Spend time talking to people about the dairy business and one word will come up repeatedly — mature. While the food and beverage market is being flooded with new, functional products, the dairy segment appears to be stuck. However, dairy processors and ingredient suppliers are looking beyond the traditional fluid milk and cheese markets at new opportunities in the burgeoning health and wellness category.
While the consumption of fluid milk continued to decline this past year, processors experienced tremendous sales (see fluid milk tables on Page 31), according to ACNielsen. A contracted national herd sparked by record low milk prices in 2002 and 2003 combined with the closing of the Canadian border because of bovine spongiform encephalopathy and higher feed prices into the spring of 2004 led to the higher prices in 2005.
"Each of those events on their own is not a big deal," said Mary Keough Ledman, principal of Keough Ledman Associates, Inc., Libertyville, Ill. "But together they created a perfect storm for exceptionally high prices."
The decline in fluid milk consumption is not due to a lack of innovation. Dairy processors have introduced numerous flavored products, but competition from the bottled water, soda pop and sports drink categories have continued the fluid milk consumption slide.
On the opposite end of the spectrum, cheese consumption and sales continue to climb (see cheese tables on Page 31). As consumers continue shifting food away from home, cheese appears to be a primary ingredient in many products, such as pizza and Mexican food, they are choosing.
Jim Miller, an economist who covers the dairy markets for the U.S. Department of Agriculture’s Economic Research Service, said the increase in cheese consumption is a long standing trend that goes back to the 1950s and 1960s.
"The growth in consumption is a function of greater availability," Mr. Miller said. "It is an ingredient that can be used in a diverse range of products."
Mr. Miller noted that the mar-ket has received a boost in recent years as "artisan" cheeses have become more available to the mass market and ethnic cooking styles have expanded.
"We have seen a revolution in the types of cooking Americans prefer," Mr. Miller said. "Italian, Greek, Mexican and even French cooking have become somewhat mainstream in this country. The trend has expanded beyond the home and into the food service market. Those cooking styles feature cheese and that has led to increased consumption."
In an effort to increase dairy consumption, the industry is turning to new product development. The yogurt category has undergone dramatic changes as companies capitalize on the demand for fortified, good-for-you products.
Ice cream is another area where the health craze has caught on. Low-fat items are becoming more prominent with companies such as Dreyer’s Grand Ice Cream, Oakland, Calif., and Unilever Canada, Toronto, launching items.
But where the real opportunity appears to lie is beyond the traditional dairy segments. During this year’s Institute of Food Technologists Annual Meeting and Food Expo, Dairy Management, Inc. (D.M.I.), Rosemont, Ill., exhibited three new dairy-based formulations targeting the health and wellness category (see related story on Page 32). The products included a whey protein enhanced whole grain apple cranberry muffin and a clear mango-flavored isotonic sports drink with whey.
"These dairy-based prototypes satisfy consumer interest in health and wellness while delivering dairy protein, convenience and appealing flavors," said Laura Gottschalk, director of ingredient channel development for D.M.I. "The dairy ingredients in these formulations not only address what consumers want, but also offer manufacturers a clean, neutral taste plus texture and other functional benefits while being naturally low in trans fat."
During a meeting held this past March and sponsored by D.M.I., Julia Kadison, senior vice-president of consulting services for the Beverage Marketing Corp. (B.M.C.), New York, noted that dairy ingredients are perfectly positioned to be "star players in the beverages of the future."
"The window of opportunity is open for expanded use of dairy ingredients in beverage offerings," Ms. Kadison said. "The dairy industry’s challenge is to capture its fair share of wellness/functional beverage growth."
Ms. Kadison said the wellness/functional segment is on track to account for 85% of incremental beverage sales growth by 2008, replacing carbonated soft drinks as the largest nonalcoholic beverage segment. The three fastest growing areas from 2004 to 2008 are projected to be ready-to-drink sports nutrition beverages (86%), nutrient enhanced drinks (84%) and energy drinks (69%).
"Protein-enhanced beverages will be a strong platform for innovation," said Ms. Kadison, creating an ideal situation for protein-rich dairy ingredients such as whey proteins and fractions, ultra-filtered milk, milk protein concentrate and more.
"More than half a billion gallons of beverages could contain dairy," she said, requiring roughly 100 million lbs of dairy ingredients. Some 65% of beverage volume represents currently untapped opportunities for dairy ingredients, meaning the potential for dairy is enormous.
By 2008, B.M.C. sees dairy ingredients appearing in products in which one wouldn’t expect to find them, such as energy drinks, isotonics, enhanced waters and fruit drinks. Dairy also is projected to remain strong in more traditional areas such as sports nutrition drinks, yogurt drink/smoothies and meal replacement beverages.
"Dairy ingredient suppliers and processors can be more proactive," Ms. Kadison said. "The opportunities are out there waiting."