Yogurt Nation

By Coco Masters

It wasn't the spider that scared Miss Muffet--it was that stuff in her bowl. White, clumpy, sour, often runny, yogurt did not inspire children to plead with their mothers at the supermarket. Nor did it get much closer to American mouths than arm's length, from which those mothers could read the list of ingredients to be reminded that yogurt is animated by at least two types of live bacteria: Lactobacillus bulgaricus and Streptococcus thermophilus. Pudding, anyone? Aisle 3.

But since the 1970s, yogurt has emerged from its former sour self into the lid-lickable treat that helps us lose weight, feel better about being parents and indulge without guilt. The brand we buy might even improve our digestion and the environment simultaneously. Try that with prune juice.

Unlike nearly every other grocery product, yogurt has charged ahead, having grown 10% annually for the past three decades, meaning that consumption has doubled every 7.2 years. What's the appeal? Like spackle for the diet, marketed to the soul, it increasingly fills the holes in our nutritional and daily eating habits. Yogurt is shape-shifting into ever more unlikely forms and flavors--squeezable, drinkable, chai, cappuccino and black currant--while nailing three major food trends: convenience, portion control and health. "Give it a few more generations, and this could be the No. 1 food," says Harry Balzer, vice president of the NPD Group, a firm that tracks America's eating habits. "This is where the country is heading."

And it's being led by kids, who, having picked up the habit from Mom, are taking it with them as they grow up--the way boomers did soda for breakfast. In the driver's seat is the French brand Yoplait, which has gone from $3 million in sales to more than $1.1 billion since General Mills acquired the U.S. licensing rights to the brand in 1977. Over 10 years, Yoplait, with sister brand Colombo, has jumped from 23% of the $3 billion U.S. yogurt market to about 38%. A powerhouse for General Mills, based in Minneapolis, Minn., Yoplait is rivaled only by the cereal unit (22% of Big G's $11 billion in sales, with such brands as Cheerios and Cocoa Puffs), but yogurt is growing faster. Sales of Yoplait's Whips! line alone are up 30% and will exceed $100 million this year.

Paris-based Groupe Danone's Dannon, with 29% of the market, is leading the charge in the even hotter probiotic segment, the part of the yogurt category that uses bacterial cultures for specific health benefits. Dannon's Activia, launched in January, is the first yogurt in the U.S. to use probiotics via a trademarked culture, Bifidus Regularis, which aids digestion after two weeks of regular use, according to studies conducted by Dannon. (Oh, Dannon vs. Danone? The yogurt brand was Americanized when it arrived here.) On the organic side, Stonyfield Farm, in which Groupe Danone holds a majority stake, has run out of cows before it has run out of customers. Stonyfield is the third largest player in the category, with 90% of the $155 million organics segment and 6% of overall yogurt sales, but it has been forced to scramble to find more organic milk as sales outrun its supply.

The category, like the yogurt, has not always been smooth and palatable. A maverick, yogurt rode with the Mongol horde, flourished in the Caucasus Mountains of Russia and has been cultured by generations around the globe. Then pale, viscous and teeming with live bacteria, it arrived from the fringes into the fridges of health nuts. When Yoplait Original appeared on shelves in 1977, "you had to be a committed health-food person to eat it," says General Mills CEO Steve Sanger. Yoplait had to convince Americans that they would love its signature creamy texture, but it also had to keep its marketing from diving too deeply into the froufrou. Mills positioned Yoplait's brand, with a wink and a nod, around French culture and used marketing techniques equally foreign to the early '80s such as hot-air balloons and vans parked at marathons for tastings. "'Real Americans,' guys like Jack Klugman and Tommy Lasorda, would eat this stuff with a skeptical look and then burst into French extolling its virtues," recalls Sanger. "It got the point across."

But in the mid-1980s, General Mills realized that the real Americans eating their yogurt from those slim, tapered cups were women in their 20s and 30s. A low-fat version of the Original followed in 1987. Sales soured in the early 1990s as yogurt struggled to define itself as an everyday snack and dessert, although many consumers saw it more as just a diet food. Eventually, consumer tastes caught up with yogurt's image, and a growing concern for fitness turned yogurt into what Sanger calls "a lifestyle badge."

Life has been sweet ever since. Retailers such as Whole Foods Market have seen yogurt's shelf space nearly triple, with more than 40% sales growth over the past five years, the result of increased demand for cups, quarts, drinkables and everything from thick, Greek-style yogurt to water-buffalo-milk, goat's-milk and soy-milk varieties. Last year 3 out of 4 U.S. households spooned, drank and squeezed billions of dollars' worth of yogurt, an average of 5 lbs. per person--a paltry amount compared with the 40 lbs. the average Frenchman consumes.

To Yoplait, less is more. "The buying rate and household penetration are low, about 46%, [but] the mix of people eating yogurt will be widespread," says Robert Waldron, Yoplait division president. Yoplait's foray into the kid category with Go-Gurt in 1998 may have seeded generations of growth. Moms in the suburbs outside Minneapolis were among the first to toss the 2.25-oz. tubes full of such flavors as Strawberry Splash to children who, sans spoons, squeezed it on the go. Five years later, kids ages 8 to 12 were choosing yogurt as a snack 8 1/2 times as often as in 1998. Among adult consumers, 70% are women and 30% men, while boys and girls eat about equal amounts, a shift that bodes well for yogurt's future.

Food-marketing expert Balzer says yogurt's appeal is its convenience. "Yogurt has this wonderful halo of health, but the ease is what drives the category. In the mid-'80s, pizza was the food of the day. Today it's yogurt," he says. "Clearly it's a structural change in the way we're eating." Yoplait's goal, says Waldron, is to get yogurt into more meals and snacks during the day, on more days of the week.

Yet the category's growth is also being propelled by studies that suggest the nutritional benefits of eating dairy products as part of a low-calorie diet. And yogurt, as a predigested, cultured dairy product, can be an alternative source of calcium for people who are lactose intolerant. Nonfat and low-fat dairy foods contain seven nutrients of which American diets generally fall short: calcium, potassium, fiber, magnesium and vitamins A, C and E. Three servings of yogurt daily help prevent osteoporosis and contribute to weight loss. Of course, not every yogurt product is as healthy as its image. An average 6-oz. cup can have as many as five teaspoons of sugar--about 80 calories--the same amount as in a 1.5-oz. Hershey's milk-chocolate bar. And artificial sweeteners such as aspartame are the subject of vigorous debate as more studies investigate potential health risks.

Dannon believes that healthy yogurt can fit comfortably under the convenience umbrella, and it is spending $60 million in advertising to educate consumers about the health and digestive benefits of probiotics--and make them more aware of Dannon's Activia and probiotic drink DanActive. Dairy groups in Europe, where probiotics are well established, see the segment as a major driver of growth over the next few years. "Yoplait will understand the success of Activia and follow soon," says Dannon CEO Juan Carlos Dalto. It's not every CEO who invites competition, but here's his logic: "You don't need only one company doing the job--you need the two or three leading brands."

That includes Gary Hirshberg, the "C-E-Yo" of Stonyfield Farm, based in Londonderry, N.H., whose seven-cow farm has since 1983 become a company with $211 million in sales. Stonyfield Farm has tripled sales in five years, helped no doubt by Groupe Danone's distribution muscle. The French company completed its purchase of 85% of the firm in 2003.

Hirshberg's passion for organics as a way to health and a better environment led him to start the company. Now he can't keep pace with the trend. "Organic demand has gone absolutely bonkers," he says. To keep up, Groupe Danone recently approved $66 million over three years for Stonyfield to expand its New Hampshire plant, built for $592,500 in 1989.

Organic-yogurt sales are limited only by the growth in organic-milk production, which is climbing 20% to 30% annually. "It's the 10,000-lb. cow in my life," says Hirshberg. To find enough organic milk, Stonyfield Farm subsidizes farmers as they convert to organic production and offers price guarantees on the milk it buys. "Conventional-milk pricing has fallen to levels not seen since the 1970s," says Hirshberg. "It's a disastrous situation for farmers with a cost structure based on 2006 energy costs." The only silver lining, he says, is that it has helped some dairy farmers recognize that organic is the way to go. But many are daunted by the time it takes to switch to organic production: three years for a farm and one year for a cow.

So Hirshberg is looking for other options abroad, including buying organic-milk powder from a co-op of 35 family farms in New Zealand to reconstitute in limited amounts for Stonyfield products. He is discussing ways to finance the changes with his prospective partners. Hirshberg has also persuaded Danone managers in four European countries to move into organic products this year, and he expects 11 more countries to follow in 2007, assuming they can find the cows. He hopes demand from Europe will stimulate the supply of organic milk here and abroad.

But where does that leave Yoplait, which thus far has sat on the sidelines of the organic and probiotics trends? Analysts say it could buy its way in. The obvious target would be Horizon, the No. 2 brand in organic dairy products. But Waldron appears content to enjoy Yoplait's spot as the nation's No. 1 brand. He would say only that he is watching for the day when "emerging yogurt segments will have more mass appeal."

Until then, General Mills is finding new ways to ride the growth wave. Its cereal division has Yogurt Burst Cheerios, which means you can expect Kellogg's to respond with Yogurt Froot Loops, perhaps? The other yogurt brands, meanwhile, are too busy restocking grocery shelves to worry about rivals. "We can make this category explode even more," says Dannon CEO Dalto. "Then we can fight for market share."