FMCG
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Acquisitions were managed separately. A dedicated central business development unit was charged with identifying opportunities relevant to the company’s strategic priorities, conducting research and making recommendations to the executive committee, the company’s main decision-making body.
What Has It Been Doing Recently?
2004
Focus strategy had enabled Danone to grow organic sales by 5% in 2001, 6% in 2002, 7% in 2003 and - a company record - 7.8% in 2004. The company now had 200 plants in 120 countries. It was number one in the world for dairy, tied number one with Nestlé for waters and world number two for biscuits and the heart of its success was driving growth from powerful market and brand positions. 75% of sales came from markets in which Danone had the lead position. Europe, by far the largest region, accounted for nearly 70% of sales. The Asia-Pacific region was dominated by China, where Danone was market leader in waters and biscuits. The third sales region, Rest of World, was up an impressive 18.6% in the year, and now accounted for 17% of total Danone sales. Here, areas of significant strength were Brazil, Argentina, Mexico, Russia and the US. But also here, the benefits of the Stonyfield Farm acquisition were outweighed by a whopping write-down of the company’s interest in DS Waters LP, a 2003 joint venture with the Suntory Group, a home-and-office water delivery business that proved much more difficult to penetrate than Danone had anticipated.
Within dairy, Danone now had an 18% global share and a share of over 25% in its ten most important markets: surging ahead in Latin America, up by 22% on the back of the company’s strengths in local adaptation and route-to-market dominance. Following a major country-by-country research programme in 35 markets, Danonino, a children’s nutrition enhancement, had been reformulated differently for each market to reflect the differing nutritional issues and was performing particularly well in Argentina and Mexico. The brand reach, with other Danone best-sellers, was also being greatly extended via the placement of Danone-owned fridges in previously unrefrigerated outlets into the less sophisticated sectors of retail trade, with 52,000 in Mexico alone. New products included Danacol, an anti-cholesterol dairy product was launched in a number of European markets. Activia was rolled out in Germany, Canada, Mexico and the Netherlands. Drinkable versions of Activia, Danette and Danonino were launched in France, Spain and Argentina, while the carb diet craze sweeping America was met by Dannon’s Light & Fit Carb Control range, launched in January 2004.
In the waters category, skewed much more towards Asia-Pacific (42% of sales) given the predominance of the Wahaha and Aqua brands in China and Indonesia, the year’s big news was the rolling-out of functional benefit waters such as Wahaha’s G-Vital and the new market extension of Ser flavoured waters, the Argentinian innovation, which after just two years’ availability on its home turf had taken water into cola territory by capturing number-two spot in the low-calorie carbonated beverages market,.
But biscuits were facing having a few more challenges. Strategically, Danone had no major global brands. Lu, the company’s largest, accounted for 40% of biscuit sales, but predominantly in Western Europe, which meant everywhere was relying on a plethora of well-established local lines such as Bolshevik, launched in Russia in 1855. The biscuit category was characterised by long-standing, local favourites, which served only to fragment one of Danone’s key corporate strengths: its global reach. Tactically, the universal rise in importance of the health and nutritional benefits was putting pressure on the R&D first to analyse and then to reformulate countless products to enhance real or perceived health benefits.
2005
With organic sales up another 6.7% and the operating margin inching forwards despite steep rises in packaging costs - particularly for PET bottles - Danone was looking unstoppable. The five countries that had been singled out for significant sustained growth – China, Indonesia, Russia, Mexico and the US (for dairy), called the New Frontiers in the company – grew by a combined 18% in the year and now accounted for 25% of total sales.
Across emerging markets in general, Danone’s strategy did not simply amount to making its products available to the relatively wealthy through Western-style retail outlets, as was the case with many of its competitors. It was also taking steps to reach down the income scale with both product and route-to-market innovation. In South Africa, Danimal had been developed with added iron, zinc and vitamin A, selling for one rand a pack and meeting the nutritional needs of children living in the townships. But with no structured distribution or retail infrastructure to get the product to these consumers, Danone recruited local unemployed females, daniladies, to sell the product door-to-door, thus gaining both distribution and providing much-needed self-employment opportunities. In Bangladesh, the company partnered with a microcredit bank to support a similar idea, while in Indonesia the company financed the purchase of hundreds of push-carts for street sales. Danone’s highly decentralised model ably fulfilled its long-term strategy: being first on the block to get high-quality food products to newly emerging consumers. In 2005, 55% of dairy sales came from what it termed ‘proximity business’: retail outlets outside the large, Western-style supermarkets and hypermarkets. Danone added another 100,000 distribution points through exactly such outlets in the year.
Dairy, in the meantime, had another good year, growing by 7%. Waters had an even better, with an organic growth of 10%, Mexico leading the way with an amazing 42%, driven by the Bonafont brand. The company’s nightmare US office-and-home delivery water business was sold off to a venture capital firm. In contrast, the biscuits product line was barely limping along, growing organically by only 1.5%.
While the company was doing well in emerging markets, growing biscuit sales by 30% in Indonesia, 20% in Russia and 9% in China, it was a category where Danone enjoyed few of the advantages it had elsewhere in the portfolio. Weak market positions in the UK and Ireland led to the sell-off of Danone’s biscuit businesses in both markets. One big problem for the product line was that the company’s main area of focus in R&D – the development of products with distinctive health benefits – was of little relevance in the category. While R&D had a collection of more than 3,000 strains of pro-biotics and was working with the Pasteur Institute to figure out how they interacted with the body, R&D in biscuits was wrestling with the perennial industry problem of producing biscuits with lower levels of fat and sugar that tasted vaguely palatable. In the absence of a solution to this big portfolio problem, smaller ones were addressed. Danone sold its UK and US sauce businesses, a struggling Italian water subsidiary and its last remaining minority interest in beer.
2006
Another year of impressive organic growth, this time up by 9.7%, emphasised the consistency and effectiveness of the Danone business model in dairy and waters, up by 9.2% and 14.8% respectively, although biscuits still trailed: an improved but still modest increase of 3%. The success in dairy was largely due to the continued rollout into new markets of the four power brands, each targeted at a different health benefit:
Activia – aids digestive regularity
Actimel – strengthens the body’s natural defences
Vitalinea-Taillefine – aids weight control
Danonino – promotes healthy growth in children
Together, these brands grew by an average of 15%, Activia by a stunning 48% to a combined total of €1.3 billion, joining Actimel as a billion-euro brand. In its first year in the US market, Activia - DanActive in America - racked up sales of $130 million, making it one of the country’s top new grocery products of the year. Elsewhere in dairy, the big news was a joint venture in China with the leading producer of fresh dairy products, Mengniu Dairy Company, which had twenty plants servicing fifteen provinces and would be used to take distribution of Danone products nationwide, a move backed up by the opening of Danone’s new research centre in China, tasked with developing product recipes that delivered the key local health and nutrition benefits while tickling local taste buds.
Beverages growth of 14.8%
was spurred on more by rolling out new products in existing markets than the dairy strategy of taking existing products to new markets. The Mexican Bonafont brand continued its rapid growth, reaching a billion litres. New Zealand-developed V energy drink was rolled out into Argentina, China and Indonesia, where beverages with a job to do continued as the key growth category. The company also launched its first sugar-free flavoured water into France, Germany and the UK. Biscuits added another 3% but with 80% of sales coming from Europe - 40% from France alone - the sector’s inherently low-growth markets still made life difficult. Over several years, these differing growth rates had now had shifted the portfolio balance: 56% to dairy, 28% to beverages and 16% to biscuits.
Strategically, while things seemed to be progressing extremely well, Danone was once again looking to the future, setting itself new and challenging goals. Firstly, chairman and CEO Franck Riboud increased annual growth targets to 6–8% for sales and 7–10% for operating, followed by new goals for international expansion. The company was by now firmly established with strong market shares in approximately 40 countries, which he intended to double within the next few years. Expansion would begin with three to five new countries a year. Ribaud also ditched the usual joint-venture method, arguing that the company now had the resources to enter markets either from scratch or by purchasing small players rather than forming partnerships with market leaders.
The constant quest for new markets, new retail outlets and new consumers also meant that Danone was no longer at the mercy of its largest retailers. Its top-ten worldwide customers (of which six were French) now accounted for just 28% of its total net sales. The largest, Carrefour, accounted for only 8%, in stark contrast to the American market, where it was not unusual for a food manufacturer to put 15–20% of its sales through its top customer. This kind of spread gave Danone a much greater degree of control of its promotional spend and more power to resist retailer requests for private labels.
2007
The entire history of Danone had been one of big, strategic moves and 2007 saw the biggest yet, the €12.2-billion acquisition of the Dutch infant and medical nutritional company Royal Numico NV and the €3.1 billion sale to Kraft Foods of almost the entire biscuits business. In the words of Franck Riboud, this was a historic year for the company, completing the long-term strategy of transforming a diversified food and beverage company into a focused health-through-food company. So divesting itself of the slow-growing, limited-relevance biscuits businesses in favour of two new product lines with much higher growth rates and profit margins - infant and medical nutrition - was a radical but logical step for Danone to take. Danone had been the first food company to commit itself to make health the main focus of its strategy; biscuits were always going to be a laggard here. Nor was infant nutrition a new category for Danone. It had hung onto its market-leading French baby food company, and been propelled to number one in Europe and number two worldwide in infant nutrition. Medical nutrition was a new field, but, research-led as it was, it might well suggest products that would transfer to other categories.
Royal Numico had been founded in the late 19th century as a powdered milk business. After World War Two, the focus had switched to baby foods and, after going public in 1981, the company had pursued a Danone-like growth strategy, making numerous acquisitions of leading infant nutrition firms: UK’s Cow & Gate, Germany’s Pfrimmer and Milupa, Finland’s Tutteli and Muksu, Italy’s Mellin, and the crown jewel Dumex, the leading brand of baby foods in Asia it bought in 2006. By 2007, the company was active on every continent and generating annual sales of nearly €3 billion.
The medical nutrition side of the business focused mainly on feeding solutions for oncology and Alzheimer’s disease patients. The new deal gave Danone four product lines: fresh dairy products with 57% of sales, waters with 21%, baby nutrition with 17%; and medical nutrition with 5%. Growth rates for all four sectors were broadly comparable. It seems almost an afterthought to observe that regular Danone business had also been booming: a 7% sales increase and margins rising for the thirteenth year in a row. This reshaping of the portfolio and the continued good performance encouraged Franck to raise the target sales growth rate up another notch: 8–10% a year, a huge number for a food business. All the company had to do was deliver it.
2008
And in the first year of the new, improved Danone, deliver it did, despite the financial crisis that hit midway through the year. Overall growth came in at 8.8%, one-third volume and two-thirds increased prices. The year had started very well, with growth of nearly 10% in the first half, slowing down to just over 6% in the second half as the recession set in. It was a year of regional contrasts, as many companies discovered. Western markets suffered whilst emerging markets continued almost untouched, although suffering by Danone’s standards was only relative, a mere 5% growth in Europe with Asia and South America both up in the mid-teens.
It was also a year of contrasts between the product lines, with baby nutrition leading the way with a very impressive 17%, a bullet expertly dodged in China despite the melamine baby food scandal: Danone’s Dumex brand was melamine-free and the swift rollout of a reassurance communication campaign in paid media, on shelf and pack stickers avoided any collateral damage. Medical nutrition took second place in the growth race at +12.7%, completing an excellent first year for the Royal Numico acquisition. Indeed, the category seemed almost immune from the financial crisis, with sales boosted further by the launch of a new compact format for the oral nutrition lines, which packed 200 mls worth of calories and nutrition into a 125 ml serving, ideal for patients with poor appetites. Fresh dairy excelled, growing over 12%, but waters were stormy: just 2% growth, a little more respectable if one excluded the Wahaha joint venture in China, where the relationship had completely broken down. Here, Danone was ‘moving on’, as Franck succinctly put it.
2009
But not even the Danone growth machine could power through 2009, which saw the biggest downturn for decades: sales for the year up only 3% and well below the pre-crisis target of 8–10%. More interestingly, volume increased almost twice as fast as value, growing by 5.2% in the year, the result of a conscious 2008 strategic decision as the scale of the growing crisis became clear: focus on growing volumes and market share during the tough times, even at the expense of sales value, in order to come out of the recession in a stronger position with a wider consumer base. This, the company argued, was merely adapting the company mission of bringing healthy food to as many people as possible to the new economic circumstances. There would be three components to the new strategy.
First, prices were reviewed market-by-market and reduced not across the board but on a targeted basis – by up to 15% where it the added value of the product was deemed out of line with its affordability in very difficult times. And whilst demand for premium brands such as Actimel and Activia was holding up well - prices were tweaked only slightly - it was with the rest of the product range that affordability had become an issue. If a price cut crippled the margin, the dairy category would quickly develop new, less sophisticated offerings that could set a new price–value relationship. More single-serve versions were launched a correspondingly lower prices, just as new bulk packs brought individual item prices down.
The second element was to maintain or even increase marketing spend, and to adjust both the message and the location. Based on its experience of financial crises in the South American markets, Danone firmly believe that, in tough times, great taste was a more powerful selling message than nutritional benefits, which corresponded to a marketing shift from nutritional reason to feelings: taste, pleasure, fun, humour. The message also came closer to the customer, via point of sale promotions and the point in-store messaging, a combination of lower prices, more single-serve versions and more point of sale push which effectively boosted the level of impulse sales. As an example, the Mexican dairy business which fully implemented this re-set strategy saw a first quarter volume decline of 10% turn into a fo
urth quarter volume increase of over 13%. Many other Danone markets saw similar, if slightly less spectacular, rebounds – the hugely troubled US market achieving a 9% growth in the fourth quarter. In emerging markets, where there had been much less impact on consumer spending, business growth continued largely as normal, 12% in Indonesia and 7% in China.
With volumes increasing steadily through the year even in sluggish markets, market shares increased in step. Danone ended the year having grown global market share in all four product lines and in 70% of the markets where it operated. Even more impressively, the focus on volume over sales value did not wreck the margins. Aided by a following wind of commodity price decreases, the operating margin increased for the fifteenth year in a row. The strategy re-set, Franck Riboud believed, had reinforced the company’s market positions and created a new momentum, with factories achieving record outputs, and leaving him confident of at least a 5% sales increase the next year.
It had been an impressive response to an unexpected economic crisis that had left many other packaged goods companies floundering. One sad note was the death of Daniel Carasso, the founder of the French Danone business. He had made it to 103, a testimony to yoghourt perhaps?
2010
The momentum of the latter part of 2009 carried forward through 2010, when the company averaged nearly 7% sales growth per quarter, with less of a disparity between sales value and sales volume (which grew by 7.6%) than there had been in 2009. Thus, reduced prices from 2009 could be maintained in 2010 as a permanent shift in the price–value relationship rather than as a temporary promotional cut. Once again, the operating margin increased to a new high of 15.2%
Dairy sales increased by 6.5% to slightly under €10 billion, divided almost equally between mature and emerging markets. Half the year’s growth in the year came from product innovation, almost all of it developed at the local unit level thanks to Danone’s decentralised operating culture, which allowed – as we have noted - local units to develop new products or adapt recipes to meet local taste, nutritional and economic needs, the new product measured by the company’s nutripack system to assure a global consistency of quality. The successes this very entrepreneurial model created - a Russian Activia drink, a Scandinavian Activia Pouring Yoghurt or a Bulgarian Activia Breakfast - they were also rolled out not just into the home market but into others where the same market conditions prevailed. This kind of continuous, flexible continuous innovation was crucial to effective competition against private label and local market competitors. The dairy product line also innovated in how it interacted with and reached consumers, launching a series of digital initiatives across multiple markets, including nutritional coaching and competitions to vote on upcoming new flavours. The company extended the concept of Danone Yogurterias: kiosks located in malls, airports and other high-traffic locations, which catered for impulse purchase of yoghurts with customisable toppings.