Strategic Management

Case – 1: Shatto Milk (Got Milk?)

Five years ago, dairy farmer Robert Shatto found himself at the crossroads. Shatto Milk Co., his
family‟s 100-year-old farm in Osborn, Mo., had been operating at a loss for two decades, and the
situation was only getting worse. Facing plummeting milk prices, industry consolidation, and
increasing competition from mega-farms, Shatto was “plodding along, while my dairy buddies
were getting smart and quitting,” he says. “Every time I crossed the road to milk the cows, I was
wondering, Why am I doing this?”

Although the 400-acre farm‟s profits were a distant memory, Shatto had both a financial and
familial stake in the company, and he refused to sell out. “I figured the only thing we could do
was to keep milking the cows,” he says, “but we had to find a way to make money for a change.”

He conducted a feasibility study and brought in a marketing firm for advice on rejuvenating his
brand. The verdict? He believed he could survive as a small family operation, but he needed a
clear way to differentiate his milk from that produced by modern, corporate dairies.

Away from the Brink

So Shatto returned to his roots – playing up his milk‟s fresh, hormone-free advantage, using retro
glass bottles bearing the slogan “Milk at its Finest,” and, having broken ties with his dairy
cooperative, charging more for what he would now brand as a premium product. “We hit on
something,” he says. “There was no other glass in the stores.” Thanks to a trendy, throwback
image and higher price tag, revenue climbed more than 70 per cent.

Shatto is among a growing number of farmers who have found that the future of the small dairy
might just lie in its homespun past. By returning to a wholesome, simpler time, when milk was
delivered fresh to your door in bottles, these farmers have taken their family operations from the
brink of extinction to profitability. Resonating with consumers increasingly concerned about
food safety, this new brand of milk has also struck a chord with environmentalists who like the
idea of recycling glass bottles. Indeed, a long time kitchen staple has become something of a hip
brand.

Like many small farmers, Shatto lost money for years by selling to a cooperative, receiving, say,
only $10.80 per 100 pounds of milk that cost him $11.25 to produce. With his new business
model, where he bottles the milk himself and sells directly to stores, he now gets $35.

Tour Operator
Although Shatto did not expect sales to move for at least seven months, within one month of the
shift, he sold out his initial supply. To keep up with the continued demand, he has increased his
herd of cows from 80 to 160, and his employees from 2 to 14. And small farmers from all over
the country now consult him about how they can keep their farms afloat.

“Last year, when I went to my accountant, he said, „You better sit down‟,” Shatto recalls. “I had
to pay taxes. After all those years, I showed a profit for the first time.”

The newly popular Shatto brand has had residual effects – farm tours that draw as many as 1,000
visitors a week, and a recently expanded product line including orange-and root-beer-flavoured
milk.

De Facto Monopoly

Though other farms have started taking a page from Shatto, challenges remain. In the past
decade, more than 50 per cent of America‟s small dairy farms have disappeared, leaving under
100,000. In Wisconsin, the leading dairy state, an estimated five farms close each day. Pressure
from large corporate farms and grocery chains, not to mention Wal-Mart‟s (WMT) continued
rise in the supermarket world, have generally forced prices down (despite a sudden surge to
record levels this year), while production costs remain the same.

Dairy cooperatives, established a century ago to help small farmers combine resources and
increase market influence, have merged in recent years, creating a de facto monopoly. “There are
two to three large cooperatives,” says Larry Swain, director of Swain & Associates, a River Falls
(Wis.) strategic planning firm that advises small family farms. “They control the milk supply.
There‟s a lot of value added to the product they market, but it doesn‟t get back to the farmer.”

A 2004 study by the Cornell University Program on Agriculture & Small Business, likened the
trend in dairy consolidation to the “Wal-Martization of milk production”. Unable to compete in
size or volume, small dairy farmers have started milking the past, so to speak – increasing their
visibility and market share, and drawing interest from regional grocery stores and supermarket
chains, including natural-food giant Whole Foods (WFMI).

Home Delivery

According to Swain, more than 100 small farms nationwide now actively promote their
traditional dairy roots – including the return of the milkman. “What they‟re doing is taking
control of the marketplace,” he says. “Something they haven‟t done in 60 years. They‟re
producing a wholesome product and marketing to lifestyle. It‟s a huge opportunity to reverse the
trend of the disappearing family farm.”

The high-end branding moves have afforded small dairies a way to insulate themselves – with
built-in margins – from the fickle market forces that have wreaked havoc on milk prices. Farmers
who sell their milk to the cooperatives at a set price-which for years has typically meant lower
than that of the cost of production – can now demand their own price, anywhere from $35 per
100 pounds of milk to retailers directly, in contrast to $10 to $16 to the cooperatives.

Oberweis, a large family-owned Chicago-area dairy, has built a high-end brand around its glass
bottles, and the company which also owns retail franchises, continues a huge home-delivery
business, dropping off its signature containers to some 45,000 customers.

Need for Cows

At the 100-year-old Mapeline Farms in Hadley, Mass, the Kokoski family has been successfully
selling milk in glass bottles for several years and now delivers it to customers‟ front porches in
galvanized steel buckets, just like the milkman of yesteryear. The Kokoskis used to run a
trucking company to help sustain the dairy, but that is no longer needed. The new strategy, says
third-generation farmer Paul Kokoski, “definitely saved the farm.”

And farmers like Robert Shatto can barely keep up with the demand. “I keep getting asked by
stores to sell them more milk,” he says. “But I can‟t until I get even more cows. You can‟t
imagine how that sounds to me.” You might say he finally “got milk.”

Questions

1. Briefly describe the business scenario of the Shatto Milk Company before they decided
on a business strategy.
2. What strategies did the Shatto Milk Company adopt and what were the results?
3. Elaborate on the business model of the company.