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1 Sample provided by Research enquiries: Liz Hague, Sales Manager tel: +44 (0) US toll-free: fax: +44 (0)

2 CONTENTS Brief definition 5 Executive summary 5 Introduction 8 Functional dairy drinks market analysis 11 Table 1 Functional dairy drinks volume sales in million litres, Table 2 Functional dairy drinks volume growth, Table 3 Functional dairy drinks volume sales in million units, Table 4 Functional dairy drinks per person consumption in units, Chart 5 Functional dairy drinks regional volume shares, Chart 6 Functional dairy drinks predicted regional volume shares, Table 7 Functional dairy drinks market value in million Euros, Table 8 Functional dairy drinks value growth, Table 9 Functional dairy drinks price per litre in Euros, Chart 10 Functional dairy drinks regional value shares, Chart 11 Functional dairy drinks predicted regional value shares, Category origins 18 The Yakult story 18 Yakult today 19 Table 12 Yakult product portfolio 21 Table 13 Yakult Honsha Co. Ltd timeline 23 Dairy: inherently functional 25 What causes osteoporosis? 25 Who is most at risk? 25 Ageing population: further statistics 27 Table 14 Nutritional properties of dairy 28 Profitability of dairy 28 Dairy: added functional 29 Typical functional ingredients and their benefits 29 Probiotics 29 Prebiotics 30 Plant sterols 31 Zenith International Ltd

3 Omega-3 32 Emerging ingredients 34 Green tea catechins 34 Co-enzyme Q10 35 Aloe vera 36 Glucosamine 36 Chondroitin 37 Whey protein 38 Functional growth areas stretching category boundaries 40 Beauty/cosmeceuticals 40 Weight management 41 Sports/energy drinks 42 Niche consumer groups 43 Further examining the emergence of functional dairy 44 Challenges: dairy industry as a whole 44 Increasing raw material prices 44 Climate change 45 Negative dairy industry publicity 45 Sexing up the image of milk 46 Calcium and the weight loss debate 48 Lactose intolerance 49 Dairy alternatives 49 Challenges: functional dairy drinks 50 Crowded market leads to consumer mistrust and confusion 50 Increasing regulation surrounding nutrition and health claims 51 Table 15 Main aspects of EU nutrition and health claims regulation 51 Advertising authorities 52 Regulation: regional systems surrounding functional claims 53 Europe EU nutrition and health claims regulation 53 US Food and Drug Administration 55 Asia FOSHU 56 Regional review of functional dairy drink markets 58 Asia 58 Zenith International Ltd

4 Europe 60 US 62 Functional dairy drinks SWOT analysis 63 Strengths 63 Weaknesses 63 Opportunities 63 Threats 63 Future and development 64 BRAND PROFILES Alpenmilch Salzburg 66 Bravo! Brands 67 Campina (with DSM Food Specialties) 68 Dairy Farmers of America 69 Dairy Farmers of Britain 70 Emmi 71 Groupe Danone 72 Danone SA 73 Lactalis 74 Leche Celta SL 75 Mars Incorporated / Masterfoods UK 76 Nippon Milk Community 77 Parmalat 78 Raisio 79 St Helen's Farm 80 Stonyfield Farm 81 Unistraw International 82 Valio 83 Wimm-Bill-Dann 84 Zenith International Ltd

5 Yakult Honsha Co. Ltd 85 Appendix symbols and abbreviations (general) 86 Appendix symbols and abbreviations (ingredients) 87 Zenith International Ltd

6 Introduction The fundamental aims of this report are to examine the main trends and developments across the global functional dairy drinks category by looking at a number of key markets in greater depth, understand its origins and principal reasons for being, and to examine the extent of future potential the category holds. The study will be simplistic yet comprehensive in its approach, with its analysis based around basic forms of interrogation such as how, why and what, as the set of questions below portray: How have functional dairy drinks appeared? Why has the category emerged and shown such impressive growth rates? When and where did it originate, and when did it really start to take off? Who or which target groups are functional dairy drinks marketed towards? What does the category have in store for the industry as a whole, and how can dairy producers best leverage these opportunities? The present day functional or 'active health' sector of the combined West European, US and Japanese dairy drinks industry is currently estimated at a volume of over 999 million litres, as achieved in In terms of the why and how, the functional dairy drinks category may clearly not have been able to emerge and grow to such an extent were it not for the early influences of Japan's Yakult Honsha Co. Ltd. We look at the history behind the market leading yogurt drink in more detail further later, but it is important to point out here that it is thanks to this pioneering company's strong, scientific foundations and the probiotic product's 'tried and tested' benefits, that so many other firms have been able to follow suit and share the success. Although consumers may not always understand exactly how probiotics benefit their bodies' digestion and general immunity, they are nevertheless aware thanks to Yakult's global presence and the continued marketing efforts of other manufacturers such as Danone that these little yogurt shots have some positive health implication and work some kind of magic on their internal mechanisms. The early impact of Yakult, the effects of which proliferated on a global scale, is undeniably one of the essential reasons that many other dairy companies have so readily and so fluently followed suit. But is it such a natural progression or more a case of do or die? Zenith International Ltd

Dairy processors and producers have been, and indeed still are, under constant pressure from rising costs on the one hand and retailer/consumer pressure on the other to keep prices for a basic

The dairy industry is a relatively uneventful category in the grand scheme of things; very little has happened over the past few years other than market consolidation.

7 Dairy processors and producers have been, and indeed still are, under constant pressure from rising costs on the one hand and retailer/consumer pressure on the other to keep prices for a basic commodity, such as fresh milk, as low as possible. The dairy industry is a relatively uneventful category in the grand scheme of things; very little has happened over the past few years other than market consolidation. Milk the conventional white stuff fresh from the cow can and will only ever generate break-even prices at best. With volumes in decline and increasing costs, maintaining value is close to impossible. Consumers increasingly proactive attitudes towards their own and their families health, coupled with changing shopping habits and more choice, personal touch services such as home milk delivery, other avenues for potential added revenue, could soon also become a thing of the past. Declining sales and rising costs are amongst a growing number of problems affecting the dairy industry. The anti-dairy lobby, dairy alternatives, misguided and ill informed health information from varied and often somewhat dubious sources, more expensive packaging and a growing burden of government legislation all present a challenge to maintaining sales. And all this whilst also being faced with climate change and pressure to improve environmental awareness and responsibility. So, is tapping the added value or functional dairy sector the only way to offset rising costs, gain a strategic advantage over competitors and the only value real growth engine? The decision to add such an offering (St Ivel Advance with Omega-3) to its portfolio certainly helped Dairy Crest find its point of differentiation and reinforce its leading position on the UK market. However, the functional dairy drinks category is not necessarily an easy industry to crack. Many have seen it as the answer, but herein lies the problem. The dairy aisles, whereas previously comprised of a small number of key products by key manufacturers, such as Yakult and Groupe Danone, are now bursting at the seams with a rapidly increasing amount of alternatives. Moreover, these all appear with varying functional positionings and suggested health claims, be they digestive, immune or heart health, or even satiety-boosting weight management. Although the functional dairy drinks market or the active health drinks or yogurt drinks market as it is otherwise known has shown strong growth rates over the past few years, and whilst successful operators have continued to enjoy strong performance, sales for the dairy category as a whole are thought to have declined somewhat during the last year or so. While the positive consumer intentions and interest are there, Zenith International Ltd

8 people are becoming more and more confused by just the sheer amount of choice. What is more, with tighter scrutiny over claims by both governmental and advertising bodies alike, consumers who on the one hand turn towards functional food and drink as they become health conscious but on the other hand may turn away from them if there is any element of doubt are now more sceptical about products alleged health benefits. In a market that is constantly edging its way to saturation point, innovation and strong product concept delivery are imperative to ensuring success. This is where dairy giant Danone excels. Its ability to remain at the forefront of innovation and adapt to or even accurately anticipate consumers changing needs are the essential reasons for its unrivalled success. Its market leading Actimel, Activia and Danacol yogurt products for immune, digestive and heart health respectively, have achieved international recognition thanks to their powerful concept and effective delivery. Despite growing competition and increasing challenges, the functional dairy drinks industry still holds a great deal of possibilities: its movement towards the mainstream is yet to fully blossom; scientific developments are stretching category boundaries and highlighting relatively uncharted territory in other functional sectors such as sports and energy drinks; and the added value margin potential is and looks set to remain very enticing. Despite the opportunities it holds, the category still represents a challenge, but an interesting one nonetheless. It s all about grasping opportunities, responding to and predicting changes in demand, developing pioneering, well-substantiated product concepts and successfully delivering their message, combined with strong brand equity and correctly identifying and marketing to a definite target consumer group. Zenith International Ltd

9 Functional dairy drinks market analysis In undertaking its research, Zenith International depends upon the goodwill and co-operation of firms in the marketplace to provide accurate figures on their activities and thus the market overall. Due to the short time frame and topical nature of this report, direct contact with every individual category operator has not been possible. Ultimately Zenith has had to make its own judgment and therefore all figures presented should realistically be regarded as Zenith estimates. Yet, with the extent of crosschecking involved in the report, Zenith believes a high level of accuracy has been achieved. (Numbers expressed may vary due to rounding.) Zenith estimates that the combined functional dairy drinks markets of West Europe, the US and Japan reached xxx million litres in West Europe claimed the xxx% majority of volume sales, having overtaken the Japanese market some years previously. In 2006, Japan generated xxx% of category volume with the US market, still in its early infancy, accounting for xxx% of combined volume sales. Volume sales across West Europe, the US and Japan are projected to reach xxx million litres by (This figure could well prove conservative if the category is afforded renewed impetus by the increased marketing efforts of existing, as well as new, operators, and if the impending EU nutrition and health claims regulation impacts positively on functional product sales in West Europe). Table 1 Functional dairy drinks* volume sales in million litres, Vol, mln litres e 2007f 2008f 2009f 2010f 2011f West Europe US Japan Combined * Volumes cover probiotic daily dose yogurt drinks and the like. For the purposes of accurate market quantification and like-for-like comparisons, enriched more 'mainstream' fresh milk drinks have been excluded. Source: Zenith International Although West Europe is the largest of the three regional markets and sees good double-digit growth year-on-year, the strongest growth rates are being generated on the emerging US market. Zenith International Ltd

10 Appendix symbols and abbreviations (general)... Negligible, less than 0.05 e Estimate f Forecast ASA CAGR CHF FDA FHC FOSHU FNFC FSA JHFNFA GDA MHLW mg na NR OA oz PET RDA rbst Vol WHO Advertising Standards Authority Compound Annual Growth Rate Swiss Francs (US) Food and Drug Administration Food with Health Claims Foods for Specified Health Use Food with Nutrient Function Claims Food Standards Agency Japan Health Food and Nutrition Food Association Guideline Daily Amount Minister of Health, Labour and Welfare (Japan) Milligram Not available, not applicable Non returnable packaging Osteoarthritis Ounce Polyethylene terephthalate Recommended Daily Allowance Recombinant bovine somatropin (growth hormone (for cattle)) Volume World Health Organization Zenith International Ltd

11 Appendix symbols and abbreviations (ingredients) CoQ10 Coenzyme Q10 DHA Docosahexaenoic acid EGCG Epigallocatechin gallate (most potent of potent of green tea polyphenols) L. casei Lactobacillus casei LGG Lactobacillus GG (a Lactobacillus rhamnosus probiotic strain) MBP Milk Basic Protein NAG N-acetyl glucosamine Omega-3 Generic name given to group of essentially fatty acids Omega-6 Also part of a group of essential fatty acids Zenith International Ltd

12 Research enquiries: Liz Hague, Sales Manager tel: +44 (0) US toll-free: fax: +44 (0)

Influence of healthy eating on market trends. Paul Paquin, Ph.D. INAF, Université Laval, Québec

Influence of healthy eating on market trends Paul Paquin, Ph.D. INAF, Université Laval, Québec Key Trends TREND A key trend is one that represents a genuine growth opportunity On which a company can base