September 5, 2001

Milk Processor Education Program (MilkPEP) And Dairy Management Inc. (DMI) School Milk Vending Test – Evaluating Opportunities for School Milk Vending September 5, 2001 RESEARCH & CONSULTING FOR THE GLOBAL BEVERAGE INDUSTRY

School Milk Vending Test – Evaluating Opportunities for School Milk Vending • Contents • Background • Test Objectives and Methodology • Key Learnings/Messages from the Test • Test Results • Business Models for School Milk Vending • School Milk Vending Opportunity • Issues and Hurdles • Conclusions

Background • Kids drink milk in schools because they like it, but also because they “have to” • When there are more attractive options available, kids quite often choose them over milk • School milk has some quite negative characteristics and associations for many students • Why Kids Drink School Milk • They like milk • Gatekeeping by school/parents • It’s free with hot lunches • It goes with certain foods (e.g. sweets) • Chocolate milk is a “treat” for young kids • Why Kids Don’t Drink/Stop Drinking School Milk • Prefer to drink something else • Milk is sometimes “bad”/warm • Absence of preferred flavor/type • Insufficient portions • Negative association with school milk • Unattractive/juvenile packaging • Package inconvenient • “Free” milk perceived lower value vs. other beverages

Background “Bad” “Good”/”Cool” Neutral Soda Milk • In fact, students rate school milk between neutral and “bad” • Soft drinks, on the other hand, are rated “good” Kid’s Image of School Milk • Parents gatekeep • Soda is sweet • Variety of flavors • A “treat” • Bubbles and caffeine • Comes in “neat” packaging • Comes in teen-size portion • Parents push • White milk is “plain”, “blah” • Limited options • Only flavored milk is a “treat” • No bubbles or caffeine • Comes in a “box” • Comes in child-size portion Source: Kidfacts

Background • The battle is only getting tougher for school milk, as soft drink companies target schools as a critical market for recruiting life-long, loyal customers for an ever-widening variety of beverages • These companies are building relationships with school districts through strong sales and marketing programs and exclusive contracts (pouring rights) • Revenue generating programs for schools/districts • Value-added educational tools and scholarships • A broad range of popular products students want • Availability throughout the day (through vending) • Fun, image building promotions • Attractive display/dispensing equipment – free to the schools Competitor Offerings

Background • Kids have identified some very basic improvements that they say would make them drink more milk • However, to date, very little effort has been made by schools or the dairy industry to respond to these needs What Kids Say Would Make Them Drink More School Milk • If school milk tasted better • Always fresh • Always cold • If milk tasted different • New flavors – e.g. banana, coffee • New formats – e.g. milk shakes • If school milk looked appealing • More attractive packaging • Cleaner packaging • If milk were more convenient • In portable/resealable packages • The right serving size • Available off the lunch line Source: Kidfacts; DDC

Background Historically, regulatory restrictions and economic considerations have limited milk’s profitability in schools, and in turn, have limited processors’ ability to/interest in innovating or marketing School Milk Realities Implications • Legislated regulations effectively limits type of products, size and price of milk on the meal line, where 90% of school milk is purchased • Considering only the school meal line, processors have seen little incentive to innovate, limiting milk’s volumetric, profit and competitive opportunities • Reinforces students’ negative experience with school milk; missed opportunity to build consumer interest, loyalty and consumption • Processor margins on school milk are significantly lower than for milk sold through other retail channels • 5%-10% of volume, but only 2%-5% of profit pool* • No margin to invest in sales, marketing or merchandising efforts; other milk-selling venues get processor focus • School milk is not competitive with other beverages now offered to students in schools in terms of availability, variety, convenience, packaging and imagery • Opens door for competitors to buy their way into schools and milk loses long-/short-term competitive advantage • Students form life-long consumption habits that do not include milk *Source: 2000 Processor Audit; Beverage Marketing Corporation

Background • Processors have been innovating outside the school arena, however, and the increasingly available 16-ounce plastic resealable bottle provides a new tool for enhancing school milk • Vending the plastic value-added milk products appears to present a significant opportunity that would address student demands and make milk more competitive in schools Vending Addresses Students’ Concerns What Kids Don’t Like About School Milk . . . Vending Addresses • Limited availability – only during meals in the cafeteria • Available at meals, throughout the day, before/after school • Machines placed in or outside cafeterias • Bad packaging – small, leaky cartons • Portable, resalable plastic 16-oz. bottles • Limited flavors and fat level options • Wide variety of products • Perceived as higher-end, ‘cool’ beverage • Paying for and selecting product gives kids a degree of control • Image as “uncool” beverage kids “have to take” • Kept very cold until dispensed • Warm from sitting out on lunch line • Freedom from waiting in line • Have to wait in line to get it

Background In fact, in one study of student attitudes, students said they would be as likely to buy milk as any other beverage from vending machines Students That Would Purchase “All the Time” from the Vending Machine if Available Source: Beverage Marketing Corporation; DDC

Background However, with milk vending practically non-existent, and soft drink machines pervasive, students have not had the opportunity to purchase vended milk Presence of Competitive Beverages in School Vending 2000 Penetration Source: Beverage Marketing Corporation; FMS

Background • Vending value-added milk not only addresses students’ needs, but also makes school milk much more attractive for processors • Additionally, it makes schools and parents feel better about kids’ beverage options in schools Vending Addresses Others’ Concerns, Too Key Concerns . . . Vending Addresses • Dairy Processors: • School milk is barely profitable • Processors can be more profitable on value-added products • Price of school meal milk inflexible and determined by Federal regulations • Vending price determined by competitive environment • Cannot afford to spend on marketing programs in schools • Vending machines act as ‘billboard’ and can enhance kids’ overall image of milk • Higher margins can support some level of programs • Kids have a healthy choice with vended milk • Parents and Schools: • Between meal beverage options limited to soda and other less healthy products

Background Perhaps most important is the potential long-term impact milk vending can have on changing the image of milk in schools – for all constituencies Vending Can Help Break the School Milk Paradigm New Paradigm Old Paradigm Students • Milk is cheap -- it comes with the free lunch • Milk is uncool • It’s for little kids • Milk is cool • It comes in great packages and flavors -- just like soft drinks • A great option instead of soda and fruit drinks • Milk is a way to get money back from the government • An inexpensive, federally regulated commodity • Milk is key to the nutritional health of kids • A “politically correct” way to drive cafeteria revenues • We can push as CSD alternative that kids love • Provides great educational tools and equipment -- a helpful partner • A revenue generator for student programs Schools • A vital way to recruit consumers for life • A profit generator • A great testing ground for new ideas Processors • I can’t make any money on school milk • A ‘necessary evil’

Test Objectives and Methodology Primary Test Objective • To evaluate the opportunity for milk vending in schools • To understand and quantify the volumetric and profit potential for school milk vending • To understand the operating dynamics of selling milk through vending machines • To identify optimal products, placement, merchandising and service levels • To build vending economic models for dairy processors and third-party vending operators Supporting Objective

Test Objectives and Methodology Several test elements, not part of the initial test concept, added complexity and forced some “on the fly” decisions/changes Initial Test Concept Test Realities 75-80 vending machines in four markets 96 machines in five markets Full, standardized array of SKUs SKUs differ slightly by market and flavors were limited– dependent on processor capabilities “Open-armed” welcome from schools, with no school commissions offered or required Bureaucratic and competitive hurdles to get placements, with commissions demanded in almost all markets User-friendly data collection and manipulation through electronic web-based technology (i.e. E-vend) • Operator collected data with limited e-vend back-up; data not available in desired detail (e.g. by day, day-part) • E-vend not working added expense, time, delayed machine operations • Districts often dictated participating schools, and school dictated where machine could be located • Limited dual placements • Control over machine placements in schools • Key variable would be dual vender placements • Vandalism was a major factor in some school districts • Delayed installation in several schools Vandalism was not considered a significant issue

Test Objectives and Methodology • Omaha, NE • Roberts Dairy • Dahl Vending • 2 Middle/6 High Schools • 4 Dual Placements • Avg. School Population: 1,080 • Boston, MA • HP Hood, Inc. • A&B Vending Co. • 5 Middle/12 High Schools • 1 Dual Placement • Avg. School Population: 1,180 • Southern California • Alta Dena Dairy • Venders Service - Orange Cty. • Roosevelt Milk Vending - LA • 6 Middle/9 High Schools • 4 Dual Placements • Avg. School Population: 1,785 • Miami, FL • Velda Farms Dairy • Great American Vending • 0 Middle/12 High Schools • 4 Dual Placements • Average School Pop: 3,060 • Austin, TX • Oak Farms Dairy • Accent Food Service • 11 Middle/10 High Schools • Avg. School Population: 1,190 • The five test markets were selected based on processor capabilities/interest, third-party vend operator capabilities and geographic representation • Vending machines were placed in middle and high schools, with dual machine placements in 13 high schools

Test Objectives and Methodology • For a number of reasons, including school district practices, machine placement was staggered over a number of weeks • Non-installed and non-reporting machines were generally due to damaged equipment, vandalism or delays due to school decision/approval process Milk Vending Machine Placements in Test Markets # Machines Originally Assigned # Machines Placed Placement Completion Date Percent Reporting for 6 Weeks Market • Austin • Omaha • Southern California • LA • Orange Cnty • Miami • Boston • Total 24 16 12 12 18 18 100 24 16 10 12 16 18 96 February 7 February 20(1) 1st wave: Feb 27 2nd wave: Apr 20(2) 3rd wave: May 7(2) April 1 March 28 88% 75% 79% 89% 94% 85% (1) Additionally machines placed in April; (2) Several machines could not be placed until vandal guards/cages had been ordered and installed

Test Objectives and Methodology • Eight-five (85) milk venders generated adequate data during the test period to be included in data analysis • Threshold operating time required for inclusion was six full weeks – excluding vacation and other unusual weeks (e.g. testing, snow days) School Milk Vending Test Sample Size By Number of Reporting Weeks 6-8 Weeks 9-12 Weeks 13-16 Weeks Total # of Venders 40 24 21 85 % of Sample 25% 28% 47% 100%

Test Objectives and Methodology • Dixie-Narco supplied glass front venders for the test • The vending machines featured the got milk?® logo and milk mustache celebrities • Vender Features: • 45 product facings/glass front • 360 unit capacity • Advanced refrigeration system • Temperature guard with automatic shutdown • Celebrity Graphics: • Tony Hawk • Dixie Chicks • Everyone Loves Raymond • Ricky Martin • Back Street Boys

Test Objectives and Methodology • The vended milk was priced at $1.00 across all test markets • $1.00 was in line with competitive vended products in similar serving sizes Typical Beverage Vending Prices in Schools ItemOmahaBostonAustinLos AngelesMiami 20-oz. Plastic Soda $1.00 $1.05 $1.00 $1.00 $1.00 Bottled Water $1.00 $1.00 $1.00 $1.00 $0.85 Bottled Juice $1.00 $1.25 $1.25 $1.25 $1.25 Canned Juice $0.85 $0.85 $0.80 $0.75 $0.75 Isotonics $1.25 $1.25 $1.25 $1.25 $1.00 Bottled Tea N/A $1.25 $1.25 $1.25 $1.00 Milk Test $1.00 $1.00 $1.00 $1.00 $1.00

Test Objectives and Methodology • Flavors offered vary by market, depending on processor product line • Test parameters required at least three flavors, and each market also offered a variety of fat levels Vend Test Product Variety by Market SKUsOmahaBostonAustinLos AngelesMiami Whole White      Low Fat White      Skim White  Chocolate Whole      Chocolate Low Fat   Strawberry Low Fat     Orange  Coffee  Total SKUs 5 5 4 6 4

Test Objectives and Methodology • Despite efforts to obtain school participation without paying a commission, most of the schools were unwilling to forego vending revenue, even during the test period • For the test, however, the schools generally accepted lower commissions than would be customary • Commissions ranged from no commissions to 10% Range of Commissions/Subsidies Paid to Schools for School Milk Vending Test Participation Test Commission Rate

Test Objectives and Methodology The test was executed through the last half of the school year 2000/2001 Test Planning and Setup Test Analysis • Designed, purchased and configured vending machines • Identified test market areas • Identified and recruited participating schools, dairies, third-party operators • Finalized test variables • Product mix • Placements • POS, etc. • Monitored test progress/conditions • Ongoing data collection • Periodic product mix review/revision • Student survey • Began preliminary analysis • Post-test interviews with processors/ operators • Reviewed data • Developed projections and volumetric opportunity • Identified best practices - products, placements, merchandising, service • Built third-party operator business models • Built dairy business models March 2001 July 2000 January 2001 June 2001 August 2001 Board Approval Machine Placement Final Report

Test Objectives and Methodology • Success of this complex test was dependent upon the strong coalition of industry partners • The team included a number of constituencies acting in concert, but with clearly defined roles School Milk Vending Test Project Team Maytag Dixie-Narco MilkPEP DMI Project Management Team BMC; Bachtelle & Associates; MilkPEP/DMI; Dixie-Narco Dairy Processors Vend Operators S/R Reps

Test Objectives and Methodology • Key Responsibilities • Designed strategy and execution plan • Helped recruit participating processors • Facilitated partnership of constituencies for successful test execution • Assisted in promotional activities • Led public relations efforts • A sponsor of the test • Provided vending machines • Helped place and serviced vending machines • Trained operators on machine use • In-field trouble-shooting • Agreed to participate within test parameters and consistently provide milk to the packaging and variety specifications of the test • Assisted in-school recruiting/machine placements • Supplied data • Worked closely with vending operators to ensure appropriate milk supply, etc. MilkPEP/ DMI Maytag Dixie-Narco Dairy Processors

Test Objectives and Methodology • Key Responsibilities • Recruited schools and placed venders • Supplied/serviced vending machines • In-field trouble-shooting, including key school contact • Provided required data for research evaluation • Communicated continually with project management team, and processors to ensure smooth test execution • Assisted in P/R efforts • Conducted student and SFSD surveys • Assisted with promotional activities • Local liaison between all constituencies • Designed strategy and execution plan • Recruited participating dairies and vend operators • Managed negotiations with and among participants • Collected and analyzed data • Communicated/liased continually with all constituencies • Prepared questionnaires for students, SFSD, processors, operators • In-field trouble-shooting • Managed budget Vend Operators S/R Reps Project Managers BMC/Bachtelle

Key Learnings/Messages from the Vending Test What We Learned from the School Milk Vending Test • Kids will eagerly buy milk from vending machines in schools • Vending will be the preferred venue for kids to buy flavored milk, especially products they can’t get on the lunch or a la carte lines • Flavors out sell white milk nearly 10 to 1 • Milk vending can be a profitable business, for both processors and/or vending operators given the right product mix, pricing and operational components • Commissions to schools will be likely • There is no single approach to school milk vending • Not all schools are appropriate for milk vending • There will be significant competitive response by the soft drink players • There was no significant lunch line cannibalization • Spoilage was not a significant issue/expense

School Milk Vending Test – Evaluating Opportunities for School Milk Vending • Contents • Test Results • The Data • Student Reaction • Processor and Third-Party Operator Feedback

Test Results – The Data • Average weekly sales by machine during the test were $280 for all schools • High schools achieved higher velocities, primarily due to the larger school populations compared to middle schools Average Milk Vender Sales Sales Per Machine Per Week Installation Period – 1st 3 weeks Base Line Period – After 1st 3 weeks All Weeks

Test Results – The Data • Average weekly sales perschool were generally higher - $327 per week • Again, high schools outperformed middle schools, in this case nearly two to one – consistent with school population Average Milk Sales Per School Per Week for All Weeks Average School Population 1,871 905 1,582

Test Results – The Data • Most high schools in the test generated weekly sales of greater than $200, while the machines placed in middle schools had much lower velocities • Student population was the key driver of these variations • As with any test that “forces” location distribution, some locations performed at significantly below-average levels and negatively skewed overall results Average Weekly Sales Per Machine Share of Milk Venders Average Weekly Sales

Test Results – The Data • Excluding the poorest performing schools, each market had significantly better results • This analysis yields a more “real world” result, as poor-performing machines would be pulled from operation and placed in higher velocity locations • For the test, very few schools significantly underperformed the market average – 10%-30% in each market Average Milk Vender Sales Excluding Poor-Performing* Machines Sales Per Machine Per Week – All Weeks *Poor-performing machines had significantly lower per week sales compared to the market-average during the base-line test period

Test Results – The Data • Looking at the test results on a per capita basis reveals somewhat higher per capita consumption for middle school students versus high school • This is consistent with general milk consumption patterns by age group, and is largely a result of increased beverage options in high schools Vended Milk Per Capita Consumption Excluding Poor-Performing* Machines Based on All Week Sales Units Per Week *Poor-performing machines had significantly lower per week sales compared to the market-average during the base-line test period

Test Results – The Data This means that over a 36-week school year, each student would consume an average of seven to eight vended milks in school – or an additional one gallon Vended Milk Projected Annual Per Capita Consumption 7.9-8.6 7.2-7.9 7.2-7.9 Units Consumed During School Year

Test Results – The Data • The degree of post-installation performance drop-off differed significantly by market, too • Across all markets, baseline sales averaged 64% of installation velocity - better than expected, based on an industry average of 50%-60% • In LA Central, where the drop-off was most precipitous, there were machine vandalism and other unforeseen disruptions Average Milk Vender Salesby Market Installation vs. Baseline Performance Sales Per Machine Per Week Installation Weeks - 1st 3 weeks Baseline Weeks - After 1st 3 weeks Baseline as % of Installation 54% 58% 45% 53% 87% 57%

Test Results – The Data All test market per caps clustered near the 0.20 units per week average, with the exception of Boston, which was significantly higher, and Austin, which was significantly lower Vended Milk Per Capita Consumption by Market Based on All Week Sales Units Per Week

Test Results – The Data Vended school milk per caps, as with total volume, fell off after the initial few weeks of the test – dramatically in some markets Vended Milk Per Caps by Market Installation vs. Baseline Performance Units Per Week

Test Results – The Data There were a number of possible reasons for the wide variation in per capita consumption rates among markets and among schools within each market • Economic factors – directional volume associated with high/low area income levels • Machine volume – if machine access was limited/had lower foot traffic • Machine performance – equipment problems had significant impact on usage and reduced consumer confidence • Location foodservice programs - expanded foodservice (and beverage) options drove lower sales volume through milk vender • Competitive product available at discount – in Omaha identical product sold a la carte for $0.80; cut into vending sales Vended Milk Per Capita Consumption Drivers

Test Results – The Data • Dual machine placements made sense in large schools • In 9 of the 13 dual location schools, per caps for both machines were in the range of or exceeded overall average machine per caps Dual vs. Single Vender Per Capita Consumption Baseline Weeks Only (Weeks 4+) Units Per Week Per Machine *Excludes 6 under-performing dual locations

Test Results – The Data • Even in schools with low per capita consumption, such as in LA, if the schools are large enough they will easily support 2 venders – or more • In the smaller Omaha schools, the second vender was generally not necessary Dual Vender School Total Sales Baseline Weeks Only Average Units Per Week Miami LA - Central Omaha Boston Average School Population 2,570 3,285 1,400 1,500 Average Machine Per Caps 0.27 0.14 0.21 0.32

Test Results – The Data • From start to finish and consistently across all markets, flavored milk outsold white milk 9 to 1 • Chocolate was the best-selling flavor, but all the flavors offered performed very well School Milk Vending Volume by Flavor Share of Sales by Market AustinBostonLos AngelesMiamiOmahaTotal White 10% 11% 9% 9% 14% 10% Chocolate 73% 60% 65% 51% 47% 60% Strawberry 18% --- 27% 40% 29% 24% Orange --- --- --- --- 10% 1% Coffee --- 29% --- --- --- 4% Flavor Subtotal 90% 89% 92% 91% 86% 90%

School Milk Vending Test – Evaluating Opportunities for School Milk Vending • Contents • Test Results • The Data • Student Reaction • Processor and Third-Party Operator Feedback

Test Results – Student Reaction • A self-administered, informal survey was conducted toward the end of the test to capture student reactions to school milk vending • While these survey results are not projectable, they offer valuable insights into student opinions • Number of Respondents 362 – High School Students 188 – Middle School Students 550 – Total • Gender of Respondents • 49% - Female • 47% - Male • 4% - No Response • Grade of Respondents • 13 – Fifth grade students • 69 – Sixth grade students • 31 – Seventh grade students • 68 – Eighth grade students • 114 – Ninth grade students • 67 – Tenth grade students • 103 – Eleventh grade students • 50 – Twelfth grade students • 35 – No response Post Test Student Surveys

Test Results – Student Reaction • Most students with the opportunity used the milk vending machines • Consistent with per cap levels derived from the sales data, the share of students buying milk from the machines was somewhat higher in middle schools than high schools Students Usage of Milk Vender in Schools Share of Total Respondents Source: Beverage Marketing Corporation; Student Survey

Test Results – Student Reaction • There were a significant number of regular users – roughly 30% of users purchased milk from the venders about once a week or more often • Less than 20% used the machine only once Student Frequency of Using School Milk Venders Share of Total Respondents Source: Beverage Marketing Corporation; Student Survey

Test Results – Student Reaction • Most milk sales from venders were incremental for school milk; if anything, vended milk cannibalized competitive beverages much more than the school lunch/breakfast line • Kids said they drank vended milk instead of soft drinks, fruit drinks and water Students Bought Milk Rather Than Other Beverages Share of Total Respondents Note: Survey question read “If the got milk?® vending machine was not in your school; what would you buy instead of milk” Source: Beverage Marketing Corporation; Student Survey

Test Results – Student Reaction • Students were generally satisfied with the milk serving size of 16-ounce – they definitely did not want smaller portions • However, a number of students would have liked more milk per vended serving Students’ Reaction to 16-ounce Serving Size Share of Total Respondents Source: Beverage Marketing Corporation; Student Survey

September 5, 2001

September 5, 2001

Presentation Transcript

Concrete 2001 Perth September 2001

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