With the dairy industry in a sour state, Borden CEO plots comeback for one-time milk giant

When Tony Sarsam took the helm of Borden Dairy in March 2018, the maker of milk, sour cream and cottage cheese was far removed from its heyday as the nation's largest dairy producer.

Borden didn't have marketing or research and development teams. Its prior owner spent the better part of a decade making little effort to invest in its plants or people, Sarsam observed, taking cash generated from Borden and investing it in its other business ventures. Sales had plunged 82% from a peak of $7 billion in 1991, and Borden, which once had a presence in all 50 states, saw its footprint shrink dramatically to only a quarter of its previous size.

"The brand, it was asleep," Sarsam said. "There was not external communication or marketing, not even really a lot of work to keep labels or point of sales fresh."

Sarsam, who has more than three decades of experience in the food industry working for companies including PepsiCo and Nestlé, wasted little time in trying to rejuvenate the 150-year old brand.

Within weeks of taking over, he added a head of marketing and hired a research and development team. He's since implemented a host of other changes such as refreshing its Elsie the Cow mascot — a one-time pop culture icon that has made appearances at the Macy’s Thanksgiving Day Parade, cameos in Hollywood and on Broadway — and adopted a new marketing campaign with the tagline “Glass Half-Full Since 1857" to highlight its products.

"Sometimes in these adventures, you find these companies that are just fundamentally broken and they are more difficult, and that really wasn't the case with Borden," Sarsam said. "There are opportunities to invest in infrastructure. The assets had been neglected a little bit, and the overall employee touch and communication had been left fallow for years."

The move to refresh Borden comes at a particularly daunting time. The dairy industry as a whole is facing a barrage of challenges that has left Dean Foods, the biggest U.S. milk producer today, considering a sale. Scores of other producers are struggling.

Milk consumption has been declining for decades and plant-based options have siphoned away consumers who once turned to the popular beverage. Shoppers also have far more choices than ever before to quench their thirst, thanks to a proliferation of beverage options that have flooded the supermarket and convenience store channels.

"It's not like all the trends are in their favor. It's not like they are in a rapidly growing market. Anyone in the fluid milk industry has an uphill climb. It's not just (Borden) trying to figure out how to compete and win in the same industry that Dean Foods is going bankrupt in."

Matt Gould

Analyst, Dairy & Food Market Analyst

In addition, retailers such as Kroger, Publix and Walmart are among the grocers who have invested in milk processing and bottling facilities — giving them more control over the supply and undercutting prices with their own private label brands. Walmart opened up a large dairy plant in Indiana last year that reduced the milk supply it sourced from Dean Foods by an estimated 100 million gallons. And earlier this year, web giant Amazon added private label dairy and beverage offerings to its grocery lineup as part of its Happy Belly brand.

These disruptions have left some analysts skeptical that Borden can compete and return to the same dominant position it held during the last century.

"It's not like all the trends are in their favor. It's not like they are in a rapidly growing market," Matt Gould with Dairy & Food Market Analyst told Food Dive. "Anyone in the fluid milk industry has an uphill climb. It's not just (Borden) trying to figure out how to compete and win in the same industry that Dean Foods is going bankrupt in."

Even Sarsam acknowledged today's dairy industry is not going to be easy.

"There is a lot of competition and there are a lot of very qualified folks out there who are making the same types of products you are," Sarsam said. "You have to be on your game. ...If you skip a couple of beats, then you are going to get yourself in trouble. That's probably true in all businesses, but I think it's particularly true (with dairy.)"

A diverse collection of businesses

Borden's present-day focus on dairy brings the company full circle from its founding in 1857, when its primary product was condensed milk. But it hasn't always been that way.

Throughout the 20th century, Borden executives expanded the company's reach into an eclectic mix of businesses, some of them household names, including printing ink, fertilizer, PVC plastics, glue like Elmer's, jams and jellies, dairy with ice cream and Eagle Brand sweetened condensed milk, pasta and Borden Chemicals through a series of acquisitions.

But the expansive conglomerate ran into problems in the 1980s and 1990s as mounting debt from the M&A binge, failed restructuring efforts and missteps following a 1992 drop in whole milk prices resulted in significant losses and financial hardships.

After private equity firm Kohlberg Kravis Roberts purchased Borden in 1995 for $2 billion, many of the struggling company's diverse product offerings were sold or spun off. Eventually, the dairy business was sold in 2009 to Grupo Lala before it was acquired by private equity firm ACON Investments eight years later.

Today, the Borden name is back to just dairy, producing more than 35 products that are sold in parts of the Midwest, South and Southeastern U.S.

"We think between the innovation, the service, that we can regain that footing and be the undisputed leader in this industry again," Sarsasm said. "Those missteps of the recent past can be turned around."

Reason for optimism

Correcting those missteps won't be easy. Fluid milk consumption has been falling for decades, according to data from the U.S. Agriculture Department. The average American today consumes 40% less annually than in the mid-1970s.

At one time, the milk industry could afford to keep increasing output and constructing new plants as population growth offset the drop in per capita consumption. Through time, despite the continued increase in the U.S. population, consumers had other options from which to choose. Suddenly, the country was awash in the calcium-packed liquid.

The emergence of products calling themselves milk made from soy, almonds, coconuts, oats and other plants have presented a challenge for the dairy industry. Non-dairy milk sales in the U.S. increased 61% from 2013 to 2017, according to Mintel. At the same time, overall sales of dairy milk dropped 15% from about $18.9 billion in 2012 to $16.12 billion in 2017.

A study conducted by Dairy Management found about half of milk-consuming Americans purchased both dairy and plant-based milk in the last year. With billions of dollars in sales at stake, it's no wonder that traditional dairy producers have been at loggerheads with newer milk options. Both sides have vehemently pressed their case to the U.S. Food and Drug Administration about how the term "milk" should be defined.

Even as these hurdles loom, there are some bright spots in the dairy industry that have given producers and processors reason for hope.

Regional dairies tend to benefit from their local roots and deep connections with multiple generations of consumers. These things are difficult for a national brand to recreate, Gould said. He pointed to the lack of enthusiasm for Dean Foods' 2015 decision to consolidate 31 regional milk operations into a single national brand called DairyPure in an effort to revive struggling sales.

Consumers also are showing a willingness to purchase a handful of products within dairy. While sales of 2%, 1% and skim milk have sharply declined, purchases of cheese and butter, as well as whole and flavored fat-reduced milk varieties have risen in recent years, according to USDA data. The statistics reflect both consumers' renewed love of fat and growing interest among shoppers looking for new product options.

"There are plenty of problems for fluid milk, but it remains an area of opportunity," Tom Bailey, senior dairy analyst for food and agricultural lender Rabobank, told Food Dive. "It's just a matter of proper positioning, and getting the alignment right with what consumers want, and nailing it on social media."

One way to do that is through the introduction of value-added options. Milk is no longer just being sold as a beverage, but rather as a product with attributes consumers are looking for — such as grass-fed, hormone-free, lactose-free, organic or non-GMO.

Chad Hart

Agricultural economist, Iowa State University

These value-added options with higher margins explain why ultra-filtered Fairlife milk, produced and distributed in a joint venture with Coca-Cola, and New Zealand's a2 Milk, whose product lacks a protein that can cause stomach discomfort, have been successful. Fairlife, introduced in 2012, has had a compound annual growth rate of 54% since 2015, Bailey noted. The brand had 3% of U.S. milk sales in 2018.

Branded dairy producers can stand out with products that have these trendy attributes. It's difficult to be competitive with general milk products, since grocery stores tend to have private label brands with prices they keep low to attract shoppers. Analysts noted supermarkets can't easily push down prices of specialized varieties that are more expensive to produce, so they leave production to companies such as Borden and Fairlife.

"We've watched those companies that just tried to be the milk company, and for the most part they don't exist anymore. The key here is not that you will just produce milk and the market share will come," said Chad Hart, an Iowa State University agricultural economist. He compared the evolution of milk to what large beer conglomerates have experienced with the emergence of trendy, more flavorful craft breweries. "It's that we're having to transform the product to fit consumer desires in order to gain that market share. You have to branch out."

This can be a challenge for large, asset-heavy milk companies that are accustomed to doing things the same way for decades. Analysts said the primary motivation for large processors is moving an ocean of milk quickly and efficiently. Shifting their attention to alternative products such as soy milk or grass-fed milk risks distracting them from what is already a low-margin business.

Leveraging its strengths

Borden's smaller footprint and renewed focus on leveraging its own strengths and capabilities to grow appears to be paying off.

The dairy processor posted sales of $1.2 billion in 2018. It is growing 5% annually, compared to a broader decline across the industry of 2.5%, Sarsam said. Sales of branded products sold at supermarkets, Walmart, convenience stores and other outlets is up 4% year to date, according to IRI/Nielsen — a figure Borden said would be higher if schools and food service outlets are included. The company is profitable and growing market share in the areas where it operates, its CEO said.

Sarsam said despite the broader challenges facing dairy, he remains optimistic there is room for growth. Borden has plans to expand into new geographies, introduce new products, add more customers to its network and double down further on customer service.

"We think between the innovation and the service we can bring as a company, we can regain that footing and be the undisputed leader in this industry again," Sarsam said. "While other dairies have been struggling and have even been pulling back on service, we have leaned in to actually make investments there and it has made a big difference, and we are finding some good solid growth with that promise."

To follow through on that promise, he said Borden is measuring order compliance to check whether the customer receives the products it ordered, if the deliveries are on time and if the items are properly loaded on store shelves. In some cases, the company is making more deliveries to customers to ensure the product is fresh or the shelves are fully stocked with signature milks, sour creams, whipping creams, buttermilks and dips.

Employees are recognized at company meetings, and Borden holds an annual celebration in which the top 1% of hourly employees and sales representatives are flown to Texas with a guest for a weekend celebration. The sales staff is rewarded through contests to win a trip for not only getting a new account or growing an existing one, but for providing great service.

Borden is not only pinning its future on service, but like its competitors is tapping into many of the trends that are at the forefront of what consumers look for in their milk.

"We think between the innovation and the service we can bring as a company, we can regain that footing and be the undisputed leader in this industry again. While other dairies have been struggling and have even been pulling back on service, we have leaned in to actually make investments there and it has made a big difference, and we are finding some good solid growth with that promise."

Tony Sarsam

CEO, Borden Dairy

The company replaced high fructose corn syrup in its chocolate milk with sugar — a change that is more expensive, but one the company claims consumers prefer. It's also making new milk products, including one with 50% more protein, one that is lactose-free, and a high-nutrient and no-added-sugar drink for kids. Borden has no plans to enter the plant-based space using the iconic name synonymous with dairy products, but Sarsam wouldn't rule it out in the future under a different name.

Analysts who follow the milk industry said while it's not impossible for Borden to become a more influential player in the milk industry despite the ongoing challenges, it remains an uphill climb. Borden must focus on investing in brand building, innovating and differentiating itself from others in the industry — a tactic employed by nearly every other competitor in the sector, they said.

But Sarsam remains undeterred. He is confident Borden's rich historical connection with dairy, coupled with the groundwork in service and innovation laid by the company, will help it avoid a repeat of its prior stumbles, and those befalling many others in the industry today.

"There is real sticking power with what people remember ... about this iconic brand and the fact that those memories are very positive memories, very trusted memories," Sarsam said. "What I do know is that there's plenty of space to grow in this industry. People are going to be wanting and needing great dairy products for generations to come, and we think we can do that better than anyone."