18 September 1998

ADVERTISINGMIGHTNOTPAY

By Liz Mason

PROMOTING liquid milk sales through generic milk advertising will not be the salvation of the UK dairy industry, according to a report by economic and marketing consultants MMD.

The report, commissioned by the NFU and the Milk Development Council, finds that the best the dairy industry can hope to gain from the generic advertising is a modest growth in the market.

"Generic marketing is not a panacea for all dairy industry ills. It could, however, make an important contribution towards helping to stabilise the liquid milk market, or even help to stimulate a modest growth in the market," it says.

The report finds that an advertising campaign costing £10m a year could increase the liquid milk market by 135m litres in its third year and maintain that increase in subsequent years. Provided the price setting system works efficiently it estimates that a 135m litre increase in demand could raise the raw milk price by 0.24p/litre.

With milk producer returns plummeting to crisis levels, many farmers believe a generic milk marketing campaign is needed to promote their product and help raise prices. They know, as MMDs report points out, that expenditure on milk advertising and promotion has fallen dramatically in recent years.

In the late 1980s advertising spend on milk promotion amounted to £20m-£25m. In 1997 just £2.7m was spent on advertising milk in the UK. "Milk now has one of the lowest advertising expenditures in both absolute terms and in relation to its market size of any food product in the UK," says the report.

Over the same period, household milk consumption has fallen steadily and even with a generic milk promotion campaign the report forecast that it will continue to drop. In 1989 British households drank about 5500m litres of milk, last year they drank just over 5000m litres, and without generic milk promotion MMDs report forecasts that consumption will continue to fall to just 4809m litres in 2002.

It is tempting to link the fall in consumption to the decline in milk promotion. But the report finds that generic advertisings demise is not the most important reason for declining household milk sales. The key factor, it says, has been the move towards supermarket shopping in recent years – a trend exacerbated by the rise in price differential between milk sold on the doorstep and milk stacked on supermarket shelves.

There is little producers can do to influence consumer preference for supermarket shopping. But they can choose whether or not to support a generic advertising campaign. MMDs report concludes that "on balance the case for a campaign is slightly stronger than that against, and if the campaign is carefully designed and co-ordinated then it is capable of producing significant returns to the industry as a whole".

For producers the argument is marginal one way or the other because although MMDs analysis suggests they will reap the highest returns from a generic campaign it finds that also they bear the greatest risk. It concludes that generic advertising campaigns of less than £5m are too small to generate significant returns and the highest returns occur with a campaign of £10-£15m a year.

Assuming the industry decided to launch a £10m a year campaign the report estimates that farmers would benefit by £29m, liquid dairies by about £8m and retailers by £0.8m. Dairies of manufactured products are forecast to lose £0.7m.

The report also assumes that farmers and dairies will bear the cost equally, paying £5m each a year to fund an ongoing campaign. As the current MDC levy of 0.04p/litre raises £5m that would mean a further levy of 0.04p/litre.

But the report warns that producers will only benefit if the milk selling system allows the expected increase in demand, brought about by generic advertising, to feed through to increase producer prices.

"The key issue for producers is whether or not increasing demand for raw milk will be fed through to the raw milk price. This in turn depends on efficiency of the price setting system for raw milk," the report says. "It is difficult to say in practice whether the Milk Marque selling system will be sensitive enough under current arrangements to register a 1.1% increase in demand. Therefore the estimated £29m of benefit to farmers represents a maximum, and there remains a risk that farmers will receive less," it concludes.

However, many farmers will be willing to take that risk, believing that although the benefits may be marginal milk advertising is a declaration of faith and confidence in their product. &#42

Forecasts of household liquid milk consumption (m litres) under different levels of advertising spend

No spend £6m a year £10m a year £15m a year

1999 4947 4973 5008 5022

2000 4899 4952 5023 5052

2001 4854 4912 4989 5021

2002 4809 4866 4943 4975

Source: MMD

Forecasts of household liquid milk consumption (m litres) under different levels of advertising spend

No spend £6m a year £10m a year £15m a year

1999 4947 4973 5008 5022

2000 4899 4952 5023 5052

2001 4854 4912 4989 5021

2002 4809 4866 4943 4975

Source: MMD

Case for and against generic milk marketing

For Against

High rate of return Significant cost of investment

Proven track record Risky, especially for farmers

Long lasting benefits Unequal distribution of benefits

Source: MMD