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Big dairy companies take plant-based alternatives beyond soymilk

Major food companies are expanding plant-based dairy alternatives beyond milk, providing a source of fast expansion in an otherwise low-growth grocery market.

Plant-based products that imitate animal milk have been gaining ground for years. But major food companies, including powerhouse producers of traditional dairy products, are now devoting resources to plant-based alternatives that mimic cultured dairy products, including yogurt and sour cream.

By dollar amount, sales of plant-based dairy alternatives remain below totals for their dairy-based counterparts. But large food companies are increasing their ranges of plant-based products to add more high-growth items to their portfolios, said Michele Simon, executive director at the Plant Based Foods Association, which advocates for around 132 companies that produce food products that use plant-based ingredients in place of animal-based ones.

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Categories such as yogurt, where U.S. sales rose 55% to $162 million during the year ended June 2018, are particularly attractive to food companies who are coping with grocery sales that hover around flat, Simon said. "This is definitely a growing category," the executive director added.

Other high-growth areas within dairy alternatives include ice cream, a category where sales grew 38% to $222 million over the same period. Plant-based milk, meanwhile, grew at 9% to $1.6 billion.

A variety of plant-based alternatives to animal products have attracted investment in recent years: Beyond dairy, Unilever PLC said in December that it would acquire Netherlands-based The Vegetarian Butcher B.V., which produces meat-free burgers and hot dogs. Meanwhile, executives at both Tyson Foods Inc. and Nestlé SA have said that they plan to launch new vegan-friendly products in the coming quarters.

Building with bacteria

Paris-based Danone has debuted new plant-based products around the world in recent months, including a yogurt under the Good Plants label in the U.S., Chairman and CEO Emmanuel Faber told an audience at the Consumer Analyst Group of New York in February. Plant-based beverages and yogurt sales grew 8% globally between 2015 and 2017, Faber said, citing figures from Euromonitor.

Danone's whole-company sales for the company's 2018 fiscal year fell 0.7% to €24.65 billion. The company plans to triple sales of its plant-based products to €5 billion by 2025.

Customers in the U.S. and Europe want to buy more fermented food products, with many citing the health benefits of probiotics, Faber said. Meeting that demand, in turn, has pushed the company to consider using new kinds of bacteria to create new products, including plant-based yogurts.

Danone has a bank of about 4,000 different kinds of bacteria that it can apply to plant proteins, potentially giving the company access to "an incredibly rich amount of solutions, textures, cultures, tastes, et cetera, for the future," the CEO said.

Boulder, Colo.-based Good Karma Foods Inc., in which dairy producer Dean Foods Co. owns a majority stake, said in February that it would start selling plant-based sour cream as well as ranch- and onion-flavored snack dips. But combining specific bacteria with plant proteins to make products that resemble traditional fermented dairy products takes time and resources, said Doug Radi, CEO of Good Karma Foods Inc.

Developing dairy products with a texture and flavor that mimics items made from real dairy involves experimenting with different bacteria cultures, Radi said. Still, Good Karma took "well less than a year" to develop its latest line of products, the CEO said.

"When you're inventing something that doesn't exist, it presents a lot more challenges ... than the umpteenth version of something," Radi said.

Room to grow as traditional dairy loses ground

Dean announced its majority stake in Good Karma in July 2018, a move that took it back into plant-based dairy after its May 2013 spinoff of WhiteWave Foods, the maker of Silk soymilk and other plant-based dairy alternatives that is now part of Danone.

While its sales are small compared to Dean's mainstay dairy milk business, Dean is counting on Good Karma for wider margins than traditional milk alone can provide, CEO and Director Ralph Scozzafava said in August 2018, after Dean announced its majority stake in Good Karma. Dean's core fluid milk business, which accounts for about two-thirds of its revenue, has suffered declines in sales volumes in recent years, and the company said in February that it was considering strategic alternatives for itself, including a sale.

Plant-based dairy alternatives have traditionally been common in health food stores, Good Karma's Radi said, but a key avenue of growth for the products is in the aisles of more mainstream retailers.

"We're barely a third penetrated in the conventional grocery channel," Radi added, noting that Good Karma has "hardly any presence" in convenience stores, drug stores and wholesale clubs.

The expansion of plant-based options comes as the U.S. Food and Drug Administration, or FDA, is reviewing how terms like "milk" and "cheese" should be used. In the months leading to January, the FDA collected comments on whether such terms should be allowed to describe plant-based foods. The Administration has yet to initiate a rulemaking process.

Proponents of plant-based foods, including the Plant Based Foods Association, argue that restricting the use of terms like "milk" to dairy products would force manufacturers to make costly changes to their packaging and potentially constitute a violation of free speech under the U.S. constitution's first amendment. Advocates of tying the terms to dairy products, including the International Dairy Foods Association, argue that continuing to apply the names to plant-based foods will confuse customers and mislead them about the nutritional value of plant-based items.

The name issue highlights one of the challenges of growing the plant-based food business, the association's Simon said. While plenty of investors are interested in putting money behind a rare high-growth sector of the food business, fewer are familiar with the regulatory hurdles that new products — and new categories of products — must negotiate.

"It's just so many more times complicated than tech," Simon said.