The Amazing Growth of U.S. Yogurt


The French eat a mind-boggling 72 pounds of yogurt per person per year on average. We in the United States eat nearly six times less than that. Despite that disparity in average consumption, in recent years this staple of western European diets has become one of the U.S. food industry's fastest-growing product categories. With this U.S. growth being driven largely by millennials (18-to-36-year-olds) with healthy living on their minds, it is also one of the most enviable food product categories to be involved in.

A global leader's U.S. gains
Of the publicly traded companies, the Paris-based Danone is the closest to being a yogurt pure play; about 55% of the company's sales come from fresh dairy products (almost entirely comprised of yogurt). Danone is the world's largest yogurt company, with the No. 1 market position in nearly every country in which it operates. In addition to its worldwide dominance, Danone -- parent company of the U.S.-based Dannon -- is also one of the best positioned companies to capitalize from this growing U.S. health trend toward higher yogurt consumption.

Since General Mills began selling its Yoplait brand in the 1970s, General Mills had been dominating the U.S. yogurt market. That dominance could still be seen as recently as 2011 when the company had a commanding 31.6% share of the market. However, seemingly caught by surprise by changing consumer tastes, General Mills very quickly found its market share dropping substantially. Today, Danone is the U.S. yogurt leader, with 27.8% of the market share, compared to General Mills' 25.8%.

Dannon Oikos. Source: Oikos

One of the reasons for such a large swing in market share away from General Mills is Danone's recent product entry into the U.S. Greek yogurt segment, Dannon Oikos. With $283.8 million in sales, Dannon Oikos became 2012's No. 1 selling new food and beverage brand launch. In 2010 less than 9% of U.S. households ate Greek yogurt. In 2012 that number soared to 47%. Today, the segment accounts for more than 40% of an estimated $7 billion overall U.S. yogurt market. Impeccable timing on the part of Danone.

Coffeehouse partnership
Danone has had many recent successes in the United States, but this is not a company content to simply leave it at that. In July it announced a partnership that will have Danone and Starbucks join forces in the U.S. To give Danone the opportunity to grow its U.S. market share even further and to allow Starbucks to expand its menu to include more food options, these two companies will develop, market, and sell co-branded yogurt products under Starbucks' Evolution Fresh brand.

The first of these products -- Evolution Fresh, Inspired by Dannon -- will be a ready-to-eat Greek yogurt distributed through Starbucks' U.S. stores beginning in spring 2014. Danone will be responsible for the U.S. grocery channel distribution, which will begin sometime in 2015. Global distribution by both Danone and Starbucks is also expected in select markets later, although no specific timetables for that initiative have been announced yet.

Stock market disconnect
Despite Danone's U.S. and worldwide dominance in yogurt, an extremely successful new product launch in the fast-growing Greek yogurt segment, and a partnership with a global coffee powerhouse, investors appear unwilling to give Danone the premium valuation it arguably deserves. Trading as high as 25 times forward earnings back in 2007 -- well before its recent dominance in the U.S. -- today Danone trades at just 17 times forward earnings. While its U.S. food industry peers have enjoyed great share price gains since the great recession, shares of Danone have lagged far behind due to persistent worries about its home market of Europe and most recently with baby formula issues in China.

Foolish bottom line
Worries about Europe and China are certainly justified, but those worries may be causing investors to miss out on the larger story being written on this side of the Atlantic. The United States is generally not described as an emerging market, but that is exactly what this country is when talking about yogurt, complete with an emerging-market type of growth. As worries about European consumers subside and Chinese problems are resolved, investors should become more receptive to this U.S. growth story and give Danone the premium valuation it had in the not-too-distant past.

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