Danone’s senior management met analysts in London on 22 October to discuss the French food giant’s plans for growth. Dean Best outlines what you need to know.

Danone eyeing rapid growth for dairy alternatives

The French group’s acquisition of WhiteWave Foods – announced in 2016 and completed last year – was in the main designed to give the dairy giant a significant foothold in the growing market for dairy alternatives.

Added to a portfolio including Activia and Actimel was the US-focused Silk and European brand Alpro. Danone estimates its sales of dairy-alternative – or plant-based – products will stand at EUR1.7bn (US$1.95bn) in 2018, with growth, the company says, being driven by consumer interest in the links between diet and health and between diet and the impact on the environment.

Francisco Camacho, the executive vice president overseeing Danone’s dairy and plant-based businesses, told the audience at the company’s investor day in London the group wants to take that EUR1.8bn to circa EUR5bn in 2025. In a note to clients, Jefferies analyst Martin Deboo said that target implied “15-20% compound growth in a category that currently accounts for 7% of sales”.

Camacho said: “We have a very ambitious goal which is tripling the size of our business between now and 2025. In business lingo, this would be called a big, hairy and audacious goal.”

The Danone executive said there is “strong growth in all key markets” for the plant-based category amid an increasing number of flexitarians – those consumers who still eat meat but eat it less often – while he argued there was a “significant opportunity” to increase household penetration.

“The reality is that the consumer trend has moved from being a niche diet for vegans and vegetarians to something called flexitarians. One-third of the US population say that they are flexitarian.”

Drinks and yogurt account for more than three-quarters of Danone’s plant-based sales and the company is pinning its plans on innovation, marketing and a push in “impulse channels” to further grow revenue from those two categories.

Danone’s innovation strategy will see it continue to launch products in segments such as alternatives for ice cream and coffee creamers – but, interestingly, the company also plans to use some of its existing conventional dairy brands to launch plant-based products. 

In the last quarter of this year, Danone plans to launch a range of dairy-free yogurts in the US under the brand Good Plants by Light & Fit. Camacho’s presentation also indicated Danone plans to launch a dairy-free almond yogurt under the Activia brand over the next year.

“This [dairy] is an incredible portfolio,” Camacho insisted. “Clearly one plus one in our case is three. We are planning to exploit these opportunities that we have and we are going to start expanding our dairy portfolio with plant-based offerings. The first one being Light & Fit. Good Plants by Light & Fit is low in sugar, it has an almond base and it’s high in protein content. There are several growth spaces that we’re exploiting with this initiative.”

Short-term pain, long-term gain for specialised nutrition

Specialised nutrition is the Danone division housing its infant-formula and baby-food businesses (or what the Aptamil maker calls “early-life nutrition”), as well as its “advanced medical nutrition” interests, which markets products for consumer groups from babies with allergies to the frail elderly.

In 2017, the division accounted for 29% of sales (compared to a combined 18% from Danone’s dairy and plant-based units in North America, a further combined 34% from its international dairy and plant-based units, with the rest coming from bottled waters).

At Danone’s investor day, Bridget Heller, the executive vice president in charge of the specialised nutrition division, emphasised how the unit she oversees is not all about infant formula but, given the recent questions the company had been receiving from analysts after a challenging third quarter, she spent much of her presentation focused on that category and, specifically, on China.

The country accounts for a quarter of the revenue Danone generates from specialised nutrition. Heller also mentioned how Greater China accounted for just short of 50% of the world’s infant-formula market in 2017) and was one where, in the company’s third quarter, it saw its infant-formula sales slide (albeit against tough comparable results).

She sought to point out how Danone had “outperformed” its rivals in China’s infant-formula market, while the company had also looked to increase the proportion of its infant-formula sales in the country that were being made through the “direct” channel versus “indirect” channels – that is, sales Danone was controlling directly, versus being made by importers shipping to the country.

Nevertheless, she acknowledged how a shrinking baby pool in China and recent changes in regulation would impact the country’s infant-formula market in the quarters to come. 

“The decline in the baby pool is really driven by a decrease in the population of fertile Chinese women,” Heller said. “The number of births peaked around 2016 [and] that was associated with the relaxing of the one-child policy and the promotion and implementation of a two-child policy by the Chinese government. Nonetheless, there was a significant decline in 2017 and we expect that decline to continue in 2018. Another lifestyle factor that we don’t see talked about a lot is the increasing willingness on millennial women to forgo having children.

“In addition is the evolving regulatory environment over the last year in China. It really is creating a sense of complexity and a lack of clarity at the moment and so we’re expecting that this may impact the timing with which people have planned innovations to come to this market.”

Heller added: “We expect the market will finish in high single-digits [growth] this year and will slow to low-to-mid single-digits through 2020. Going forward, we are absolutely convinced that there huge, positive opportunities for specialised nutrition in China – both within infant formula and beyond infant formula. We believe we have the right assets to capitalise on several important growth drivers and we continue to believe we can strengthen the foundations we’ve established and prepare to begin to grow in new spaces as well.”

Is CEO Faber’s “zeal” frustrating some?

Danone reiterated its 2020 targets for growth in like-for-like sales (accelerating to 4-5%) and an increase in recurring operating margin to more than 16%.

The company argued the step up in its plant-based sales, a doubling in its e-commerce sales (from EUR1bn to EUR2bn) and 5%+ growth from specialised nutrition and waters would drive its top-line growth.

Synergies from the WhiteWave deal, a broader efficiency programme (dubbed Protein) and a greater percentage of sales being derived from “innovations and renovations” (and thereby from products sold at higher prices, so Danone argued) would contribute to the margin target.

Some short-term pressure, notably in China’s infant-formula market, means there is some caution in the market over the outlook for Danone’s sales growth in the next few quarters. But there is, among some analysts, more confidence in the company’s direction when looking further ahead.

“Based on the low valuation multiples the market does not look through to 2020 but focuses more on the three consecutive slower growth quarters ahead, despite the continued margin improvement. We do not see a material organic sales growth recovery until the third quarter of 2019 at the earliest, which is a situation investors are not willing to pay up for at the moment,” MainFirst analyst Alain Oberhuber said this morning.

“However, we continue to like the investment story as the EPS CAGR will be 9% up to 2021 and Danone is active in interesting categories combined with sustainable cost savings to come through in the next quarters.”

Nevertheless, Danone CEO Emmanuel Faber is proving a controversial figure in the financial community. The move to buy WhiteWave was not universally welcomed, while the Danone chief’s repeated assertions the food industry needs to change to guarantee its growth (“This industry is just going nowhere if it doesn’t change”, he said yesterday) do not always go down well among analysts.

In a note to clients today, Jefferies’ Deboo posited the rhetorical question. “A danger that missionary zeal might overwhelm more prosaic goals?” He added: “Emmanuel Faber clearly feels that the mass-marketing model is broken and that Danone will deliver value to shareholders only if it delivers positive externalities to wider stakeholders and a sense of purpose to its consumers. 

“We are not convinced because, one, the model isn’t broken, in our view; two, we worry that a too-obsessive pursuit of purpose-driven benefits and brand-as-social-advocate might blind Danone to the value of more mundane, but potentially broader, consumer appeals; and, three, the evidence of the valuation is that it is shareholders, not other stakeholders, who are most in need of convincing with regard to Danone’s good intentions.”

At the investor day yesterday, one analyst pointed out how Danone’s earnings per share had risen by around 45% since Faber took the helm in 2014 – but the company’s share price had, by comparison, increased 15%.

Asked for his thoughts, the Danone chief responded: “Am I happy to see the share price where it is compared to where I think it could be based on the delivery …  and based on the long-term ambition and the mid-to-short term that we see for our categories, our brands, for the business? No. I’m not happy with that – and we are working hard to make sure that we are closing a gap of valuation by focusing on what essentially we’ve been sharing today.”

Earlier on, Faber, in his opening remarks on why the food industry needs to change the way it does business, said: “The idea that the ultimate goal is shareholder value maximisation is the wrong way to start. We started from the fact that companies that will pursue broader goals will be the ones that will generate better shareholder value in the mid and in the long term.”

However, he added: “I fully endorse the fact that we would not have proven our case if that doesn’t show in the share price, if the externalities in the long term in the vast space around us are not valorised and monetised in our share price.”

just-food interview, June 2017: Danone CEO Emmanuel Faber on why industry “mindset” on health and sustainability needs to change

just-food interview, April 2018: “B Corp is very relevant for the food industry today” – Danone CEO Emmanuel Faber on French giant’s work on the certification