Danone Looks To Emerging Markets For Long-Term Growth
PARIS Dow Jones–French food and bottled water company Danone BN.FR is counting on expansion in emerging markets to secure strong long-term growth a strategy analysts say should bear fruit but also will present obstacles en route.
Our growth in these markets will be stronger than in mature markets Emmanuel Faber Danone’s co-chief operating officer told Dow Jones Newswires. The more complicated context of 2009 leads us to set priorities in entering new countries but geographic expansion remains our strategy for the decades to come he said.
Danone recorded EUR15.2 billion in revenue in 2008m 63% of this from the fresh dairy division where the French blue chip is the world’s number producer by volume with blockbuster brands like Activia and Actimel.
Danone doesn’t give a figure for revenues in emerging markets per se but Faber said the company gets at least 30% of its annual revenue in such countries. Emerging markets are even more significant in terms of growth Nomura estimates 70% to 75% of Danone’s organic profit growth emanates from emerging markets. Nomura rates Danone reduce.
Mature markets on the other hand are sluggish. The French company saw sales in fresh dairy fall on its home turf in 2008 and only hold steady in Spain and Germany.
Emerging markets also hold promise for the sales of bottled waters where brands like Evian and Volvic make Danone world number two behind Nestle SA NESN.VX. While water sales in Western Europe and North America posted a strong decline in 2008 growth was sustained in the rest of the world according to a company regulatory filing.
Danone doesn’t need to do something transformational right now but over the next six 12 18 months they should be looking for opportunities in new markets where they are currently not present for example in certain places in Asia said Eric Scher an analyst at Sanford Bernstein which rates Danone shares at outperform.
Faber said Danone is targeting countries across the world whether in Asia or Latin America or even in some African countries. It will also have projects in India he said.
The attraction of emerging markets for Danone is strong. But while the virtues of expansion aren’t in doubt Danone will need to be nimble to clear hurdles on the way and be ready to grapple with the complexities of new markets and the demands of possible partners. It may also see weaker margins in emerging markets at least in the short-term.
One of the big challenges in India for the food industry in particular is the very fractured mode of distribution with multiple channels to get products into retail stores said Gunjan Bagla managing director of U.S. Amritt Ventures which advises American companies on Asian markets.
Bagla said that despite the recent expansion of big retail chains 90% to 95% of retail goes through the equivalent of mom and pop stores Getting your product through that can be extremely difficult.
Danone knows all too well that using joint ventures to help circumvent such challenges isn’t necessarily a simple or cheap solution. In April the company sold its interest in Indian bakery company Britannia Industries Ltd. 500825.BY to the Wadia group. This put an end to an intellectual property dispute with Britannia over the Tiger biscuit brand in India and allowed the French company to pursue its business interests independently.
JV partners in India have become worldly-wise. Good entrepreneurs in India know they can build a business on their own so they have become quite aggressive on the terms in joint ventures Bagla said. The cost of joint ventures for Western companies has therefore gone up.
And India isn’t the only developing market where a partnership hasn’t worked out for Danone. Since 2007 it has been in a legal battle with the minority holders of its Wahaha water venture in China.
Danone which holds 51% of the capital of the subsidiaries making up Wahaha believes the minority holders have illegally established companies that produce and market products similar or identical to those marketed by the Wahaha subsidiaries.
Despite its woes in China Danone doesn’t rule out joint ventures in the future although it will seek control. The question is not so much how much capital is held but more what managerial control we might have. The door to joint ventures is in no way closed but we would prefer to have the management Faber said.
Another option is outright acquisition. When Danone announced a surprise capital increase late May it signaled that as well as paying down debt and supporting organic growth the cash raised would give it flexibility to pursue small acquisitions.
It’s clear that from now on in our businesses and above all if we are talking about emerging markets the local players are generally small- and medium-sized – it is these businesses that could interest us Faber said. Acquisitions in Western Europe are not a priority he said.
But a series of small bolt-on purchases will expand Danone more slowly than via marquee acquisitions. In the main Latin American countries [where Danone is already market leader in dairy products] Brazil and Argentina it’s a fragmented market with a lot of local players so it’s a question of steady expansion rather than a big surge said food and drink analyst James Hemsley of Business Monitor International.
Hemsley said that although assets in emerging markets did dip in price as the world economy slowed they have rebounded over the last few months.
In Latin America there are assets worth buying but you need to be one of the top economic players to make it economical. You need to spend big to build the facilities to supply the brands investing in infrastructure or joint ventures Hemsley said.
Setup costs aren’t the only factors that could crimp margins for Danone as it expands in emerging markets. The distribution of perishable dairy products is a more expensive exercise and requires more frequent deliveries says Nomura analyst David Hayes.
Danone is trying to increase the propensity to consume yogurt through the introduction of…health concepts. They’ve already done that in easier-to-win markets like Russia Mexico and Eastern Europe now is the time to go to the next level which may be more challenging regarding margins and returns Hayes said.
Faber insists that Danone can garner strong margins in some emerging markets.
In certain emerging market countries with products with significant added value local production and capillary distribution our margins can sometimes be greater than in mature markets Faber said. A capillary distribution network uses diverse transportation means to make small wide-reaching deliveries.
But even if Danone can get strong margins in some instances it will have to keep its selling prices low to gain market share. In the short run Danone will have to adjust their price levels down with the dairy market – so short term the organic sales growth momentum will be impacted by the adjustment of the price says Marco Gulpers an analyst at ING which has a buy rating on Danone shares.
You have to take that to secure the long-term growth – if you look beyond that emerging markets will be the superior growth platform for Danone or for Unilever UL for that matter Gulpers added.
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By William Horobin
Of DOW JONES NEWSWIRES
