Katy Askew

On the money: Danone turns to product mix to offset margin pressure

By Katy Askew | 20 February 2014

Danone looks to reverse Actimel decline in Europe

Danone looks to reverse Actimel decline in Europe

Danone plans to improve its sales mix through product innovation to offset margin pressure across its markets in 2014, a year in which it now expects margins will not grow as much as it had expected.

The company reported a fall in 2013 profits today (20 February), as margins in the year deteriorated due to rising costs in countries such as the US and Russia.

Profitability was also hit by a recall of infant formula in China and deteriorating sales in Europe, Danone revealed.

The French dairy giant said this morning (10 February) margins came in at 13.2%, slightly below analyst expectations of 13.4%. The group also cut its margin outlook for 2014. Danone said it now expects to "stabilise" margins in 2014, setting a possible range of a fall of 20 basis points to a rise of 20 basis points. The company had previously predicted margin expansion in the year.

Commenting on the outlook for the group's margin, CFO Pierre-Andre Terisse said improvements would be weighted to the end of 2014, with input costs forecast to rise in the mid- to high-single digits in the fiscal.

"[Cost inflation] is obviously very strong in some markets - I have one in mind and it is Russia. We are running at about 30% inflation in Russia.... It is very consistent, it is emerging markets that are suffering most... This is good news because this is the place where we have most [freedom] on price," Terisse said.

However, management emphasised it is only looking at cost increases as a "last resort".

"I don't want everyone to imagine that if you have an [input] price increase you transfer it to the consumer... The best way to answer to that is, first of all, you can reduce the promotion. Second, we play the mix and launch new products. We usually try to launch new products with a higher price... Lastly you have the productivity plan. The productivity is never finished. And after that we do the price increase. That is the way we manage the situation," CEO Franck Riboud explained.

For instance, Riboud continued, the group plans to launch products with higher price points in the hotly-contested US Greek yoghurt sector.

Danone had resisted passing higher costs on in the US, management explained, in order to remain competitive in the market. As a result, the group was able to grow volumes in the sector and increase its market share from number two to "joint number one", management argued.

Danone also has plans to launch a number of products in China, where it will try to tap into demand for quality infant formula products to improve its product mix while also rebuilding its business in the wake of a recall sparked by Fonterra's botulism scare.

The company saw its share of Chinese infant formula sales drop from 19% to 12% after it was forced to recall Dumex infant formula produced using concentrated whey powder supplied by Fonterra. Although it transpired the recall was a false alarm, Danone's market share has yet to recover - and now stands at 14%, according to the company.

The group is broadening its product offering in the sector: the company is relaunching Dumex as a "basic" product, in April it is rolling out Dumex International to target the still strong demand for infant formula produced overseas, and later in the year Danone will launch super-premium infant formula under the Bluehouse brand.

By strengthening its premium and super-premium product line-up, Danone expects to move the product mix sold in China to more expensive - and therefore higher margin - items.

Danone has also faced significant top-line pressure in its core European business. The group said a recovery in 2014 would help it build profit momentum - but stressed that much work needs to be done to revitalise the region.

"We have the base business to refurbish, we have to fight the decline of Actimel," Riboud observed. "That is the reason we have a huge plan of innovation... We have the feeling that we know how to handle this and we have some very nice examples showing us we are going in the right direction. It is not rocket science."

On European margins, Terisse added: "Its absolutely clear that through work on the cost base, work on the top line, is to stabilise margins in Europe. We are getting through it... the stabilisation of the top line is one of the key concerns for that."

It seems, then, that while Danone still has a long way to go before improvements feed through to the top and bottom lines, much of the heavy lifting is being tackled.

According to Kepler Cheuvreux analyst Jon Cox, the future looks somewhat brighter for Danone. "We believe the worst is probably over in terms of negative newsflow after the company's problems of the last 24 months (Europe dairy, China infant nutrition)."

However, given the cautious outlook, Cox added he "wouldn't be surprised" to see some further trimming of estimates.

Andrew Wood of Sanford Bernstein concurred. "We would expect a 2-3% cut to 2014 consensus and our EPS expectations for the company."

Sectors: Baby food, Dairy, Emerging markets, Financials, NPD & innovation

Companies: Danone

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