Danone has defended its decision to acquire Russian dairy Unimilk

Danone has defended its decision to acquire Russian dairy Unimilk

Danone has insisted Unimilk, the Russian firm it acquired last year, provides the French company with a "great platform" in the country despite slowing sales.

The company revealed yesterday (28 July) that Unimilk's volumes fell 11.2% during the second quarter of 2011. Sales climbed 6% through an improved combination of product mix and prices but growth was slower, prompting some criticism from analysts.

However, Danone said moves to cut the number of Unimilk's SKUs had been a reason for the fall in volumes. The company's priorities have been, it said, to integrate Unimilk into its business and "build a platform for next year", co-COO Emmanuel Faber said.

"We are not trying to capture the volume growth that was created in the back end of last year by the previous management team," Faber said. "What we are interested in from Unimilk today is to create this platform from a strategic point of view."

He added: "Unimilk is giving us a great platform to grow our franchise in Russia. We have been accelerating the integration process of Unimilk. We have come from a corporation phase to a real integration phase. That is currently focusing on building the platform for Unimilk to deliver the growth that we expect from our joint Danone and Unimilk business in Russia next year."

The Activia maker's shares fell yesterday (29 July) after it reported its half-year results, which included a drop in second-quarter volumes from its fresh dairy business.

MF Global analyst Andy Smith described the 0.2% dip in fresh dairy volumes as "very poor" and pointed to the slowdown in Russia, where volumes rose 6% in the second quarter - but compared to a 15% increase in the first three months of 2011. When Unimilk was excluded from the results, Danone's fresh dairy sales volumes in the second quarter increased 2.6%.

Danone's first-half dairy sales climbed 6% but, in the second quarter, growth slowed to 5.5%. Excluding Unimilk, the company's fresh dairy sales increased by a "more reasonable" 5.4% in the second quarter, Smith said.

However, referring to the company's dairy business as a whole, he added: "We think that the market will be disappointed by the sharp sequential slowdown in fresh dairy sales," Smith said.

Andrew Wood, Sanford Bernstein's senior research analyst for food in Europe, criticised Unimilk's record in the year since Danone acquired the company last June.

Wood said Unimilk's volume growth in the second half of 2010 had been "excessive" and margins had fallen from 6% in 2009 to "negative" in the first quarter of 2011, although he noted they had improved to 5% in June. A target of 5% margins for the whole of 2011, however, "looks like a stretch", Wood said.

He added: "The promise (at the time of the acquisition) of 15-20% growth in this business now seems like a distant dream. Danone is clearly in clean-up mode and has shifted focus to improving profitability at the expense of growth."

Danone, Wood said, had hailed Unimilk as a "game-changer" but the prospects for the business appear uncertain. "It still could turn out that way in the future but this now looks like a 2012 event at best," Wood said. "At worst, there is still the risk that this turns out to be another M&A disaster for Danone."