How Danone Turns Bacteria into Bucks

Sophisticated R&D helps the yogurt maker find new microbesand sell the health benefits to consumers

Viewed under a microscope, Bifidus animalis DN-173010 looks like a plump, slightly misshapen jelly bean. But when this bacterium gets into your digestive tract, it is one tough customer. Passing through the stomach, it survives a bath in gastric acid strong enough to corrode metal. Then it moves into the intestine, teaming up with other microorganisms to push fecal matter through the colon.

That may be more than you wanted to know. But this patented bug is making millions for Paris food company Groupe Danone (GDNNY ). It's the key ingredient in Activia, a yogurt Danone is marketing as an aid to regularity. Activia posted nearly $2 billion in worldwide sales last year, up 30%. Analysts say its introduction in the U.S. in 2006 through the company's Dannon division was one of the most successful product launches in recent food-industry history, with sales expected to reach $300 million this year.

Activia exemplifies what Danone may do better than any other company in the world: turn bacteria into bucks. By using sophisticated science to identify microbes that can make people feel better and maybe even look better, Danone has become a leader in the fast-growing business of functional foods. And it has far outpaced competitors in persuading consumers to buy food enhanced with these bugs.

"What Danone has done is base these [products] on science and clinical studies," says Gregor Reid, a microbiologist at the University of Western Ontario. "That is what pharmaceutical companies do, but it's very unusual for a food company, because profit margins are much lower."

The headquarters of Danone's bacteria research is an airy glass-and-wood building in the countryside southwest of Paris. There Danone has amassed a trove of 3,500 deep-frozen bacteria cultures. The collection started in the 1950s, when Danone employees started bringing back dairy products from their travels worldwide and swapping samples with university labs. The original goal was to identify new bacteria strains that would produce tastier yogurt.

Until recently most of the bacteria had received only cursory analysis. Activia's Bifidus bug, for example, sat for more than a decade before researchers discovered that it helped ease constipation. But now, armed with a new generation of gene-sequencing equipment that can map a bacterium's DNA in three days, a team of 100 researchers is scouring the collection for potential blockbusters. "The more we look, the more we are finding health benefits," says Gérard Denariaz, a Danone microbiologist who oversees the effort.


One such discovery, Lactobacillus casei DN-114001, appeared to give the immune system a boost in clinical trials. It's an ingredient in a yogurt drink introduced in the U.S. this year under the brand name DanActive. In France, the company last year unveiled Essensis, a drinkable yogurt the company claims can "nourish" the skin. Other bacteria show potential for dampening inflammation and fighting obesity, Denariaz says.

Danone devotes about $240 million annually, or 1.2% of revenues, to R&D. Once the company's scientists believe they have a potentially profitable strain, Danone goes through painstaking efforts to test the new bacteria on humans. The company has sponsored more than 20 clinical tests on yogurts containing healthy bacteria, following protocols similar to those used in drug trials. In a recent study, researchers followed 4,000 people who drank the immunity-boosting yogurt Actimel daily for six months in 150 locations worldwide.

One goal of the health studies is to provide Danone with ammunition to defend its products before European Union regulators, who are imposing tougher rules on food companies making health claims for their products. (The Food & Drug Administration generally doesn't require food companies to substantiate such claims.) But impressing regulators is not the only reason Danone conducts such elaborate trials. It has turned science into an effective promotional tool, detailing research on its Web site and sending data packets to doctors. Rivals such as General Mills' Yoplait have published just a few studies on the probiotic yogurts (those containing healthy bacteria) they sell. Switzerland's Nestlé discontinued a probiotic yogurt it launched in the late 1990s. "If you commercialize your science in the right way, you own the market, and that's what Danone has done," says Julian Mellentin, executive director of London's Centre for Food & Health Studies.

It's no secret why Danone is devoting so much energy to bacteria. Those little bugs command top prices. A standard four-serving pack of Activia, for example, sells in most countries for more than $3, about twice the price of conventional brand-name yogurts. With probiotic yogurts accounting for almost a third of its $20 billion sales, Danone is poised for 8.7% annual growth over the next three years, outpacing larger rivals such as Nestlé (NSRGY ), with 5.9% growth, and Unilever, with 4.2% growth, says Andrew Wood, an analyst with Sanford C. Bernstein & Co. (AB )

Many American merchants predicted that Activia would be a failure. Juan Carlos Dalto, who heads Danone's North American division, recalls that an executive at one major U.S. retail chain asked: "Are you really sure you want to put small cups with billions of bacteria on our food shelves?" In a bow to American sensitivities, Activia ads refer only obliquely to intestinal functions, using terms such as "discomfort" and "natural regularity."

The plan worked. Says Michelle Barry, a marketing consultant that advised the company on Activia's U.S. launch: "They got the message across without grossing consumers out."


Hope You're Hungry

In a broad evaluation of nutraceutical health claims published in February, 2007, Consumer Reports notes that some of the new generation of functional foods are impractical. It takes 10 cups of omega-3 enhanced spaghetti, for instance, to get the same dose of heart-protective omega-3 as you would get in two servings of fish.

More Bacteria Benefits

In its November, 2007, edition, the scientific journal Nutrition Reviews summarizes a growing body of research on the benefits of "good" bacteria. Besides aiding digestion, these microorganisms appear to reinforce the immune system, dampen allergic reactions, and even enhance bone density. The 11 co-authors are scientists in the U.S., Canada, and Europe.

By Carol Matlack

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