London, Oct. 6 - In the 1900s, a Russian biologist theorized that Bulgarian peasants lived longer because of their yogurt consumption. A century later, the sales pitch for what has become a staple of supermarket shelves borrows from that sentiment.
Now, its U.S. consumers that Groupe Danone, the world's largest maker of dairy products, must win over to yogurt's health benefits.
It's not an easy task, considering they eat an average 130 pounds of potatoes a year compared to 7.2 pounds of the curdled-milk stuff. In France, Danone's home turf, the average yearly consumption of yogurt is 49.1 pounds.
Factor in the sheer size of the U.S. territory, the cost of TV advertising and the initial reluctance of supermarkets to make room for yogurt on their shelves, and it becomes clear why Danone's progress there has been spoon-sized.
In fact, U.S. yogurt consumption lags so far behind that of other developed countries that America actually qualifies as an emerging market for Danone (DA) .
To conquer this market, the group has a multi-pronged strategy of reworking tried-and-tested products from mature markets, promoting the health benefits of its yogurts and targeting niches such as the Hispanic community. It's also cranking up production capacity.
The rewards could be enormous. From $300 million in 1980, the U.S. market has grown to $3.5 billion in 2005. Over the past three years, it has increased by 7% to 9% annually. That compares with no growth in France's market for dairy products this year.
"The payout in the U.S. is very good because you get big businesses," said Juan Carlos Dalto, chief executive of the Dannon Co, Groupe Danone's U.S. subsidiary.
"But this is a very expensive country. It's not only about the distances, but about the cost of the communications, of the TV mainly, of the advertising," he said.
Stirring things up with Activia
Danone is no newcomer to the U.S., where it first set up shop in 1942 after company founder Isaac Carasso immigrated there during WWII. Through the introduction of pots with fruit on the bottom to the launch of blended and low-fat goods, it's built a solid business.
But it's only recently that the group has decided to make a major U.S. market push, notably with the introduction of its Activia yogurt, a product that Danone says that promotes digestive health.
Launched in the U.S. in 2005 in a $60 million advertising and promotion campaign, Activia raked in $130 million in sales in the first year. Already commercialized in Europe, the product was adapted to the U.S. market. In particular, its fat content was cut to less than 2% so it could classify as low fat under Food and Drug Administration rules.
Dalto said Dannon had to be generous in its spending to promote Activia in the U.S. The product represented a new approach to yogurt, and its health benefit in regulating digestion had to be clearly communicated. Activia contains natural live bacteria that keep the gut healthy.
"We needed to reassure consumers that on top of the benefits... it remains as tasty as other yogurts," he said. "If you put this kind of product on the shelves and don't advertise it, most probably you will not sell."
The gut's good, so what's next?
With the Activia brand making headway, Dannon is already looking for the new, new thing. Innovation is a key driver of market expansion in the U.S.
Danone has found success in exporting already established European products to the U.S., but it is keenly aware of the need to tailor for American tastes. So it's developing its own brands through a local R&D center in Texas.
Crave Control is an example of such innovation. It's a dairy snack that's high in protein and fiber, but low in calories. It pledges to satisfy even the hungriest calorie counters.
Dannon has also established a team to target America's 40 million-plus Hispanic community, with its own unique eating and buying habits.
"It's a big segment and has evidently different patterns of consumption and they require fine-tuned attention," said Dalto. "One day, we may think of products that are only marketed to Hispanics."
Smaller rival Johanna Foods has made major inroads into the Hispanic community with its La Yogurt brand. Thanks to its Sabor Latino line, with flavors like guava and mango, Johanna has seen sales increase from $34 million to $38 million in three years, according to consumer research group Mintel.
Dannon has already adapted some of its marketing, with advertising spots for Activia aimed at the Hispanic community and aired on Latino TV channels and featuring Hispanic actors.
'Functional foods' find favor
Dannon will also continue to look to more mature markets in Europe for inspiration. There, other brands, such as Actimel and Danacol, have met with resounding success. Danacol helps keep cholesterol under control. Actimel promotes immunity, Danone says.
Along with Activia, these "functional foods" are Danone's specialty. Bear Stearns analysts estimate that the group derives 52% of sales from genuinely health-boosting products.
It's also the market segment expected to see the most growth in the next few years.
The U.S. is a key market for Danone because growth is slowing in other parts of the world.
"We now estimate that two thirds of group growth and margin expansion will come from the non-Western European portion, or 41%, in the future," Bear Stearns said.
The so-called 'frontier countries,' which include the U.S., China, Russia and Mexico, are the key drivers of growth and accounted for 11% of sales in 1999, but generated 25% of group revenue by 2005, according to the broker.
In the U.S., Danone's main competitor is General Mills' (GIS) Yoplait, a West-coast staple. Yoplait had a 38% market share in 2005 thanks to brands like Yoplait Original, Yoplait Light and Yoplait Gogurt, according to Mintel.
In comparison, Danone boasted a 31% share of the U.S. market, far ahead of smaller rivals such as CoolBrands, which sells yogurt under the Breyers label.
Dannon remains stronger in the East, where it was first launched, while Yoplait dominates the market on the West coast.
But the pattern could change.
"We're making huge investments in brands and advertising, but we're also making huge investments in our infrastructure and significantly increasing our capacity in the plants that we have," said Dalto. The headquarters is in White Plains, N.Y., with manufacturing facilities in Ohio, Texas and Utah.
"We're completely changing the size our business at all levels."