Danone’s deal to acquire over 90% of US organic baby food firm Happy Family is a first for the French food giant in the category and appears to strengthen its fast-growing infant-nutrition division. Michelle Russell takes a look at the move.
Danone, the French food giant behind brands like Cow & Gate and Aptamil, revealed this May that has signed an agreement to buy over 90% of US organic baby food firm Happy Family.
The deal marks Danone’s entry into the US baby food market and – notably – into the country’s organic baby food category.
Set up in 2006, Happy Family is, Danone said, the fourth-largest player in the US baby food market. It has more than a 4% share of the US sector and generates gross sales of around $60m.
The company claims to have been a driver in the US baby food category’s growth over the past few years and it specialises in products made with premium organic ingredients, it says. Products include brown rice baby cereal, amaranth ratatouille and breakfast smoothies.
For Happy Family, the deal will allow it access to the expertise of a major international group, particularly for distribution and R&D. Founder and CEO Shazi Visram said the deal will allow it to further its goal of making its products more available and enable it to continue to innovate.
For Danone, the acquisition is in what it called an “innovative and fast-moving” segment of the baby food market and one which it is not yet in: organic.
Danone has seen solid growth from what it calls “baby nutrition”. It has has proved a boon for Danone while it works to revitalise parts of its fresh dairy business that are struggling. Danone’s yoghurt business in the US, for example, is buoyant but in its core markets for yoghurt, Europe, the company has had a challenging few quarters.
In 2012, Danone’s baby nutrition unit reported robust growth in all geographical markets, with sales up 11.6% to EUR4.26bn. The company got more than 20% of its total revenue from the division last year.
In the first quarter of 2013, Danone’s baby nutrition sales grew 17.1%, a key factor in its higher company-wide revenues year-on-year. On the firm’s earnings call, Danone CFO Pierre-Andre Terisse said its baby nutrition division had recorded a “truly exceptional performance”. Growth was primarily driven by milks, as well as trading up and demand for safety across Asia.
Terisse reiterated that the group’s priority for infant nutrition was to “strengthen our portfolio and … to be present across all segments”.
After the announcement of the Happy Family deal, Terisse’s comments at the publication of Danone’s first-quarter sales could be seen as a hint of its ambitions in organic baby food.
The acquisition of Happy Family is a relatively small one for Danone. The company did not disclose financial details but analysts have said the deal was likely to have been for US$250m-$300m, based on Happy Family’s gross sales last year of $60m.
For a company looking to extend its a financially healthy baby nutrition business, Happy Family looks a wise move. Analysts offer an optimistic view the acquisition, despite it being a relatively minor deal.
Kepler Cheuvreux analyst Jon Cox describes it as a “niche deal in a niche, interesting market”, while Natixis analyst Pierre Tegner says the acquisition is “good news” for the group in that it will “help rebalance Danone’s profile”.
“Happy Family sells organic products but does not make formula, only food, ready-made meals,” he comments. “This is a first step for Danone in the US baby food market, which we did not believe it was targeting. Happy Family is small, and is probably barely breaking even, especially as it is distributed across the country, mainly through organic food retailers. In sum, the acquisition is intended to give Danone a foothold in a growing niche segment.”
Indeed, while sales of baby food in the US declined by 1% in 2012 to around $6bn due to falling birth rates, sales of organic baby food continues to grow. Health concerns among parents have pushed sales up, according to Euromonitor.
“Parents are worried about the safety of food for their babies and are willing to spend more on organic baby food to avoid pesticides and other additives,” the research analysts note in a report Baby Food in the US.
According to the Organic Trade Association, the US sector organisation, the organic baby food category grew to $343m in 2011, up 15.9% on the prior year. It has not yet published 2012 figures.
Danone will encounter a familiar competitor in the US organic baby food sector in Nestle’s Gerber Organics brand. Hain Celestial is also present in the category, with Earth’s Best, while Campbell Soup Co.’s recent acquisition of Plum Organics gives the US soup maker the number two organic baby food brand in the country.
Felix Martin Garcia, executive vice president of Danone’s baby nutrition arm, says Danone will build on a Happy Family business model that has “proven its effectiveness” but plans to “step up” the development of the company and its brands. Whether this involves introducing the products to new markets, the company has not said.
The strongest positions for Danone’s infant nutrition division are in the Asia-Pacific region, which accounts for around 40% of its business.
However, analysts are sceptical the firm would choose this market for any potential launch.
“Happy Family does not make milk, so I do not think it is accurate to have ambitions for this brand in China,” says Tegner. “There is more probability they [will] think about developing organic baby food in mature markets (Europe) where the trends have been sluggish for the last four years.”
Cox offers a similar view. “China is the growth driver for infant formula. I don’t think they will look to expand out of the niche for the time being given the overall competitive dynamic in the market is very intense.”
For now, the plans will likely be about growing the brand and its product portfolio.
Maryellen Molyneaux, president of The Natural Marketing Institute, a consultancy looking at the “health and wellness” sector in the US, says she was surprised about the acquisition, given it is outside Danone’s areas of expertise, but suggests it was a strategic move.
“The brand – and note the name is Family not baby – is really about capturing consumers at birth and holding on to them. The products are not all for infants, they’re for toddlers certainly but I think there are plans there to grow that brand and grow it organically.”
For the final part of our management briefing, looking at the acquisition of Plum Organics by Campbell Soup Co., click here.