COPENHAGEN (Dow Jones)--Danish exporters, particularly dairy group Arla Foods (AFA.YY), are beginning to feel the chill as a grassroots boycott of Danish goods spreads through the Middle East.
The Muslim protest was sparked over drawings of the prophet Muhammad published Sept. 30 in one of Denmark's leading newspapers, Jyllands-Posten and reprinted in a Norwegian newspaper Jan. 10. Islamic tradition bars any depiction of Muhammad.
Jyllands-Posten has apologized for the depictions, one of which showed a bomb in the figure's turban. However, its offices in Copenhagen, Jutland and Viby were closed Tuesday after receiving bomb threats.
Arla Foods has borne the brunt of anger, with Middle East shop owners pulling the group's dairy products from shelves throughout the region, costing Arla lost sales of $1.5 million daily.
The company - the result of a 2000 merger between Denmark's MD Foods and Arla of Sweden - has annual sales of DKK46.4 billion ($7.5 billion), including DKK3 billion in the Middle East. Express Dairies of the U.K. merged into the group three years later. The company recently bought U.S.-based White Clover Dairy, gaining a foothold in the U.S. market.
The U.K. now accounts for a third of Arla's total sales and is its biggest single market, where it sells Cravendale milk products and Discover cheeses. In Germany it's best known for its line of Buko cream cheeses. Arla's major brands in the U.S. include the Rosenborg, Dofino, Denmark's Finest and Mediterra ranges of blue, havarti and feta cheeses.
Other Danish companies on the boycott list being circulated include toy maker Lego Group (LEG.YY), Carlsberg A/S (CARL-A.KO), which sells alcohol-free beer in the region and pharmaceutical group Novo Nordisk A/S (NVO). All reported little or no impact from the boycott.
Arla, owned by a cooperative of 11,600 Danish and Swedish farmers, has been operating in the Middle East for nearly 40 years, its most important market outside of Europe, and has a local production facility in Saudi Arabia.
"The reason for us getting the full blast of the boycott is that we sell consumer goods that people need every day," said Arla spokesman Louis Honore said. "We are very visible in the supermarkets, and we are by far the largest Danish company in the market."
So far, Arla hasn't revised its earnings outlook for the 2006, but if the boycott continues for a month, it could be a "catastrophe," Honore said.
"Our competitors are moving in and trying to fill the empty shelves with their products," he said.
Rivals include local dairies as well as international giants such as Switzerland's Nestle SA (NESN.VX), Groupe Danone (DA) of France and Campina BV (CMP.YY) of the Netherlands, with which Arla tried unsuccessfully to merge last year.
"These could benefit, of course," said Vontobel analyst Claudia Lenz. The Middle East is an attractive market for European dairies, because milk and milk product consumption is low and growing, she said. "If you look at the per head consumption, it has much more potential."
Only a year ago Arla announced plans to double its sales in the Middle East, to 120,000 metric tons of cheese, butter and cream from 60,000 tons in 2005. It cut staffing at Danish facilities and increased personnel at its dairy in Riyadh.
Danske Bank economists said exports to the Middle East made up about 1.2% of all Danish exports in 2004, while Jyske Bank said a prolonged boycott could lead to thousands of job losses.
However, most economists expect the boycott to have limited effect on the country's exports if it remains short-term and doesn't spread beyond the Middle East, with the food and agriculture industry hit hardest.
The European Union Commission Tuesday warned that any government officially backing the informal boycott "would expose itself to serious criticism" at the World Trade Organization.
In an effort to diffuse the growing tension between Europe and the Middle East, the Commission watered down its previous statement in which it threatened legal action if Saudi Arabia's government approved the boycott.
Muslims had for months sought apologies from the newspaper, with diplomats stationed in Copenhagen asking the Danish government to intervene.
Initially, Prime Minister Anders Fogh Rasmussen declined, saying the government didn't and shouldn't have jurisdiction over a free press.
But as the boycott gained ground last week and government and business leaders urged greater diplomatic action, Rasmussen this week reiterated that "independent media cannot be edited by the government." He added: "I personally have such a respect for people's religious belief that I personally never would have depicted Muhammad, Jesus or any other religious character in a way that could offend other people."
Rasmussen's personal feelings apparently didn't help. About 5,000 members of the militant Islamic Jihad group, including several gunmen, Tuesday marched in Gaza City demanding Denmark apologize for the drawings.