MainFirst analyst Alain-Sebastian Oberhuber has suggested Danones initiative highlights the seriousness of the situation for Danone in its European markets

MainFirst analyst Alain-Sebastian Oberhuber has suggested Danone's initiative highlights the seriousness of the situation for Danone in its European markets

Danone's move to cut EUR200m (US$261m) in costs from its European operations to try to boost its business has highlighted the challenge the French food giant is facing in its main markets in the region. Michelle Russell takes a closer look at whether these measures are enough to revive Danone's fortunes in Europe.

It is no secret Danone has faced pressures in Europe, particularly in the south of the Continent where the region's debt crisis has taken its toll on consumer spending. In June, the group cut its full-year forecast for profit margins due to declining consumption in the region and higher commodity costs.

In its most recent results in October, Danone admitted its third-quarter sales fell short of market expectations, with declining revenue in Spain and Italy weighing on group revenues. The maker of Actimel yogurt suffered "sharper" declines in its European fresh dairy division as conditions deteriorated in southern Europe, particularly in Spain and Italy, where sales were down by over 10%.

Worryingly, CFO Pierre-Andre Terisse said at the time he did not expect the climate in Europe to be very different in 2013 to what it has been in 2012. He said recovery in Europe would require Danone growing the top line and lowering costs.

It may have come as little surprise then to industry observers that the company would announce a cost-cutting initiative. However, whether this will be enough to revive the group's fortunes has garnered a mixed reaction from analysts.

Danone said the measures would see it "adapt" its management structure in Europe and "reduce general and administrative costs", but did not disclose whether this would include job cuts.

Aurel BGC analyst Jean Marie L'Home said any job losses would be "rather exceptional for the group" and "reflects the seriousness of the situation on European markets". However, L'Home said the group's willingness to respond to "the European slump" was "definitely a good sign".

"The magnitude of the expected savings is equivalent to 100bp of operating margin (on a level of 14.1% estimated for 2013)," L'Home said.

Kepler Capital Markets analyst Jon Cox also sounded an upbeat note.

"Supply-chain savings will remain within its continuous excellence programme," he said. "We assume 43 basis points of savings will be maintained with the remainder used to stabilise group profitability in a recessionary environment in Europe."

For others, however, the cost cutting measures may not go far enough.

"[The cost-cutting plan] probably isn't enough as Danone is facing serious and structural problems," Credit Suisse analyst Alex Molloy told The Wall Street Journal.

Meanwhile, MainFirst analyst Alain-Sebastian Oberhuber told just-food the deterioration in the performance of Danone's European operations seems to have "gone faster than people were expecting".

"There has been significant price pressure as the price of their products are almost double the price of the private label equivalent so they've had to do the adjustments pretty fast. Because they've had to do it fast, they've announced these cost savings, which will harm margins next year."

In particular, for all Danone's issues in southern Europe, Oberhuber highlighted its domestic market as the "issue" for the group.

"When I look at the Spanish market, enough has been done. However, I'm not so sure about France, that is the issue. Here, we are always cautious, particularly, for 2013, I'm not so sure they have done everything they can in France, it's a difficult market. In Spain they are on the right track to boost volume again in 2013 but the question mark now is more on France."

The economic environment in France has deteriorated in recent months. Last month, credit ratings agency Moody's stripped France of its Triple A sovereign credit-rating, meaning it believes the risk of the country defaulting on its debts has increased.

While the company has gross margins that exceed the industry average, its operating margins trail those of its consumer peer group, according to Bloomberg.

Oberhuber believes Danone will have to restructure its French operations in an attempt to boost domestic revenues and "win back its competitive edge".

"Given the difficult situation we could face in France in 2013, this EUR200m will flow into the French market," he says. "The market at first took [the cost cutting announcement] positively but then they realised the French situation is getting worse. What they will do is to take out personnel on the administrative side and usually in France ... it is pretty difficult to make people redundant."

The announcement comes weeks after it emerged activist US investor Nelson Peltz had acquired a 1% stake in Danone.

Oberhuber says the investment by Peltz suggests there is "good quality" in Danone's stock.

"The guy is pretty well known in the market for investing in consumer goods, in particular in food and beverage companies, and it is obviously one hint that the stock is not expensive and there is good quality in the stock if they do it right, if they are fluid.

"In the next couple of quarters, they still have a lot of headwinds coming through, but longer term the stock could be more valuable longer term, maybe two or three years."