Market Potential for Specialty Cheeses in Select New York Markets

January 2006 EB 2006-01 A Value-Added Opportunity: Market Potential for Specialty Cheeses in Select New York Markets Angela Gloy, Cornell Program on Dairy Markets and Policy Mark Stephenson, Cornell Program on Dairy Markets and Policy Department of Applied Economics and Management College of Agriculture and Life Sciences Cornell University Ithaca, New York 14853-7801 Funding for this research has been provided by the United States Department of Agriculture (USDA) and research is being conducted under the direction of the Agricultural Innovation Center (AIC) affiliated with Cornell University. It is the policy of Cornell University actively to support equality of educational and employment opportunity. No person shall be denied admission to any educational program or activity or be denied employment on the basis of any legally prohibited discrimination involving, but not limited to, such factors as race, color, creed, religion, national or ethnic origin, sex, age or handicap. The University is committed to the maintenance of affirmative action programs which will assure the continuation of such equality of opportunity. ii Table of Contents Executive Summary iv List of Tables vi List of Figures vii I. Introduction to Value-Added Dairy Market Assessment 1 Study Objectives 1 Study Motivation 1 Study Outline 3 Defining Specialty Cheeses 5 Overview of the Market 5 Market Drivers 5 Market Size and Scope 9 Production Cost Structure 12 The Experience Curve 13 II. The NY Specialty Cheese Market – Demand Considerations 13 Potential Growth Markets 13 New York State Wineries: Market Overview 14 New York State Wineries: Survey Results 17 New York State Wineries: Key Findings 25 New York City Specialty/Gourmet Shops: Market Overview 26 New York City Specialty/Gourmet Shops: Survey Results 28 New York City Specialty/Gourmet Shops: Key Findings 40 New York City Restaurants: Market Overview 40 New York City Restaurants: Survey Results 43 New York City Restaurants: Key Findings 50 iii III. The New York Specialty Cheese Market – Supply Considerations 51 Overview of Existing On-Farm Dairy Processors and Products 51 On-Farm Cheese Maker Feedback 52 Current New York Value Added Dairy Product Offerings 55 Product Identification 56 Natural/Organic Product Potential 58 Ethnic Product Potential 60 Specialty Cheese Distribution 63 Specialty Cheese Distributor Feedback 63 The Product Distribution Decision – Cheese Maker Characteristics 67 The Product Distribution Decision – Product Characteristics 68 The Product Distribution Decision – Market Outlet Characteristics 68 IV. Key Marketing Points 69 Coordinating Supply and Demand 69 The Value in Understanding Product Price Points 72 Specialty Cheese Product Promotion 73 Product Promotion – Sampling 73 Product Promotion – The Cheese Story 73 Product Promotion – Cheese Competition Award Recognition 74 Product Promotion – Capitalizing on Existing Resources 74 Product Promotion – Additional Opportunities 75 V. Summary and Avenues for Further Investigation 76 Looking Ahead: Value Added Dairy Opportunities 78 References 80 Specialty cheese resources 85 iv EXECUTIVE SUMMARY The specialty foods market is experiencing considerable growth. Within this category, value-added dairy products are estimated to generate $6.35 ($7.83) billion dollars in sales in 2004 (2007) (Sloan, 2004). In New York (NY), where dairy production resources are plentiful, specialty dairy food production is an attractive market development opportunity. Dairy producers interested in on-farm specialty food processing may find it a viable means of enhancing farm-level returns, particularly in the face of volatile commodity prices, and where dairy producers exhibit a complementary skill set advantage. This project characterizes key marketing dynamics associated with providing specialty dairy products to select NY markets. This project is motivated by the notion that there are value-added food processing opportunities available to NY State dairy producers that not only compliment existing NY food and drink enterprises, but also enhance non-food stakeholder interests through benefits associated with business and rural economic development. Despite the varied reasons for entering the specialty dairy products market, this report maintains that economic viability is necessary for long-term market involvement and that attention to marketing responsibilities is an integral part of venture sustainability. The report addresses market and product identification, distribution, and promotional activities associated with supplying value-added dairy products to NY State wineries and New York City (NYC) restaurants and specialty/gourmet shops. These three potential market outlets were surveyed to determine market potential for value-added cheeses. Results suggest that marketing efforts are facilitated by unusually high levels of consumer interest. This translates to consumers “pulling” at the end of the supply chain for new products and information. Strong consumer interest however, can not compensate for attention to marketing fundamentals. In particular, this report finds 6 key points for would-be processors to consider. • First, all survey respondents perceived specialty cheeses as a growth market. Specialty cheese market growth mirrors expansion observed in the broader specialty foods category, and reflects increased product offerings, and promotional and educational efforts by supply chain participants. • Second, survey respondents welcome additional specialty cheese product offerings from local NY cheese makers. A number of survey respondents revealed that they source product nationally. Local processors presumably have a cost advantage in that their distribution expenses from within state are smaller than out-of-state competitors. • Third, retail product price points vary by market given the different expenses to supply that market and consumer price sensitivities. Cheese buyers in NYC expressed some concern about the high cost of domestic specialty cheeses. v However, the production cost structure of farmstead and artisanal cheese does not lend itself to economies of scale, resulting in high per unit costs. Minimization of capital expenses and attention to the additional time and labor costs associated with initiating processing operations is a recommended strategy. Accurate estimates of production costs, as well as distribution and promotional costs, help establish reference points for retail price assessment. • Fourth, both production and consumption patterns are influenced by seasonality. Milk production peaks in the spring and summer months, which coordinates well with the winery market tourist season. In contrast, NYC specialty shops experience their peak demand from September through December. For dairy producers not dedicating all of their milk to cheese production, the question of balancing arises. Ultimately, the ability to coordinate milk supplies with processed product supplies is the first step in later coordinating cheese supplies with market outlet demand. • Fifth, while survey respondents were receptive to working with individual cheese makers, their primary concern was assuring product consistency, and to a lesser extent, establishing mutually compatible delivery formats. Both issues will be increasingly important as small-scale processors move from smaller, less formal markets, to larger ones where the cheese buyer introduces additional purchase specifications. Distribution costs were identified by several respondent groups as a limiting factor in broadening the product’s marketable area. • Finally, domestic specialty cheeses are a new enough phenomenon that market participants are still in the early stages of the learning curve. Identifying production, distribution, and marketing strategies that do not compromise product quality is an on-going, collaborative effort. Consumers especially appreciate promotional efforts which help pull them along in the education process. In-store tastings, cheese signage, and the proliferation of cheese plates at restaurants all work to increase knowledge about specialty cheeses. Many specialty product consumers are drawn to the food’s production characteristics (i.e., organic) for which they will pay a premium. Processors would do well to convey as much information about their farm, their animals, and their product, as possible to consumers via the farm/cheese story. A number of factors dovetail to make specialty cheese production particularly attractive to producers: close proximity to a large, diverse urban market (i.e., NYC), strong consumer demand, observed retail prices, and the depth of dairy resources in the Northeast region. The trade-off is that these same factors work to entice that many more dairy producers into on-farm cheese production, subsequently raising the number of competitors in the market. The level of competition is most likely distinguished though by product quality, the degree of attention to economic costs, and the level of product visibility. The more marketing savvy small-scale processor can use these points to their advantage and increase the likelihood of new product success. vi List of Tables Table 1. Supermarket Sales of Cheese by Type, 2002 11 Table 2. Random Weight Cheese Sales by Type 12 Table 3. Wine Regions Profiles 15 Table 4. Suggested Wine and Cheese Pairings 16 Table 5. Summary Winery Survey Responses 18 Table 6. Specialty Cheese Interests 21 Table 7. Profile of Selected NYC Specialty Shops 27 Table 8. Summary NYC Specialty Shop Survey Responses 29 Table 9. Respondent

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