have to conduct

extensive research to develop other flavored milks that will appeal more to the Chinese

consumer.

I have mentioned food safety and advertisement to help promote Deans milk, however,

this whole process begins with the cows. Right now a majority of cows in China are from New

Zealand and only produce 8,000 pounds of milk; however, US cows produce on average 20,000

pounds of milk. To be profitable Deans needs to import cows to China that produces these high

numbers of pounds per cow. Cows are already very expensive to breed and develop, so it is very

important that they are producing large amounts of milk. This could also become a huge market

in the US for producing cows on a mass scale and exporting them to China. (Hutjens, 2010)

Right now in the US milk is almost considered a necessity in everyones diet. This has

developed because of the health benefits that are publicized and the fun look milk has been

given. The goal is that Deans milk will become popular in the wealthier families in China, and

then become a staple in the Chinese consumers diet. This will then begin to spread to the

middle class and then allow everyone an affordable and safe milk product in their lives.


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The government has a huge role in business in China. For Deans to be able to set up

large factories and distribution centers they need land and the trust of the government. Land and

the location of the land tend to be the biggest issue. Cows can be raised in several different parts

of China; however, where exactly they will be raised can affect their outputs. The location of

Deans factories will also factor into their profitability and easy access of getting their products

to the consumer. I believe Deans need to prove to the government that they are a safe company

who is in China to raise the food safety standards of the milk industry. They need to forecast that

they are in China for the consumer number one and number two they are in China for the profit.

The move of having Deans in China will make China look better because it shows they are

doing everything possible to solve these melamine and food safety issues (Hutjens, 2010).

VIII. RECOMMENDATIONS

For our recommendation we decided to look at in which country the dairy industry would

be more attractive. We looked at both China and the United States from the standpoint of a major

dairy manufacturer in the United States, such as Dean, and chose Milk as our product. After

careful deliberation, we have decided that we would choose to introduce our product into the

Chinese market. Currently there is relatively little competition, there is little consumer

confidence in Chinas internal dairy industry, we have available methods of distribution, and also

we have reliable marketing tactics based on what has been successful in the United States

market.

First of all, the current dairy industry in China is very weak. Industry leader Sanlu went

bankrupt with the Melamine scandal and New Zealand international company Fonterra left the

country because of their association with Sanlu and the money they lost. Current companies in

China are struggling to gain market share since the consumers image of safety within the dairy

industry have been shattered again and again. Foreign investment in the industry has been scared

away and is not looking to come in any time soon. Because of all of this, the threat of

competition in the China dairy industry is at a low. There is a great deal of room for a company

to come in and dominate if it can figure out a way to gain consumer confidence and reliability in

safety. With the China diet constantly adapting more western-style foods and tastes, it is

inevitable that the small Dairy industry in China will continue to grow. As more people become


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aware of the health benefits of milk in China, there is enormous room for growth in milk

consumption. To be able to enter the market now, establish a quality brand name, and obtain

leading market share would be a lucrative investment that has a huge potential due to the facts

that the industry is destined to grow and China is the worlds biggest country.

Chinese consumers have been turned off by the dairy industry recently because of the

repeated melamine scandals. This is why the most important focus for the implementation of our

milk is food safety. We need to figure out a way to enable the Chinese consumers to trust our

product. We are an American company and we believe that in this case it works to our benefit,

since consumers have lost all faith in Chinese companies. We can come in as experts in the

industry, citing many years of experience and no melamine-scale scandals as evidence. Our

company will enter China and begin the dairy process to produce our milk from the ground up.

Since we are a large company already, we have enough capital to invest a couple years into

developing our supply chain in China to make sure we get it right the first time. Any mistake in

food safety at this point would be game over. We will need to obtain the land to create large

dairy production facilities. We will bring in farmers from the U.S. and have them train the locals

that we hire for our farms. Also, we will import cows to our production facilities since the cows

in America produce over twice as much on average as the Chinese cows. Once we have our

process intact, we will have checks at each stage of the process to insure that the quality is up to

our highest standards in America and also to oversee and supervise each area of the process.

When the milk is put into containers and dated, then we can ease up on our oversight of the

process and use local transportation and distribution to take the milk to the areas in which we

decide to sell it.

As far as the distribution of our milk goes, we have thought of a way to introduce our

product to the market where we feel it will impact the most and also inspire confidence in our

product. The target market we want to reach first is the children and teenagers in China. We want

to put the product in a place that they already have confidence in, and also a place that can seem

cool or hip. We want to take advantage of the fact that these little emperors have financial

power and can influence the way of the market. The fast food company KFC has seen huge

success in the Chinese market. It is known to be an American brand, yet it is fashionable, cool,

and well distributed throughout China. We want to convince KFC to start carrying our milk


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product in their stores in China and begin a campaign with them to promote milk as the perfect

complement to a meal. To get KFC to go along with this we will give them exclusive milk rights

in their stores in the U.S. and persuade them that milk should be offered in the states.

McDonalds andWendys have already launched successful milk campaigns in the States, and

KFC needs to be a part of this, especially with the growing trend of health consciousness in the

U.S. We will show them the need to offer milk in America and leverage offering them cheap

rates and exclusivity if they go along with our China plan. When KFC begins to sell milk in

China, combined with our promotions directly towards our target market, we will begin to create

a demand for this new product. Once demand increases we will begin to distribute our milk to

other Chinese Stores such as McDonalds or Starbucks, and also to trusted retailers. By

continuing the trend of supplying our product only at reliable food establishments we can inspire

greater confidence due to product association. After we gain sufficient market share and a

widespread company image we can begin massive distribution throughout China. The staggered

approach we will take also allows us additional time to continuously develop our production

while the market demand grows.

It is important that we use prior knowledge in determining how to effectively market our

milk product to China and a good way to do this would be to look at what has been successful in

the U.S. market. Much of China already knows that milk is considered a healthy beverage since

the government has been trying to implement the one glass a day plan. It is more important than

ever that we market our product with a focus on food safety. Since we want to establish our

product as reliable, a good way to do this would be to associate it with other things that the

Chinese trust in. Our advertisements will reflect this because we will be promoting the milk with

popular brands like KFC. One of the most successful U.S. milk advertisements was the Got

Milk? campaign and the milk mustaches on celebrities, athletes in particular. This will also be a

huge part of our marketing campaign. It will establish reliability since it is being promoted by

trusted celebrities; it will hit our target market of the youth hard since we will use people popularwith them, and it will also create a healthy perception of milk since we will focus on using

athletes. Big billboards and posters of athletes such as LeBron or Kobe holding a glass of our

milk and having a milk mustache will create a buzz. A tagline for our product and exclusivity

added such as: only available at KFC, will cause even more interest. Another important part of

our campaign is to cater our milk towards the Chinese consumers tastes. Before we enter the


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market and while we are developing our milk production facilities, we will conduct market

research on the population of the larger Chinese cities to develop flavors and varieties of milk

that will reflect the popular opinions. We can implement a few western tastes and also enter the

market with eastern-specific tastes. Each KFC will offer a wide variety of milks so that there is

something for everyone. The most important part, however, is large scale advertising to make the

milk seem cool and exclusive, and also to associate it with trusted brands and celebrities. If this

is achieved we will successfully obtain the youth segment of the Chinese market, and from there

we can hopefully enter a wider market and a wider target population. In the long run we could

develop into the industry leader and the exclusive vendor at certain popular establishments, and

even change the way that the country of China consumes milk.

Dairy Assemble!

Pictured from left to right, Kristin DeSutter, Meiling Liu, Andrew Erickson, & George Witchek

enjoy a fresh glass of milk straight from the Huaxia Dairy Farm outside Beijing.


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(2003) The History of Bubble Tea.Bubble Tea Supply Company,http://www.bubbleteasupply.com/index.php?page=what.html, Visited April 6, 2010.

Hutjens, Michael (2010) U.S. Dairy Consumption. The Board of Trustees at the University ofIllinois.http://www.livestocktrail.uiuc.edu/dairynet/paperDisplay.cfm?ContentID=7447,

Visited April 6, 2010.

Hutjens, Michael. Personal interview April 2, 2010.

(2010) International Dairy Foods AssociationKey Issues.International Dairy FoodsAssociation

http://www.idfa.org/key-issues/details/4568/

K. Venkata Subbaiah. (2009) A Supply Chain Management in a Dairy Industry- A Case Study.Proceedings of the World Congress on Engineering 2009. Page 2 WCE 2009.

Lee, Elizabeth (2010). China Launches Ad Campaign to Improve Product Image.VOANews.com.http://www1.voanews.com/english/news/economy-and-business/China-Launches-Ad-Campaign-to-Improve-Product-Image-80500497.html

(2010) Kraft Foods, Inc.Company Profile 2009.Datamonitor C, pp. 5, 2328.http://www.marketlineinfo.com.proxy2.library.uiuc.edu/library/DisplayContent

(2002) Non-fat Dry milk Specifications. USDAhttp://www.fas.usda.gov/excredits/foodaid/commodities/nonfat.htm

(2010). North America: United StatesThe World Factbook: Central Intelligence Agency(CIA).https://www.cia.gov/library/publications/the-world-factbook/geos/us.html,Visited April 4, 2010.

(2009) Marketing milk: one year on from melamine in China.AFN.http://www.ausfoodnews.com.au/2009/08/25/marketing-milk-one-year-on-from-melamine-in-china.htmlVisited April 5, 2010.

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(2010) Milk.Answers.com.http://www.answers.com/topic/milk, Visited April 6, 2010.

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(2010) Milkdelivers.org.http://www.milkdelivers.org/, Visited April 4, 2010.
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