2009-2010 Annual School Channel Survey

1. 2009-2010Annual School Channel Survey Final Report July 2010 MAKING A MEASUREABLE DIFFERENCE 2275 Half Day Road, Bannockburn, IL 60015 847.945.1155  www.primeconsulting.biz

2. Table of Contents • Overview • Respondent Profile • Specific Subjects • Milk Usage & Comparison to Potential • Type of Milk Trends (Fat, Flavor & Calorie) • A La Carte & Vending Availability • In-school Promotions • Flavored Milk Dialogue • Appendix

3. Annual School Channel Survey: Scope M A C R O Packaging Suppliers The annual survey is designed to gather various performance, process and activity measures from throughout the school channel supply chain. N = 3 suppliers s who collectively provide 85% of all packages. Processors N = 61 processors serving 52% of all schools. Schools N = 1,388; districts representing 12% of students. Performance Measures M I C R O Process Measures Activity & MilkPEP Program Participation Measures

4. Table of Contents • Overview • Executive Summary & Key Learnings • Respondent Profile • Specific Subjects • Milk Usage & Comparison to Potential • Type of Milk Trends (Fat, Flavor & Calorie) • A La Carte & Vending Availability • In-school Promotions • Flavored Milk Dialogue • Appendix

5. School Milk Declined 2.1% School milk volume declined 2.1% or 10 MM gallons. White milk declined 5.1%, or 7 MM gallons. Flavors declined 3 MM gallons, as schools reduced their offerings. Chocolate declined 2 MM gallons after growing 10 MM the prior year. “All other” flavors have declined nearly 50% over the past two years with that volume moving back to Strawberry. MM MM MM MM Source: Processor based data projection

6. Change in Milk Usage Nutrition Director perceptions were much more optimistic than the actual sales and usage data. Directors perceive milk usage grew 1% while their data (and processor data as well) shows a 2% decline. Perceived Change in Milk Use (vs. prior year) Actual Milk Usage Change (vs. prior year) 1.7% 1.4% 1.3% ‘09-’10 ‘08-’09 ‘09-’10 ‘08-’09 -2.1%

7. Milks Used in a Week Weekly Milk Servings per Student = Students at the School/ District Potential for Milk Servings 5 5 = + x = Lunches per Week Breakfast per Week % Served Current Potential Weekly Milk Servings per Student & Current Potential Definitions During the Capturing the School Milk Opportunityworkshops, school districts and processors are encouraged to evaluate milk development. Weekly milk servings per student is taught as the simplest and most comprehensive measure of milk development. The calculation is as follows: Schools are encouraged to compare their current performance against calculated “current potential.” A school’s/ district’s potential is defined as the number of potential milk servings at lunch (5 per week), plus breakfast (adjusted for participation).

8. 4.6 -0.2 3.7 -0.1 2.9 -0.1 Elementary Secondary All Respondents Weekly Milk Consumption The average student consumes 3.7 milk servings (8 oz) per week, a decrease of 2.1% from last year. This makes the first year-over-year decline since the survey was initiated during the ‘05-’06 year. -3.4% -2.1% -2.0%

9. Weekly Milk Consumption Weekly Servings per Student Distribution Elementary Secondary '08-'09 – 4.8 '08-'09 – 3.0 % of Students in Responding Districts '09-’10 – 4.7 '09-’10 – 2.9 15% +3 pts 68% +3 pts 17% -6 pts % of Students in Responding Districts 6% -3 pts 73% +8 pts 21% -5 pts

10. Weekly Milk Servings per Student 3.7 3.9 4.3 4.2 3.1 3.7 4.0 3.2 2.7 5.8 2.7 5.2 4.5 4.9 3.9 4.0 3.5 3.6 3.2 3.7 4.2 National Average = 3.7

11. Weekly Potential % of Potential 6.51 72% -3 6.44 70% -1 6.48 71% -2 Weekly Potential % of Potential Consistent with Last Year, Milk Usage is Much Lower in Larger Districts’ Secondary Schools ELEMENTARY At the Elementary level, milk usage is very similar(within 3%)amongst students in larger districts, compared to medium/ smaller districts. Smaller districts saw a larger decline than larger ones. Geography differences are more a driver of differences than district size. SECONDARY The story is different in secondary schools. The largest districts experience a much lower milk usage per student (2.26 per week), compared to the non-Top 125 districts (3.32 per week). 5.85 57% -1 5.74 39% NC 5.80 50% -1 Weekly Potential % of Potential TOTAL The largest districts in the country are where milk usage is lowest and where a large opportunity exists. Each student in the larger districts uses roughly 20 fewer milks each year than their peer in medium/ smaller districts. 6.15 65% -1 6.19 56% NC 6.17 61% -1

12. Milk Fat Levels Continue to Decline • White milk is almost always 1% or 2% product. Over the past three years, 18% of White milk units have shifted from 2% to 1%. Now nearly 75% of White milk is 1% or fat free. • Flavored milk is skewed more heavily toward Fat Free (37.3%) and 1% (56.8%). Elementary and Secondary schools use virtually the same fat levels. Portion of Schools by Predominant Milk Fat Level White Milk Flavored Milk 2.3% 1.0% 1.1% 0.2% 1.2% 0.3% 0.4% 0.5% 6.0% 6.1% 5.5% 10.6% 25.0% >2% 28.6% 37.5% 42.5% 2% 1% Fat Free & .5% ’06-’07 ‘07-’08 ‘08-’09 ‘09-’10 ’06-’07 ‘07-’08 ‘08-’09 ‘09-’10

13. School Milk is Lower in Fat than the General Market The average milk serving in school has a full 1% lower fat content than milk served at home. 0.2% 0.5% 5.5% Whole 29.5% 25.0% 2% 1% Fat Free 36.8% All Milk White Flavored Schools 1.19% 0.7% 1.85% AVG FAT LEVEL 0.84%

14. Schools & Processors Have Cut Calories Over Last 4 Years Average Calories per 8 oz Serving ‘06-’07 165.8 Flavored Milk -11.8 Calories (-7.1%) ‘09-’10 154.0 ‘06-’07 149.9 White & Flavored Milk -9.9 Calories (-6.7%) ‘09-’10 140.0

15. Schools & Processors Have Cut Calories by 7% Over 4 Years The average milk serving has 10 fewer calories than ’06-’07 school year. This equates to 73 Billion fewer calories this year over four years ago. Analysis Note (6.10) The basis for this analysis is the processor responses to the MilkPEP Annual School Survey. Calories for white and flavored milk (by fat level) were developed from a sample of Processors who provided calorie information. In some cases, the information was limited to chocolate, and Prime estimated the calories for other flavors based on the flavor formulation measurement analysis and data from other school milk projects. Source: MilkPEP Annual School Survey & Prime Consulting Analysis 1 Responses received from processors who collectively operate 142 milk processing plants and serve over 50,000 of the nearly 96,000 public school throughout the U.S.

16. Tremendous Progress Made Toward 150 Calories per Serving Portion of Flavored Milk ≤ 150 Calories 55.5% 13.4% ‘06-’07 ’09-’10 68.2% Portion of All Milk (Flavored & White) ≤ 150 Calories 38.2% ‘06-’07 ’09-’10

17. Flavors Offered on the Meal Line While White milk is available in every school, Chocolate distribution declined for the second consecutive year, and now stands at 98.7%, down .6 points (decline was .3 points the year before). Strawberry is available in 47% of the schools, down 3-4 points compared to last year. Other flavors are more regional/ processor specific. Across the country, 12% of schools offer a 3rd flavor, down from 22% two years ago. % of Distribution Elementary Secondary -0.6 -0.4 -3.6 -3.1 -2.8 -3.9

18. Flavor Offering in Average School Continues to Decline % of Schools Offering __ Flavors • Flavored milk availability declined this year for the second year in a row. Nearly half of all schools only offer White and Chocolate. • Over the past two years, 1 out of every 8 schools have dropped at least one flavor. • This pull back is attributable to the growing financial pressures and concerns about flavored milk calorie level and added sugars. • This year, 12% of schools offer more than two flavors, back to the level of 3-4 years ago. +4 -1 NC -2 NC -1 Flavors beyond White % of Schools Offering > 2 Flavors* 22% 15% 14% 12% 8% * Excluding White

19. More Flavors = More Milk Used* Weekly Servings per Student White Only White + Chocolate White, Chocolate, +1 Flavor White, Chocolate, +2 or More TOTAL Portion of Sample 1% 49% 38% 12% 100% Milk Consumption Level is Related to Flavors For several years running, the data points to: * Schools offering more flavors also tend to offer more competing beverages a la carte, which have been found to take away from milk. See the a la carte analysis for further details (related to Sport Drinks, Vitamin Waters & Carbonated Juices in Secondary Schools).

20. Flavor Mix on the Meal Line Chocolate milk continues to become a larger part of the mix at the expense of White milk. Share of 8 oz “Meal Line Milk” Units by Flavor (Processor based projection) 2.3% 2.0% 1.4% 6.9% 7.0% 7.6% 60.3% 61.4% 62.3% 30.5% 29.6% 28.7%

21. Flavors Deliver Strong Volume Where They are Offered Flavors beyond Chocolate perform well and deliver good volume in schools that offer them. The charts below show each flavor’s share of the milk units in schools where they are each offered. % of Share (1) (1) (1) (1)National represents processor volume share. The “Where Offered” represents the flavor’s share in schools that carry the flavor. Vanilla and other 3rd flavors rarely appear in schools without Strawberry, while Strawberry is often the only flavor beyond Chocolate. Therefore, the Vanilla and 3rd flavor shares are a reflection of their share when alongside Strawberry, not in place of Strawberry.

22. Package Types for Milk on the Meal Line In aggregate, the packaging choices made by schools and processors this school year saw a .5 point swing from bottles to cartons. Many of the districts that switched this year cited economic pressures as the main driver for the change. Elementary grades were more likely to see the change, as they represent 62% of the volume. Share of Milk Units by Package Type

23. A La Carte Milk Sales Sales of a la carte milk experienced a slight uptick to 30 units each day, plus two over last year. A la carte milk sales data was provided by 80% of sample respondents. Daily Unit Sales per School ELEMENTARY SECONDARY TOTAL ’07-’08 ’08-’09 ’09-’10 ’07-’08 ’08-’09 ’09-’10 ’07-’08 ’08-’09 ’09-’10 NOTE:Separating meal line from a la carte milk units may not be done consistently from district to district.

24. A La Carte Milk Package Size Larger sizes are disappearing from secondary schools. % of Districts Reporting 8 oz meal line packages represent virtually all Elementary and 86% of Secondary milk offerings. The offering of larger sizes is driven by processor offerings. 10-11 oz ……….. Concentrated in New England and Texas 12-13 oz ……….. Mostly in Midwest, Michigan and Wisconsin A number of states and districts have restricted beverage serving size over the past two years, which has reduced larger packages of milk by 7 points in secondary schools. +2.8* -0.6 -1.8 -0.3 -0.1 +1.6 -0.8 -0.6 +0.9 -1.1 * Change versus last year

25. A La Carte Beverage Offerings Beverage distribution declined for all categories except bottled water. % of Districts Offering … Elementary (57% of Respondents) Secondary (82% of Respondents) vs. YA vs. YA 64 83 +9 NC 6 37 -11 -15 86 88 -7 -5 7 20 -18 -24 2 16 -8 -8 49 -13 -13 7 39 -12 -12 5 5 -9 -22 1

26. A La Carte Variety Adversely Effects Milk The number of competing beverage choices offered has a direct effect on milk usage by students. When schools provide more options and variety, milk loses 8-18% depending upon the number of choices made available. Secondary School Avg Weekly Milk Servings per Student Loss of Milk Usage Annual Servings per Student 3.22 2.97 8% 9 No. of Other Competing Beverage Choices* 2.78 14% 16 2.64 18% 21 This greater variety also overwhelms added milk flavors which are 1-2 versus far more items across the competing categories. * Competing beverage choices are defined as sports drinks, iced tea/ lemonade, vitamin water and carbonated juice.

27. A La Carte Variety Adversely Effects Milk (cont’d) When only white milk is offered, usage is dramatically lower, regardless of grade level (elementary vs. secondary). Avg Milk Servings Weekly per Student 1 Increased variety of a la carte overwhelms the addition of milk flavors – and milk usage is lower. E2 E1 E3 2 L2 Milk usage in elementary grades is consistent across the different number of flavors, driven in part by more competing beverages. S1 2 4 3 S2 L3 S3 L1 E0 1 S0 Secondary schools add competing choices faster than they add milk flavor options. This helps explain why milk usage declines when more flavors are available. 3 No. of Competing Beverage Categories The largest districts (Top 125) are much more likely to add a lot of competing categories which adversely effect milk. These districts also receive more sales effort from other beverage companies. 4 LEGEND Letter signifies grade level or district size: E – Elementary (regular survey) S – Secondary (regular survey) L – Top 125 (abbreviated survey) Number indicates the number of flavors offered, excluding white(i.e., E 1 = Elementary with only 1 flavor – Chocolate).

28. Beverage Availability through Vending in Secondary Schools • Availability of milk in vending machines dropped to 12% of secondary schools this year. Distribution has dropped 40% in just two years. • Significant declines (>10 points) occurred in Maine, Michigan, Indiana, Arizona and Washington. • Other beverage vending was reported in 52% of secondary schools. This is 3 points above last year. % of Secondary Schools with Vending Milk Other Beverages 69 52 49 20 16 12

29. Presence of Milk Vending Varies Dramatically 16% 3% 0% 6% 11% 25% 3% 5% 0% 11% 17% 36% 16% 17% 16% 22% 2% 3% 15% 34% 19% National Average = 12% of Secondary Schools

30. 2009-2010Annual School Channel Survey Thank you for your continued support of milk. If you wish further information, please contact your Milk provider or MilkPEP at 800.945.MILK or visit www.milkdelivers.org July 2010