By Dominique Vidalon
PARIS (Reuters) - French food group Danone faces a European ruling on health benefit claims it makes on two of its best-selling yoghurts Activia and Actimel that could be a boon or a blow to its image and its shares.
The outcome of the European Food Safety Authority review is important for the world's largest yoghurt maker because its strategy focuses on well differentiated dairy brands with a "good for you" proposition, sold often at a higher price.
It is being watched closely as validation of Danone's (DANO.PA) claims would be a strong marketing tool and prompt a re-rating of a stock, which has lagged its European sector this year.
Rejection, if coupled with negative media coverage, could ultimately force Danone to rejig the growth model of its dairy business, which made up almost 60 percent of the group's sales of around 15 billion euros in 2009.
"A positive opinion would give Danone a competitive edge on others and would justify a premium over the current share price," said Aurel BGC analyst Jean-Marie Lhome.
Danone shares have gained 1.6 percent this year to trade at around 44 euros, or a market capitalisation of 28 billion euros, to underperformed the 7 percent gain for the European Food and Beverage sector index .SX3P.
Danone trades near parity with key European rival Nestle (NESN.VX) at 16.6 times estimated 2010 earnings versus 16.8. It commands a premium over Unilever's (ULVR.L) (UNc.AS) 14.9 times.
Activia, a yoghurt that claims to aid digestion, and Actimel, a dairy drink said to help strengthen the body's defences, had combined 2009 sales of 3.7 billion euros.
This is 43 percent of the sales of the fresh dairy division and 25 percent of global revenue.
Last year, the key Activia, Actimel, Danonino and Danacol brands grew faster than the average of the dairy division.
Agnes Berthet-D'Anthonay, a spokeswoman for Danone, told Reuters the company expects to hear from the EFSA on the Activia and Actimel dossiers "between April and June".
Activia makes 36 percent and Actimel 52 percent of its sales in the European Union, the market affected by the decision.
HEALTH CLAIM CONCERNS
Recently, several brokers voiced concern the EFSA might reject Danone's health claims, saying the group's management was becoming more cautious in its comments on the issue.
"With Danone's core business in fresh dairy substantially outgrowing its peers through compelling label claims, we are increasingly concerned that neither blockbuster Activia or Actimel/Danactive might be obtaining EFSA approval in the coming months," said brokers Jefferies International in a note.
The EFSA is reviewing thousands of health claims for food products in the EU under a 2006 law aimed at ensuring these claims are backed by adequate scientific evidence. Its opinions are then used by the Commission, which makes the final ruling.
The global food industry has been increasingly using health claims as a marketing tool. But authorities on both sides of the Atlantic have also been raising the bar on these claims.
Earlier this month, U.S. health regulators warned units of Nestle and over a dozen other foodmakers about overstating or misstating the nutritional value of baby food and other products on their labels.
For Danone, the EFSA review process has not been a smooth road. In April 2009, it withdrew its applications regarding Activia and Actimel as there was confusion about what data the EFSA needed. Danone filed new applications covering the two products late last year and early this year.
One positive for Danone is that the EFSA last July endorsed its claim that Danacol yoghurt drink helps reduce cholesterol.
But then last month the same body said Danone did not have sufficient evidence to justify its claim that Immunofortis, an ingredient it puts in baby formula products, strengthens a baby's immune system.
"We were rather surprised. It was ten years of research. The case was solid and remains solid," Berthet-D'Anthonay said.
Danone has yet to re-submit a claim on Immunofortis.
Investors largely dismissed the negative opinion on Immunofortis as it concerned products making less than 1 percent of Danone's sales. But rejection of claims on the Activia and Actimel blockbusters might be a different story.
"A lot hinges on what the media will read into it. If they take the stance that this (a negative opinion) proves they are ripping off consumers, this will hit their image," said Oddo Securities analyst Pierre Tegner.
Longer-term, Danone may have a harder time differentiating its products on health grounds and the premium it can charge.
"This could accelerate Danone's exit from a niche positioning mainly based on "functional" food. They may seek a more global growth model using a taste, pleasure and quality at a fair price proposition," Tegner added.
The issue is not such a headache for Europe's two other big food giants Nestle and Unilever as they are not awaiting EFSA approval of health claims on significant products.
Nestle, the world's biggest food group, has a number of products carrying health claims that EFSA has ratified which relate mainly to minerals and vitamins such as in dairy products, while Unilever has EFSA approval for its pro-Activ cholesterol-lowering products.
Reporting by Dominique Vidalon; Edited by David Jones
Reuters UK
