by Greg Thain
The dairy group’s most significant change came in the Russian market. Here, Danone CIS - number one in the country with a 26% market share and growing strongly - bought Unimilk, the number-three local operator. The purchase not only increased Danone’s Russian market share to 40% but also brought three strategic benefits:
· Danone mainly operated in western Russia, while Unimilk’s areas of strength were in southern and eastern Russia. Access to Unimilk’s 26 modern plants and efficient distribution network meant Danone brands could now go national throughout Russia
· Whilst Danone was focused mostly on supermarkets sales, Unimilk serviced small, independent outlets, still a huge market factor in Russia. Danone brands could now hugely extend their distribution points, opening up more scope for impulse purchase pack sizes.
· Russian Danone was a premium brand, whilst Unimilk’s key brands were in more affordable market sectors. Unimilk’s leading brand, Prostokvashino, was the largest dairy brand by volume in the country: now Danone could cover a market covering the entire socio-economic spectrum.
The second significant change in the year for the dairy group was the official ending of the re-set programme; prices were now being allowed to increase, not back to their old levels, but in tune with market movements from their new baseline.
Waters also had a good year, with sales value rising by over 5% and volumes by nearly 8%. The mature markets had returned to growth, largely as a result of Danone’s efforts in promoting the health benefits of natural spring water and – to overcome consumer concerns about landfill – the launch of the first 100% recycled PET bottles, rapidly followed by the first PET bottle manufactured partly from sugar-cane waste. In the meantime, emerging markets continued to deliver double-digit growth through a combination of proven-brand extensions: Mexico’s Bonafont was rolled out in Brazil, Turkey and Poland, with the company taking a proactive approach in finding and opening up new springs. The two nutrition Product Lines continued as in previous years, both delivering high single-digit increases in sales value and volume.
Reviewing the year, Franck Riboud, described it as a watershed: the last year that sales from established markets would exceed those from the new economies, now 49% of the 2010 total. Danone’s key growth markets were what it termed the MICRUB countries: Mexico, Indonesia, China, Russia, the US and Brazil, which were all delivering double-digit growth – a 14% average for the year and 20% in Brazil, Russia and the US – and of a critical mass sufficient to power the whole company. Danone is perhaps alone – and not a little impertinent - in counting the US as an emerging market. Nonetheless, for yoghurt, it ticks both the boxes: a large population and a low but rapidly rising per capita consumption (one-sixth of France and Spain). Danone added to its US presence by buying Yocream, the country’s leading brand of frozen yoghurt. The acquisition of Medical Nutrition USA, Inc. also opened up that category stateside.
This meant, of course, that Danone was now pursuing three different regional strategies. In the highly competitive, mature markets of Western Europe, the approach was innovation aimed in health-oriented/well-being food products. In North America, it was developing the size of the product categories through innovation and improved distribution. Emerging countries, where competition came from very low-cost local producers as well as global giants looking to make their presence felt, the strategy was affordability plus availability, which involved not simply product concepts but also production and storage. Danone built a micro-production facility in Bangladesh that cost less than the price of an average house in France and managed the absence of reliable and available factory-to-home refrigeration chains by developing Nutriday yoghurts, stable for three months at room temperature.
2011
With growth in the year of nearly 8% - 3% came from volume and the rest price - Danone sales reached a new high of €19.3 billion, 80% from emerging markets, with Asia growing by 20% and Rest of World by 13%. Europe grew by just 2%, as against 60% of from the six MICRUB markets alone.
In the dairy category, the two main growth engines in previous years, Russia – now the dairy group’s single biggest market – and the US both encountered hiccoughs. Russia’s eye on the ball was perhaps distracted by the Unimilk merger, whilst the US had been somewhat slow to spot the meteoric rise of the Greek yoghurt, up from 5% of the market in 2009 to 25% in 2011. The US response was the Oikos range, which greatly improved the company’s second half-year performance. Elsewhere, Activia, now available in 72 countries, was the big performer. And there remained plenty of innovation at the unit level: new containers in Spain and an Activia Smoothie in Portugal. Also rolled out was a new addition to the brand line up: Densia, fortified with calcium and vitamin D, targeted at improving bone health.
But the year’s surprising hero was water, which grew by over 15% and managed to improve its margins despite a 20% increase in packaging costs. Western European markets, helped by a very hot summer, delivered a quarter of the growth; the rest came from emerging markets, two-thirds from the company’s range of flavoured and fortified waters such as China’s Mizone, Bonafont in Brazil and Aqua in Indonesia. The two nutrition businesses also showed significant growth. Baby nutrition sales increased by 10.7%, a total of more than 50% growth since the 2007 and powered by a rapid internationalisation by Danone, which had taken the brands into seventeen new markets. Medical nutrition grew by 9.4% in the year and 50% since acquisition, again through new market entries but also via the runaway success of the concentrated 125 ml offering, ideal for the elderly, infirm and those suffering poor appetites, which was now rolled out across multiple product lines.
Looking forwards, the next emerging market on the company’s radar was India. Danone had had a presence there since its tie-up with Britannia Biscuits, but it had taken a cautious approach to building a presence in other product categories, once again preferring strategic partnerships: it teamed up with Japan’s Yakult Honsha Co. to launch a pro-biotic yoghurt into several cities and took a majority stake in Narang Beverages, owners the Himalayan water brand Qua. Also, and drawing on its micro–factory experience in Bangladesh and Indonesia, Danone set up a similar operations to produce Yum Creamy and Yum Chuski, high-nutrition, low-cost products designed to help poor children with dietary deficiencies. The continuing shift of business towards emerging markets, now employing 60% of the company’s staff of 101,000, led to the DanCare programme, a new approach first to attracting and then retaining staff. DanCare was an in-house clinic, designed ensure workers had access to high-quality health care, a preoccupation entirely consistent with a key part of the company’s product portfolio.
2012
Sales were up a reasonable 5.45%, and although this was slightly below the historical norm, all seemed well. But beneath the surface lurked some significant issues. The dairy segment – the company’s largest with over 50% of sales – was not performing. Sales were only growing in step with price inflation at just over 2%. Volume was actually falling back slightly. The Achilles heel was the southern European countries economic problems: formerly high yoghourt consumers were now struggling to make ends meet. More promising for the company were the US dairy markets, where the company was rapidly catching up with the Greek yoghurt boom through Activia Greek and Oikos Dips. Low per capita consumption markets such as Brazil, Mexico, Russia and China were also beginning to move, the latter two strengthened by new joint ventures.
But the waters were flowing: an increased volume of over 6%, the top-line increase of 10% plus goosed by continuing above-average growth of flavoured aqua-drinks. As with dairy, the company’s strategic approach geographically was two-tier approach. In Europe, where top line increases were tough to get given the weakness of the southern European economies, the focus was on to reduce the environmental impact of the company’s water brands. Conversely, in the emerging countries, it was all about category and share growth, with key brands such as Bonafont and Mizone rolled out into all markets where new water resources could be acquired.
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However, the company’s strongest position lay in baby nutrition, where growth of 11.6% was led by the infant formula brands, particularly in the Chinese market, and further supported by a complete restaging of its leading Dumex brand. The North American market was strengthened by the acquisition of Happy Family Organic Superfoods, which, with its strong baby food and infant yoghurt offerings suited Danone perfectly. Organic was by far the fastest-growing part of the US weaning foods market, having doubled its share to over 20% within three years – a compound average growth rate of 38% compared to the rest of the market’s 1%.
The performance of the medical nutritional product group confirmed that Danone actually had a systemic problem with the European region. As sales in China, Turkey and Brazil drove a more than 6% increase overall, European sales declined, like-for-like by over 2%, while Asia grew 12% and the rest of the world by nearly 5%. This, the company decided, was no passing fad but represented a prolonged and possibly permanent downturn in its European businesses, as long as the southern European countries showed no signs of emerging from their near–bankrupt doldrums. And the first half of 2013, the European sales decline accelerated to more than 4% like-for-like, while Russia and North America surged ahead by over 9% and the Rest of World by nearly 16%. Something had to be done.
The answer was announced in December 2012: a severe retrenching of the company’s growth goals and supporting cost base. The two-year plan would entail halving the number of country management; Danone would shift to a multi-country management structure. Management functions would be merged and, as company strove simply to maintain existing dairy volume, 900 jobs would be shed. By contrast, it was business as usual in the rest of the world, where all the growth was coming from. Danone struck up one its historical partnership deals by taking a 67% stake in Morocco’s largest dairy company, Centrale Laitière du Maroc. And the Indian redoubt was breached: acquisitions were made across all four divisions.
What Is Its DNA?
Danone has an interesting history, with levels of consistency at the very top matched only by other family firms like Mars and Ferrero. The original founder, Daniel Carasso, lived through almost the company’s entire history. And from the point that Danone took its modern form after the BSN merger, it has had just two leaders, who just happen to be father and son. This has created an operating style and form based more on individual beliefs and character than best practice promulgated by consultants and imposed by heroic, parachuted-in CEOs. We suggest the following three key features are what make Danone unique:
Health/Well-being
There isn’t a serious food company in the world that doesn’t have health and well being high on its agenda, but none has been as single-minded as Danone. Rather than simply bolting acquired or developed healthful alternatives onto existing business, Danone, over a period of ten years, completely reshaped its portfolio with this very end in mind. As a food conglomerate, it was enjoyed profitable and growing products and product lines, but these were sold off over time to give the company a level of strategic focus rare on food companies.
But then Danone is not a typical health food company catering to obsessed niche consumers or trying to persuade consumers to eat rabbit food. Both the dairy and waters Product Lines – 66% of sales – are categories that are designed for all consumers, and recommended for daily consumption – in any quantity - by public health authorities the world over. They both occupy the area of what we might call natural good health, which Danone also sees as inseparable from taste and pleasure. The baby and medical nutrition categories have much tighter target markets but are still aimed at regular consumption. This degree of focus prompted the company to develop its Nutrition and Health Charter in 2009. Here are its fundamentals:
· Adapting products to the needs of consumers in terms of nutritional quality, taste and affordability
· Developing products that have health benefits
· Consumer information presented in a clear and responsible manner
· Promoting healthy lifestyles
· Support for nutrition and health research programmes
· Dialogue with public health authorities, consumer groups and scientists
· Sharing knowledge with the scientific community and health professionals
Many food companies do some or even all of these things in parts of their portfolio. But none do so with the single-mindedness of Danone.
Local/Global
In operational terms, in its embracing of local operational autonomy, Danone is much more like a mid-20th-century international company than a 21st. For local business units to have not just the authority but also the encouragement if not the demand to innovate on global brands, as they see fit and to suit their own market needs, it is a dagger to the heart of global brand managers everywhere. But the beauty of the Danone style is that it can operate indeed this way yet still have global brands that work and originate, from local settings, products with international clout.
The logic of the Danone operational style is unassailable. The dairy category is inherently local in manufacturing terms, thus creating the opportunity to be local in marketing terms too. In waters, while very powerful global brands certainly exist, there are also many local brands whose credibility rests on local springs. Danone is betting that pushing the benefits of mineral water, where provenance can be key, is a better strategy than the Coke/Pepsi model of manufactured bottled water and the Nestlé’s de-branding of the local spring in favour of Nestlé global. One key element of this strategy is to create something unique and differentiated, then push it hard. Danone does exactly that.
At a more prosaic level, a key benefit flows from a Danone operational style quite unique among global food companies: speed. Managers nearest the issues have full authority to do something about them. There are no cumbersome layers, no backs to be protected nor agendas second-guessed: if something needs doing, it gets done. With the right mechanisms in place to share and spread successes quickly, it is a very powerful model.
Forward Thinking
Perhaps the most striking thing in the history of Danone is not just that the company made some very big structural and sector participation moves – many companies do that – but the timing of the moves themselves. From the Danone-Gervais merger via the BSN merger, the diversification of the portfolio, the move out of glass, the refocusing of the portfolio, the early moves into Eastern Europe and other emerging markets, the seismic divestment of biscuits coupled with the Royal Numico acquisition, up to the re-set strategy for dairy, none of these was made in extremis. There were no fire sales or desperate measures. All were all made either in anticipation of problems looming or in the expectation opportunities appearing. Even the recent downsizing and consolidation of its European operations was by no means belated, by no means an emergency measure. Quite simply, Danone is the cream on the milk of the world’s top food companies without ever having been in a crisis. This is some achievement and, given what looks like an unassailable stability at the top, it all augurs very well indeed well for the company.
Summary
The evolution of Danone from French glass company looking for bottle contents to the world’s largest health-through-food company is an impressive story. It is very focused in product range terms – there are just four - four, but very diverse geographically. Russia is its largest market, at 10% of sales, while China, Indonesia, Mexico and Brazil are all in its top ten. The Danone Group is the market leader in the 38 of its biggest countries, with the benefits of a usefully fragmented retail customer base: its top five customers provide only 14% of its sales. Many US-based food businesses are not so lucky, on the hook to that level of sales from just one customer. Few food companies can still see that kind of growth potential in the US. In addition, perhaps the Greek yoghurt phenomenon was useful lesson, and may remain a sharp reminder, that the company cannot be complacent. It is not alone, and needs the speed and creativity its emerging markets are famous for if it is to grasp eve
ry opportunity that comes its way. That being said, with the company now structurally geared towards strong product growth in naturally growing emerging markets, the future for Group Danone looks very bright.
Dean Foods
Where Did They Come From?
Milk processing is a tough business. Lots of people buy lots of milk, but they want it fresh and they need it cheap. Milk processing involves a high fixed cost and low margins, usually collecting from farms geographically apart. Profits are very susceptible to relatively small changes in throughput. Milk supplies vary in quantity through the year, with above-average supplies from February to June and below average for the rest of the year. Consumer demand is pretty much the converse: below average early in the year and above average in the last four months. In turn, milk producers attempt to manage this imbalance to their own advantage: converting surplus milk to butter, powder and cheese and, when they are able to increase sales of these items, divert more milk into those products. They thus drive up the price of bulk liquid milk to would-be bottlers. It takes smart strategy to succeed in this world.