�Shruti Date Singh and Jen­nifer Ka­plan

Milk­ing It

Bloomberg Businessweek (North America) - - Companies / Industries -

can do lo­cal bet­ter than any­body,” Sch­warz says.

Con­sumers, es­pe­cially mil­len­ni­als, want an­i­mals and work­ers treated well with­out com­pro­mis­ing taste, con­ve­nience, or qual­ity, says Fair­life co­founder Mike Mccloskey, a ve­teri­nar­ian turned farmer. He’s long been fix­ated on the com­fort of cows and sus­tain­able farm­ing meth­ods, such as con­vert­ing ma­nure into methane to power dairies.

The dairy in­dus­try has been strik­ing out for decades in its ef­forts to get peo­ple ex­cited about milk, as ce­real con­sump­tion has slowed and soy and al­mond milk have cut into sales. Per capita milk con­sump­tion in the U.S. fell to about 19 gal­lons a year in 2015, ac­cord­ing to the U.S. Depart­ment of Agri­cul­ture. At milk’s peak, in 1945, The av­er­age Amer­i­can con­sumed about 42 gal­lons. Clever ad­ver­tis­ing and mar­ket­ing—in­clud­ing the leg­endary Got Milk? cam­paign, be­gun in the 1990s—did lit­tle to spur growth.

Since 2011, Dean has tar­geted kids and adults with its Trumoo milk, which comes in such fla­vors as cook­ies and cream and choco­late marsh­mal­low. Par­ents like it be­cause the milk con­tains no high-fruc­tose corn syrup. Dairypure, on the mar­ket for about 10 months, ap­pears to be build­ing on Trumoo’s mo­men­tum. For the 12 weeks ended on Jan. 23, vol­ume sales of Dean’s branded milk rose 1.6 per­cent, com­pared with a 7.3 per­cent de­cline in the same pe­riod the year be­fore, ac­cord­ing to San­ford C. Bern­stein an­a­lyst Alexia Howard. Spe­cialty milk sales jumped 21 per­cent in 2015, up from 9 per­cent growth in 2014, largely thanks to “the launch of Coca-cola’s high-pro­tein Fair­life brand,” Howard says.

Some say Coke’s drive for dairy will be an up­hill climb, given Fair­life’s pre­mium pric­ing. “Some­how you’ve got to build a value-added case that there’s more to this,” says Ian Shack­le­ton, an an­a­lyst at No­mura In­ter­na­tional.

Coke, which holds a mi­nor­ity stake in Fair­life, be­lieves its ef­forts will pay off. Jones was semire­tired when he con­nected with Mccloskey and his wife, Sue, in 2010. He urged them to team up with Coke, which has a vast dis­tri­bu­tion net­work and ac­cess to hun­dreds of thou­sands of su­per­mar­ket shelves across the coun­try. Two years later, Jones helped bro­ker the joint ven­ture. “We needed the mar­ket­ing,” Mccloskey says. “We had ev­ery­thing ex­cept the struc­ture to get it to con­sumers in ev­ery cor­ner of the coun­try.”

Fair­life can also tap Coke for guid­ance on re­search and de­vel­op­ment, chem­istry, and mar­ket­ing. Its board is split be­tween mem­bers from Coke and farm­ers from the co­op­er­a­tive.

The soda gi­ant takes a hands-off ap­proach to the part­ner­ship, says Scott Uzzell, pres­i­dent and gen­eral man­ager for Coke’s Ven­tur­ing and Emerg­ing Brands group. “They know dairy bet­ter than any­body,” Uzzell says. “We know con­sumers.” and one al­leged in­jury, ac­cord­ing to fil­ings by the com­pany to U.S. reg­u­la­tors. By month’s end, Honda had to re­call 53,000 cars.

The Civic is Honda’s best-sell­ing model, and the mis­step is a set­back for the Ja­panese au­tomaker and its new chief ex­ec­u­tive of­fi­cer, Takahiro Hachigo. Since he took over in June, the 56-year-old en­gi­neer and Honda lifer has been try­ing to re­as­sure an­a­lysts, deal­ers, and con­sumers that the spate of re­calls in re­cent years as­so­ci­ated with faulty air bags made by Takata and other qual­ity-con­trol prob­lems are a thing of the past. He chalks up many of the chal­lenges to a com­pli­cated or­ga­ni­za­tional struc­ture and in­ad­e­quate com­mu­ni­ca­tion among Honda’s units. “We need to im­prove on that,” Hachigo says.

Un­der the pre­vi­ous CEO, Takanobu Ito, Honda set an au­da­cious goal in 2012 to dou­ble sales, to 6 mil­lion units, by March 2017. The au­tomaker built plants in China, In­done­sia, and Thai­land and ac­cel­er­ated prod­uct de­vel­op­ment, plac­ing huge de­mands on its en­gi­neers.

“Honda’s cul­ture used to be more open and re­laxed,” and en­gi­neers had more time to plan and test prod­ucts, says Noboru Sato, a guest pro­fes­sor at Nagoya Univer­sity who was a Honda en­gi­neer for 26 years and has writ­ten a book about the com­pany. “But now, with so many new tech­nol­ogy de­vel­op­ments re­quired to be com­pet­i­tive in the mar­ket—elec­tric cars and au­tonomous­driv­ing sys­tems—too many tasks” are be­ing put on them, he says.

Honda’s Fit and Vezel sub­com­pacts were called back sev­eral times each for per­sis­tent en­gine and trans­mis­sion glitches from 2013 to 2014. The car­maker says it’s also re­plac­ing more than 30 mil­lion Takata air bag in­flaters, which can rup­ture and spray plas­tic and metal shards at pas­sen­gers, af­ter in­ci­dents that re­sulted in at least nine deaths.

Costly re­calls and a stronger yen have con­trib­uted to a 19 per­cent slide in Honda’s stock this year. Its U.S. mar­ket share is about two per­cent­age points short of where it was in 2009, and it’s lost ground to Toy­ota

52-week change in sales, week ended Feb. 20

Sales of Coca-cola’s flag­ship bev­er­age

have gone flat

Soft drinks –0.2% But­ter­milk –4.7% Reg­u­lar milk –13.6%

Spe­cialty milk +23.5% Or­ganic milk +7.2% Milk sub­sti­tutes +6.1% The bot­tom line Spe­cialty milk sales jumped 21 per­cent in 2015, up from 9 per­cent in 2014, boosted by Coke’s Fair­life drink. “We have given the full con­trol back to R&D, ap­point­ing peo­ple to be re­spon­si­ble for plan­ning a prod­uct and strength­en­ing its com­pet­i­tive­ness.” ——Honda CEO Takahiro Hachigo

and Nis­san in Ja­pan. Over­all, Honda ex­pects ve­hi­cle sales to rise 8 per­cent, to 4.7 mil­lion units, for the fis­cal year end­ing on March 31.

Hachigo plans to pull off what he calls a “fun­da­men­tal trans­for­ma­tion.” He’s reshuf­fled top man­age­ment and is con­sol­i­dat­ing re­spon­si­bil­ity for prod­uct plan­ning, de­vel­op­ment, and eval­u­a­tion. “We have given the full con­trol back to R&D,” he says, “ap­point­ing peo­ple to be re­spon­si­ble for plan­ning a prod­uct and strength­en­ing its com­pet­i­tive­ness.”

Hachigo has pulled back from his pre­de­ces­sor’s sales tar­gets and is slow­ing things down. Take­hiro Kono, man­ager of a Honda plant in Yorii, north of Tokyo, says the com­pany has beefed up qual­ity checks on the Fit and Vezel cars made there. “The lead time needed to roll out a ve­hi­cle has be­come longer.”

Honda is also re­think­ing its global man­u­fac­tur­ing net­work and plans to shift some pro­duc­tion back to Ja­pan from mar­kets where the ve­hi­cles are sold. “Mak­ing a good global model is more ef­fi­cient than in­tro­duc­ing a num­ber of vari­ants for each re­gional mar­ket,” Hachigo says.

To lock in sav­ings from the cheaper yen, Honda will be­gin ex­port­ing the Ac­cord Hy­brid sedan from Ja­pan to North Amer­ica for the first time this year, and it’s also con­sid­er­ing ex­port­ing Civic and CR-V sport util­ity ve­hi­cles.

To re­vive sales, Hachigo is count­ing on sev­eral new mod­els, in­clud­ing the re­designed Ridge­line pickup truck, the CR-V, and the Odyssey mini­van in North Amer­ica. He has big hopes for a lo­cally pro­duced Acura lux­ury SUV in China and the Freed mini­van in Ja­pan. The com­pany plans to in­crease do­mes­tic pro­duc­tion by 30 per­cent, to about 950,000 ve­hi­cles, by 2020.

Green cars are cen­tral to Hachigo’s plans. Af­ter the Clar­ity fuel-cell sedan goes on sale later this year, a plug-in hy­brid ver­sion built on the same plat­form will de­but by 2018. By about 2030, two-thirds of Honda’s sales will be hy­brids, plug-ins, or fuel-cell ve­hi­cles, he says.

Takata re­mains a big con­cern, says Takashi Aoki, a fund man­ager with Mizuho As­set Man­age­ment. “It’s hard to say the bad news is over.” As for the 2016 Civic re­call, Hachigo played it down, say­ing that re­place­ment parts are ready and re­pairs can be­gin and that the com­pany has taken mea­sures to pre­vent the er­ror from hap­pen­ing again. The speed of Honda’s ex­pan­sion “has been too fast, and that has in­creased the work­load at the re­search cen­ter and the plants. It’s my top pri­or­ity to change that.” �Jie Ma and Yuki Hagi­wara, with Craig Trudell

The bot­tom line Hachigo has reshuf­fled Honda’s ex­ec­u­tive ranks and plans to raise do­mes­tic out­put by 30 per­cent, to 950,000 ve­hi­cles, by 2020.

re­stric­tions on hun­dreds of dis­posal wells, re­duc­ing the amount of wa­ter dis­posed un­der­ground statewide by a to­tal of 1 mil­lion bar­rels a day. The ac­tions ap­pear to be help­ing in some ar­eas. The num­ber of earth­quakes in cen­tral Ok­la­homa de­clined 27 per­cent from the first to the se­cond half of 2015. “Un­til the earth­quakes dis­ap­pear, the threat level will con­tinue,” says Matt Skin­ner, an OCC spokesman.

In 2012 the most vi­o­lent ac­tiv­ity was south­east of Ok­la­homa City; to­day it’s in the north­west­ern part of the state. In a 30-minute pe­riod on Feb. 13, a trio of earth­quakes reg­is­ter­ing as high as 5.1 rocked north­west­ern Ok­la­homa and could be felt in seven states.

About 1,000 of Ok­la­homa’s 4,000 dis­posal wells are in the Ar­buckle for­ma­tion, a layer of lime­stone that stretches hun­dreds of miles across the state. The Ar­buckle acts like a sponge, soak­ing up in­jected waste­water. Sci­en­tists be­lieve that in some cases that wa­ter is in­creas­ing pres­sure along Ok­la­homa’s ex­ten­sive fault lines, caus­ing them to slip and set­ting off earth­quakes. Blam­ing a par­tic­u­lar well for a par­tic­u­lar quake, though, is nearly im­pos­si­ble. “We don’t nec­es­sar­ily have a smok­ing gun that shows the mech­a­nism of how that pres­sure trans­mits across fault lines,” says Jeremy Boak, di­rec­tor of the Ok­la­homa Ge­o­log­i­cal Sur­vey.

While most of Ok­la­homa’s dis­posal wells are owned by oil and gas com­pa­nies, some, like An­drews’s, are in­de­pen­dent op­er­a­tions. Prob­lems af­fect­ing other parts of the frack­ing in­dus­try are also hurt­ing his bot­tom line. Four truck­ing com­pa­nies that pick up waste­water and pay An­drews to dis­pose of what they’ve col­lected have gone bank­rupt in the past year, leav­ing him with $85,000 worth of un­paid in­voices. The deal “has ended up bit­ing me in the rear,” he says.

Rick Jack­son, who owns five dis­posal wells and 50 trucks in Ok­la­homa, is also get­ting squeezed. “The prof­its used to be fab­u­lous,” he says. “Those days are gone.” Jack­son’s wells, in the south­ern part of the state, haven’t been af­fected by the OCC’S re­duced dis­posal vol­umes. Still, his two big­gest clients, large oil pro­duc­ers, are cut­ting back, re­duc­ing the amount of wa­ter they’re giv­ing him. He’s had to fire 22 of his 110 work­ers. “The name of the game to­day is sur­vival,” Jack­son says.

The dis­posal reg­u­la­tions will lead to fur­ther cuts in oil pro­duc­tion, says Kim Hat­field, vice chair­man of the Ok­la­homa In­de­pen­dent Pe­tro­leum As­so­ci­a­tion, a trade group of oil and gas pro­duc­ers. “If you can’t dis­pose, you can’t pro­duce,” he says. An­other op­tion is to treat and re­cy­cle the wa­ter, which An­drews and Jack­son each es­ti­mate would cost from $2.50 to $3 a bar­rel. Hat­field says the re­al­ity is closer to $5. Given the state’s 10-to-1 ra­tio of wa­ter to oil pro­duc­tion, that would mean oil prices need to be at least in the $50-a-bar­rel range for pro­duc­ers to cover their wa­ter treat­ment costs. “I prob­a­bly re­view at least one pro­ject a week promis­ing to turn bad wa­ter into good,” Hat­field says. “Can they do it? Ab­so­lutely. Can they do it eco­nom­i­cally? No.” �Matthew Philips

The bot­tom line In Ok­la­homa, reg­u­la­tions have re­duced earth­quakes—and squeezed prof­its at waste­water dis­posal com­pa­nies. Netflix Ama­zon Prime

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