When Farmland Dairies broke up the New York City milk cartel, the real war began
It was a clear night and Marc Goldman stood on the top floor of New York's World Trade Center. Slowly savoring the view, he walked the perimeter of the elegant restaurant Windows on the World. Lights from all five boroughs glittered before him. It was all his; he had conquered New York City.
For several years, Goldman, the president of New Jersey -- based Farmland Dairies, had been fighting to distribute milk in the nation's largest city. So last January, following a federal judge's ruling that New York State could no longer deny Goldman's family-owned business access to the New York City market, Goldman decided that everybody still in the office should pile into a couple of cars and head off for a victory dinner.
Far below him that night, Goldman's victory was front-page news, for it spelled an immediate drop of as much as 40? to 70? in the price of a gallon of milk. "Holy Cow -- We Won!" trumpeted the tabloid New York Post. "Prices Set to Fall as Judge Ends Scam." Later, The New York Times called Farmland the "Dairy that Won the East." And New Yorkers themselves, never more patronizing than when they talk of New Jerseyites, mailed kind words across the Hudson. "I pledge to buy Farmland Dairies milk and will urge my friends to do so," wrote a man from West 74th Street. "Mark [sic] Goldman is my hero," wrote another.
To millions of consumers, businessman Marc Goldman was indeed a hero. Never mind that all he wanted to do was what simple geography suggested: take his milk on a 15-minute ride across the George Washington Bridge into the biggest market in the country. But the gate at the toll booth -- New York's antiquated milk regulatory scheme -- wouldn't open for him.
The dismantling of federal regulations has been one of the major business stories of the past decade, bringing changes to such industries as airline and trucking. But deregulation hasn't touched many places like New York, which has its own system of regulating business. It sometimes takes a Marc Goldman to challenge the status quo and open the marketplace once again to competition.
And, in Goldman's case, to suffer the consequences.
Goldman, 40, very nearly bypassed the family dairy company altogether. Farmland traces its founding back more than 70 years to when his grandfather hand-milked a herd of 30 cows and his grandmother delivered the milk by horse-drawn wagon. The dairy farm is gone now; his office stands across the street from a roller rink and an auto body shop in Wallington, N.J. The only cows there nowadays are those an Farmland's half-gallon cartons. Like most big dairies, Farmland processes and distributes milk, but doesn't produce it.
After he graduated from college, Goldman worked at many of the manual jobs at the plant. He'd run the filling machines and he loaded trucks. An office job awaited him. He demurred. His father and his uncle were running the business then, and Goldman alludes to "friction," especially with his uncle. He left on a cross-country drive in a Volkswagen bus, fell in love with Colorado, and settled there as a ranch hand. But he returned to New Jersey. Pondering his future, he realized, "Food was one of the things I considered of value and could feel ethically comfortable with." The rough-and-tumble nature of the milk industry didn't cloud that view, he says, adding, "I wasn't looking for an easy market."
Nor did he return to one. Put in charge of new projects, Goldman first confronted New York State's bureaucratic licensing system in the mid-1970s. Milk splashing into a crystal-clear glass, a familiar metaphor for wholesomeness, in reality flows neither freely nor purely. Rooted in federal price controls and encumbered by various state regulations, milk is as politicized as it is pasteurized -- and perhaps nowhere more so than in metropolitan New York, where the stakes are highest and where the term "street war" is invoked whenever the going gets especially tough. A Depression-era state licensing law gave the commissioner of the Department of Agriculture and Markets discretion to prohibit a dairy from selling milk if it would create "destructive competition in markets already adequately served." According to the commissioner, New York was adequately served by major licensed dairies, of which there were five. It didn't need Farmland, thank you very much; critics charged that this protectionism cost New Yorkers upwards of $2 million a week.
Farmland, which was already selling milk in New York's Rockland and Orange Counties, made an agreement to purchase a small dairy in Westchester County. The dairy did not change hands right away, however, because the sale was contingent on Farmland getting a local license to distribute milk, such licenses being nontransferable. Two lawyers and two and a half years later, Farmland finally secured a license, and a limited one at that, for Westchester County.
Common sense said: continue on a bit to the south, to New York City, Golconda for a milkman. The common wisdom said otherwise: forget it, don't bother trying to get into the city itself, because they'll never let you. Pete Hardin, editor and publisher of The Milkweed, an outspoken milk marketing report, explains that "they" include "the New York City dairy plant unions and the State Democratic party -- one of the oldest political alliances in the country. For decades, the state licensing laws have restricted competition."
Goldman pressed on. "I wasn't about to just live with the idea we couldn't cross the Hudson River," he says, alluding to some 9 million consumers in the city and Long Island. Dairies, which operate on small margins of a few pennies per gallon, can't truck milk great distances and make a profit. Granted, Farmland sold other products, but milk sales still accounted for more than half of its business, which Goldman places at about $150 million a year. Continued growth dictated expansion into New York, as did Goldman's plans for a coordinated marketing program. Unless he was selling in New York, it wouldn't pay to advertise on New York's far-reaching media.
Goldman fought shrewdly, both in courts of law -- his legal expenses have exceeded $1.5 million -- and in the court of public opinion. He had little choice. He had to go to court to force the commissioner to act on his application to distribute milk in Staten Island, his chosen beachhead. The day before his case was to come before the judge, the hearing date for his license was set. The hearings stretched three months and filled some 2,500 pages. And these were hearings about milk, mind you; Oliver North never made an appearance. Farmland called upon a number of witnesses who Goldman had personally lined up. He had simply walked into various Staten Island grocery stores and asked the owners to testify as to how tightly the favored five dairy companies controlled the New York City market, and how supermarkets were "married" to their milk suppliers.
Goldman also visited dairy farmers in upstate New York. He broke bread with them at countywide meetings, explaining how they, too, were hurt by the lack of competition -- higher prices dampening demand and cutting their sales. He also rallied consumers. Thousands sent him signed coupons, clipped from Farmland ads in Staten Island newspapers, protesting high milk prices. Goldman says he passed 10,000 coupons on to Governor Mario Cuomo.
By now wise to the ways and means of the $500-million milk cartel, Goldman had signed on a lobbyist in Albany, where the milk regulations were under fire. Among others, the New York Public Interest Research Group, which was inspired by the work of Ralph Nader, was an outspoken critic of what it called "a citywide milk monopoly."
Goldman anxiously waited five more months until February 1985, only to learn that still more hearings were needed. Winter turned to spring, spring to summer, and when autumn arrived, and the hearings still dragged on, Goldman filed suit in federal court to force a decision. Once again, within days of his scheduled court date, he learned his application had finally been ruled upon. The December 18, 1985, edition of the Staten Island Advance headlined Farmland's foot-in-the-door victory: "N.J. Dairy Wins Right to Sell on Island." A bronzed facsimile of that headline appears on a plaque just inside Farmland's front door.
On December 31, Goldman filed license applications to do business in the remaining four New York boroughs. Just over a year later, this past January, he won the right. This time, he won it in court, as U.S. district judge Leonard D. Wexler declared unconstitutional the decision of the agriculture commissioner to deny Farmland a license. In ruling in Farmland's favor, the judge left to the state legislature the task of amending the antiquated milk licensing laws -- which it finally did in July. The law-makers removed many of the restrictions in the licensing laws; the changes will go into effect over the next few years.
No wonder Goldman, at his victory dinner atop the World Trade Center, saw a prosperous future spread out before him, the countless points of light each a potential customer for Farmland.
But he was soon brought back to earth. The right to sell in New York was one thing. Actually selling was something else again. Goldman rode the crest of public sentiment and watched his first week's sales in New York sharply boost milk production at the plant. He was ready for the sudden jump in demand, having recently modernized the back half of his operations, especially the key processing steps. "Marc wanted to be able to go into New York with a high-quality product, offering an extended shelf life as compared with product found in most markets," says Dale Seiberling, president of Roscoe, Ill.-based Seibering Associates Inc., an engineering, design, and consulting firm, which installs state-of-the-art milk-processing systems.
But other necessary parts of a dramatic and successful entry into New York haven't run quite as smoothly. In part this was because the timing of his hoped-for victory was unpredictable, but also because the bloodied New York dairies have been counterpunching like mad. "He went in like a lion -- too quickly, I'd say," notes one metropolitan-area dairy owner sympathetic with Goldman. "The dairy business is highly service-oriented. You've got to supply a quality product, daily, on time. The industry scuttlebutt is he's lost some accounts he couldn't service." Goldman denies the gossip but does admit he was short of drivers for the first six weeks. Moreover, his marketing efforts were lagging. It was spring, more than four months after the judge's decision, before Farmland started a limited television advertising campaign and inked promotional agreements with the New York Mets and with Phil Simms, the New York Football Giants' quarterback.
Simms suffered a few sacks on the way to last year's Super Bowl, and Goldman was about to be handled just as roughly. He and his drivers must wonder if they are delivering gold bullion rather than milk. Some of the five entrenched dairies (Dellwood Dairy, Sunnydale Farms, Elmhurst Milk & Cream, Queens Farms Dairy, and Dairylea Cooperative) responded with angry picketers protesting the loss of union jobs to an out-of-state processor. Goldman needed injunctions in each county to remove them from outside of supermarkets that accepted his milk. Thugs have beaten up one of his drivers. They've smashed windshields and radiators. It's become so bad that Goldman has hired security guards to ride shotgun on deliveries.
There has been a war of words, too. "Certainly Marc has done a very effective public-relations job in promoting himself as a hero to the consumer," says Robert Crowley, executive director of New York Milk Industry Council, an association of some 90 processors and distributors. "But believe me, he's no white knight." Crowley would like to make a few things known: that Farmland "lives in a very protected market in New Jersey"; that retail prices in Westchester County, which did drop when Farmland entered, are now "some of the highest in southern New York State, with Farmland controlling 40% to 45% of the market"; that Goldman "diverted" low-cost powdered milk from government food-distribution programs; and that in pressing for accounts in New York, Farmland has made illegal gifts of free products worth some $49,000. And, by the way, don't overlook the guilty plea to rigging school bids in New Jersey.
Goldman groans at the barrage. "I would be embarrassed to say some of the things they say," he says. "What I find interesting is they will tell lies, and you have to deal with them. Then, they'll tell another lie, and it doesn't matter that they've already told 10." He denies favored status in his home state and can't help but laugh at the irony of the charge. He claims no more than 20% of the Westchester market, agrees retail prices are a bit higher, but says his pricing in Westchester is similar to that in other regions. As for the "diversion" of government surplus commodities, a misappropriation of some $481,000 of government dairy products was spotlighted in a 1984 federal audit. But Farmland was later "absolved of any wrongdoing," according to an assistant regional inspector general with the U.S. Department of Agriculture who was questioned about the audit. He termed the matter a technical violation of rules that have since been changed, and added that Farmland had substituted products of higher value.
Illegal gifts? Absolutely not, says Goldman, while admitting "we have given some incentives -- advertising and promotional incentives." The school bid rigging? Farmland did, in fact, along with several other New Jersey dairies, plead guilty to a misdemeanor of price-fixing in the 1970s. "Our legal advice at the time was it would be faster and cheaper to plead guilty than fight the charge," says Goldman. "I wasn't running the business then, and as far as I know, we didn't engage in any price-fixing." He points out that the five New York dairies were convicted of price-fixing as recently as 1982.
For all his problems of selling in New York, Goldman probably isn't even making much money: price-cutting by Farmland and the other dairies reportedly has brought a lot of milk to market below cost, possibly illegally. The five dairies complain that current prices are bleeding them dry -- and they may not be crying wolf. New York City's Department of Consumer Affairs reports that in June a gallon of milk cost an average of $2, compared to $2.42 last December.
It's clear that nobody's getting rich selling milk in New York in 1987. At the behest of the New York Milk Industry Council, the state's director of dairy industry services is investigating charges that Farmland is illegally selling milk below cost. Goldman is a little oblique: "In many cases, margins are very thin right now. In some cases, we've walked away from business where they've brought prices down. In others, we've held on, even though the price was not too great. Our intention is to sell at profitable prices. I don't see any future in selling below cost."
Goldman insists Farmland has deep enough pockets to gain and hold on to market share. "We didn't wage an eight-year battle to give up after six months," he says. "We intend to stay in and keep punching." Soothing the bottom line are the fruit juices, ice-cream mix, and cream that accompany his milk into markets.
If it takes deep pockets to win the New York market, all Goldman's efforts could ultimately benefit another new player. John Labatt Ltd., a Canadian company best known for its beer, has been assembling a powerful milk empire in the Northeast. According to some estimates, it now controls some 40% of the market in New York City, 65% to 70% in northern New Jersey, and 90% to 95% in Philadelphia. It recently bought Tuscan Dairy Farms, Farmland's largest competitor in northern New Jersey. And it has acquired two of the five entrenched New York dairies, Dairylea and Queens Farms Dairy.
Predicts Pete Hardin of The Milkweed: "Farmland's battle to get into New York may prove to be only spring training compared to what lies ahead."