Danone Cuts Out the Cookies

By Sally McGrane / Paris

In the lobby of Groupe Danone's headquarters on the Boulevard Haussmann, the company's television ads from around the world play on a video monitor. In a Spanish ad, an attractive woman wearing a jogging bra sweats through her workout, then gulps a bottle of the company's Lanjaron water. This vision of radiant, healthy beauty seems a bit at odds with the packaged cookies tempting visitors at the reception desk. More delicious cookies are waiting in the conference room. But, says Laurent Sacchi, Danone's senior vice president of communications, eyeing one of the cookie packets, these are the last of the stock. "Once the sale goes through, I don't think you'll see these anymore," he says.

Danone, which had $19.6 billion in sales last year, is the world leader in yogurt and fresh-dairy sales and, with bottled-water brands like Evian and Volvic, No. 2 in the packaged-water industry, behind Nestle. Danone was also No. 2 in world cookie sales until July 3, when it sold its cookie division to Kraft Foods Inc. for $7.4 billion. Six days later, Danone bought Royal Numico, a Dutch company that makes hospital meals and baby food, for $17.2 billion.

Cookies for baby food. CEO Franck Riboud says "the new Danone" will be "the most beautiful food platform you can imagine." Danone's cookie divestiture completed a transformation that has given the former conglomerate a clear focus. To get there, the company has undergone a radical change. In 1996 Danone was selling beer, glass, frozen food, pasta sauces, candies, Italian cheese, cookies, dairy products and water. Riboud, who took over the business from his famous industrialist father Antoine that year (the family controls less than 0.5% of the shares), decided in 1997 to refocus the company, which began its conglomerate life as a glassmaker called BSN in 1966. "We used to say that the mission of the company was to bring health through food to the maximum number of people," he explains. Thanks to Numico's baby-food and clinical-nutrition divisions, "now we can add to that mission 'from the beginning of your life to the end of your life,'" he says.

In its transformation, Danone began selling off businesses like Kronenbourg beer and by 2003 had narrowed its activities to fresh dairy products, bottled water--and cookies. "In a long history of disposals, this we suspect was the final major divestment that leaves Danone fully focused on the growing health-oriented markets," says Charlie Mills, an analyst at Credit Suisse, of the July sale of the cookie business, which included household names like LU and Prince and made up 15.6% of the company's total sales.

It's a laudable mission, but will the shareholders grow fatter from it? "We were born with this health positioning. With the new Danone, I think we can say that 98% of total sales will be functional health and nutrition. It's very different from the competitors," says Riboud, 51, a skier and windsurfer.

But consumers have always talked healthier than they have eaten, and they have traditionally shown some resistance to the premiums they have had to pay for "healthy." And haven't snack-food companies like Pepsico proved that you can have it both ways: indulgent treats and "healthy" snacks, each commanding fat profit margins? Pepsi's Frito Lay North America division had 24% operating margins last year, easily exceeding Danone's 14% ops margins on fresh dairy products.

To Kraft CEO Irene Rosenfeld, whose company makes such hardly wholesome fare as bacon, macaroni and cheese, and frozen pizza, the opportunity to buy Danone's cookie business was too tempting to resist. "It will increase our presence in snacks--our fastest-growing global segment--and transform our international business," she says.

With its purchase of Numico, which Mills criticizes as too expensive, Danone is betting that demand for healthy food is going to outpace consumers' desire for another chocolate-chip cookie. "We were more and more convinced that due to health issues, long-term-speaking, cookies were going to be in trouble," says Sacchi. He cites increasing health awareness, increasing government regulation, increasing focus on disease prevention, the changing needs of aging populations, particularly in Western Europe, which accounts for 40% of Danone's sales, and the spread of diet-related health problems as factors. "In some countries," says Sacchi, "obesity will be the new tobacco." That could well be the case in the U.S., where soda and snack companies have been targeted by consumer activists and sued for harming children's health.

The real issue is growth. The increase in cookie sales worldwide topped out at 3.1% in 2006. "There are cookies in every household in France," says Sacchi. "The only way to grow is to make every household eat more and more every year." Or grab more market share, which is often difficult and expensive. By contrast, Danone's fresh-dairy-product line (yogurt and milk-based desserts) grew 9.2% last year, with growth as high as 20% in Argentina, Mexico and Brazil, and 35% in Russia. Bottled water showed similarly high growth, at 14.8% in 2006. Numico grew nearly 12% last year.

Danone has been one of the few companies to create "active" foods like yogurt touted as having health benefits thanks to the addition of patented probiotic bacteria. Activia, a yogurt with a strain of Bifidus bacteria, marketed as aiding digestion and eliminating bloating, accounts for $1.8 billion in sales worldwide.

The yogurt, on the European market since 1987, sold $130 million in its first year on the U.S. market, 2006--a breakout hit in a country where people don't eat that much yogurt and are more accustomed to treating health problems by popping a pill than changing their diet. Actimel, sold in the U.S. as DanActive, which claims to strengthen the body's natural defense system with Lactobacillus casei, has sales of more than $1.4 billion.

Danone is tailoring the active blueprint by mapping diet deficiencies by region and designing products accordingly. Danonino, a yogurt product for children, is enriched with vitamin A and zinc in Brazil, calcium and vitamin D in Poland, and iron and vitamin C in Mexico. "People are ready to pay a bit more" for a product that does something for their health, says Sacchi, who contends that the active health brands still carry mainstream prices.

Defining exactly what a good-for-you product is--or what the market for these products might be--isn't a science. "You could make the market look as wide or as narrow as you want. The definitions are pretty loose," says Bob Goldin, executive vice president of Technomic, a food-industry research and consulting firm. "'Healthy' is very subjective," says Michelle Barry, senior vice president for consumer trends at the Hartman Group, a health-market consulting and research firm. "Consumers talk about it differently depending on who they are and what they believe." Danone is sensitive to this. The French believe prunes help digestion, so Activia comes in prune flavor in France; the Chinese associate cucumbers with regularity, so in China it's cucumber-flavored. But Danone also insists its health claims are based on hard science. The company has founded 16 "Danone Institutes" to study nutrition. It filed 30 health-related patents last year and maintains a "bio bank" with 3,000 strains of bacteria for research.

Since the Numico purchase, Danone's stock has fallen slightly, as investors digest the huge price, but Danone is convinced that trading cookies for clinical nutrition will make shareholders feel better in the long run. "At the end of the day, the new Danone is one of the best things we can imagine for the future," says Riboud. Replacing the unopened package of cookies on the table, Sacchi mentions that in Europe, Danone has just launched something called Essensis, a yogurt that he claims is good for your skin. What's next--yogurt that makes your hair grow? "Nobody would have bet that a yogurt made to help you go to the toilet more often would be a success," he says with a shrug. Just try doing that with a cookie.