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May 20, 2013

Best bits: Danone steps up investment in future growth

In recent months, Danone has come under scrutiny for the performance of its fresh dairy operations in Europe. However, in spite of - or perhaps because of - the work needed to turn that business around, the French food giant appears to be stepping up expansion in faster-growing markets and categories.

By Dean Best

In recent months, Danone has come under scrutiny for the performance of its fresh dairy operations in Europe. However, in spite of – or perhaps because of – the work needed to turn that business around, the French food giant appears to be stepping up expansion in faster-growing markets and categories. The company behind Activia and Actimel saw sales and margins from its European dairy arm fall in 2012 amid challenging conditions in the south of the continent. Countries like Spain are significant markets for Danone’s European dairy business.  Product launches, changed recipes, promotions and a management restructure are all being used to boost the performance of the business. Danone is seeing early signs some of that work is paying off but the group is cautious about its short-term prospects for its dairy business in Europe. However, while Danone is working hard to revitalise what is a significant business, it appears not to be taking up all of the time and focus of the company’s management. There has been a flurry of announcements in recent weeks from Danone on investment in emerging markets and buoyant categories. Of course, the challenges in the dairy sectors of southern Europe may have given the company added impetus. It could also be argued the presence of activist investor Nelson Peltz on the company’s share roster has stirred Danone’s management into action (something Danone would likely deny). Nonetheless, in the last month alone, there have been three announcements that emphasise Danone has a keen eye on growth opportunities. This morning, Danone announced plans to set up a yoghurt venture in China with one of the country’s largest dairy processors, Mengniu. Seven days ago, Danone said it had snapped up over 90% of US organic baby food firm Happy Family. And, at the start of May, Danone agreed a deal to buy a majority stake in Sirma, Turkey’s largest bottled water firm. Analysts welcomed Danone’s move into organic baby food, adding another category to a company that still generates 58% of its sales from fresh dairy products. In the US, sales of baby food fell 1% last year but the organic category is ticking over nicely. Danone’s dairy tie-up with Mengniu also looks wise. Euromonitor forecasts China’s yoghurt sector, worth around US$7bn, will double in size by 2017. Sure, Danone will face stiff competition in both US organic baby food and in Chinese dairy. Happy Family competes alongside the likes of Hain Celestial and Nestle in the US organic baby food sector. Mengniu is China’s largest yoghurt producer, accounting for 17% of sales but Wahaha, Bright Food and Yili all enjoy market shares of over 10%. However, both are buoyant and still relatively fragmented markets and offer Danone solid prospects for growth. Danone’s latest attempt to really crack China’s fresh dairy sector does throw up some questions. The latest deal with Mengniu marks the second time in six years the two companies have tried to work together.  In 2007, Danone and Mengniu ended a venture in China that had seen the two companies produce and distribute fresh dairy products in the country. At the time, the companies said the business conditions for the venture had not been met. The French company’s record of partnerships in emerging markets is mixed. Its previous venture with Mengniu ended affably; another Chinese partnership, with food and drinks giant Wahaha, ended up in arbitration. Danone also had a spat in India with local player Britannia Industries. Nevertheless, with its latest agreements with Mengniu and the Chinese firm’s largest shareholder, state-owned food and drink vehicle COFCO, Danone believes this time it has the “winning combination”.

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