Dannon Company, Inc., located in White Plains, NY, is a wholly owned subsidiary of Groupe Danone in Paris (French authorities consider it a “strategic” business and have created legal barriers to protect Danone from takeover). TV watchers have all seen the investment Dannon has made in their Activia Brand of yogurt, which, if taken in the right amount, purportedly helps one’s digestive system do its job (recall numerous ads with Jamie Lee Curtis as star- spokesperson).
It appears “scientifically proven” was a bit too much for regulators. Last week a $21M, mulit-state settlement was announced, and Dannon was enjoined from claiming health benefits for Activia that they cannot support. This follows 2010 settlement of a class action suit brought in 2008 which cost the company up to $45M plus $7-$10M in approved attorneys fees. We wonder, in light of these two settlements, what now of the Activia brand?
First, how important is this brand to Danone? In their 2009 financials as reported in a February 1, 2010 company press release, the “Fresh Dairy” line has more revenues than the other three business lines combined. Activia and the other yogurt products are located in “Fresh Dairy.” (Danone claims to be #1 in market share in this business group.) To give you a relative sense, Financial News reports Danone is considering selling one of its other business segments, "Waters," to a Japanese group for between 5B and 7B Euros. “Waters” is roughly one-third the size of “Fresh Dairy.”
The February 2010 press release discusses the economic outlook for 2010, but not the potential litigation outlook.
Sales of “Fresh Dairy” in the first quarter of 2010 were up over 7%. To be sure, these sales were flat in 2009, due to the worldwide recession, but this is nothing short of robust growth, and due, in part to their overall strategy of increasing volume and market share by developing NEW consumers (at the short-term cost of margin pressure). In the note to stockholders, there was no mention of the truth-in-advertising issues.
In mid-April of 2010, along with in its quarterly earnings announcement, Danone released a statement that it had stopped making health claims for its Activia yogurt and had dropped an attempt to get their alleged benefits recognized by European Union scientists. (This was as a result of European truth-in-labling/advertising actions.) For the first time, the Danone share price dropped as a direct result of this issue (by nearly 3%).
As there was little mention of the litigation claims in any of the press releases (we wondered why there wasn't an "all-hands-on-deck" approach to this, we took a closer look at what Dannon had to do or change as a result of the class action suits, as described in the order under “injunctive relief.”
1. Remove the words “clinically proven” or “scientifically proven” from its product labeling, packaging, commercials, etc., and substitute the words “clinical studies show.” (I am not making this up.)
2. Add to its FAQs a statement that Activia is a food product and not a treatment.
3. Place the scientific genus, species and strain of the bacteria used in Activia next to their registered trandemark Bifidus Regularis.
4. For their DanActive products, Danone had to remove the word “immunity” from labels, packages, etc.
5. They had to qualify claims that DanActive helps strengthen body defenses and helps the immune system with “when eaten regularly as part of a balanced diet and healthy lifestyle,” or similar language.
The class action and regulatory complaints were settled without admission of guilt, at a high cost of around $80M. But to the consumer, the label/advertising changes are insignificant (if not invisible), and Danone’s positioning will likely continue to be the same. Unless there are more specific brand-related legal issues in their future, the $80M can be considered as unfortunate additional expense, but longer term, valuation should be relatively unaffected.