Looking up

CEO Franck Riboud explains how Danone turned a crisis into an opportunity and why the future lies in emerging markets.

“Hard discounts are not declining but they are stabilizing, which means that brands are gaining market share.”
-Frank Riboud

When does lowering your prices lead to a rise in profits? The temptation might be to say never, but it is precisely the approach Groupe Danone took with some of its biggest brands in response to the treacherous business climate of the last few years. As part of its Reset Programme, the company took advantage of depressed milk costs to lower its prices on products like probiotic yoghurt drink Actimel in key markets. Taking the results for Poland as an example, the process clearly yielded some positive outcomes. By reducing the price of Actimel by 30 percent, the consumer base was increased by 50 percent, reaching a record value in the final two months of 2009.

For the organisation's Chairman and CEO Franck Riboud, these results vindicate Danone's response to an incredibly difficult trading environment. "The most important thing for me, and I explained that last year, was to be sure that Danone will not suffer from the crisis but, let's say, will leverage the crisis to reinforce our position," he says. "If I look at the market share and even the volume market share of all our brands in every country, in every business of Danone, let's say in 90 percent of the countries and the businesses we gained market share, so that's the best answer for us."

Additionally, the way in which Danone has negotiated the recent turbulence gives the CEO a great deal of hope for the future, hope that companies who failed to take similarly radical action might not be feeling this year. "If we look at 2010, we are more confident in our ability to deliver what we expect than when, in 2008, we said the crisis is there. If you remember we were one of the first to say that even in the emerging countries there will be a slowdown," Riboud continues. "Because of the job we did (what we called a reset), we totally reset the Group in a context that was more easy than you will have tomorrow; it's a fact that we decided to leverage the positive impact of the raw material to develop the volume of our brands. Those who are going to do that next year will have more trouble to execute. So the strategy was a good one for sure, except that the most difficult thing is not to express a strategy. The most difficult thing is to deliver the result you expect from the strategy. And when I look at the figures we have in 2009, or the result we have in 2009, clearly the management of this company finds their way to deliver what we expect from the strategy."

All in all Danone hit a growth in sales of seven percent last year. While not a massive jump, it exceeded what many would have predicted at the end of 2008 and has clearly instilled a little more confidence in the organisation. Whereas the company declined to provide any concrete forecasts at the beginning of 2009, this year they have laid out some clear targets. Though current predictions place 2010 growth as being flat (only matching that of last year), analysts have indicated that this may be a conscious effort to under promise and over deliver. This seems like a plausible assessment, especially seeing as any company seeking to emulate Danone's reset plan is going to find it a far trickier proposition in 2010 than in 2009. Having already done much of the hard work, Danone is now in a position to explore other ways to achieve bigger top line growth. "Is it easier for the competition to answer to our reset plan next year, or was that easier last year?" says Riboud. "That was definitively easier last year because everybody, every company was benefiting from the positive raw material impact. Tomorrow, you will have to answer not having the positive impact of the raw materials, so it's going to be tougher to deliver a reset plan. Not for us, it's done."

The impact of the last few years on Danone's relationships with the retailers that sell its products has been significant. Some voices had even been predicting the 'death of the brand' with lower cost products grabbing market share as buyers became more concerned with price than the name on the label. Riboud however thinks that those writing eulogies for branded products are acting prematurely. "For example in France, with the hypermarket channel, they react and they gain share," he says. "Hard discounts are not declining but they are stabilizing, which means that brands are gaining market share." In turn, as supermarkets rush to corner the market in lower cost alternatives to familiar brands, that puts them under pressure. Margins are tightened meaning that the increase in market share might not provide the financial benefits that the retailers seek. Riboud sees the best possible outcome to be a future where producers like Danone and major retailers work more closely together to the benefit of all. "The vision I have is a positive one, because more and more we can't find a solution just within our company. We must work together. So perhaps that was a disagreement a few years ago, but clearly now if I look at the way we work with Carrefour, with E.LeClerc, with Wal-Mart, with all of them, we have a business plan, we have long-term objectives, and we know what do we have to put behind this to deliver the result."

A key focus in Danone's strategy is building customer base in emerging territories. This has led the company into an unusual collaboration in Bangladesh with Nobel Peace Prize-winner and founder of Grameen Bank, Professor Muhammad Yunus. In a break from the normal corporate model, the small-scale initiative is instead chiefly focused on making social rather than financial gains. In recognition of the fact that around 50 percent of Bangladeshi children suffer from malnutrition, the small factory - 200km north of the capital Dhaka - manufactures nutritionally reinforced yoghurt at a price affordable to local people. Additionally, the plant sources most of its raw material locally, providing a much-needed economic boost to farmers in the area. Finally, much of the product is distributed to nearby villages by a network of local people, accompanied by Danone officials explaining the health benefits the yoghurt can bring. Given that a single cup of the yoghurt - marketed under the name Shoktidoi (energy in Bengali) - can provide as much as 30 percent of a child's daily nutritional requirements, the initiative has some potentially far-reaching benefits for the people of Bangladesh.

Unsurprisingly, there are also gains for Danone beyond just doing a good deed. This small-scale approach has allowed the company to test the waters rather than diving head first into entirely unfamiliar territory. Projects such as this give invaluable insights into doing business in new markets, particularly the different approach to sales and marketing that is required in places like South Asia.

Riboud himself is adamant that successful expansion into traditionally less affluent territories is about much more than just keeping prices low. "Knowledge of the consumer is a real battle, especially in an emerging country," he says. "Looking at the success we have with baby food in Indonesia; did we reduce the price in baby food? Answer, no, because especially in the emerging country where the buying power is less, if you reduce the price of your baby food product you will lose market share. It's a direct link between quality and price. Is it a reason not to look at the consumer who doesn't have the buying power to buy your, let's say, expensive product? No, our job is to find the right answer for the consumer, and that's the reason why we launched this product in Indonesia. And, obviously, as usual in Danone, if it is a success in a country, we will roll out in the other one, because the only thing we know, the best we know, is to roll out the best practice, and we are organized to do that as quickly as possible."

A common route for an organisation of Danone's size seeking to expand into new markets is large-scale acquisition. However, while acquisition certainly plays a part in the company's plans, anyone awaiting something on the scale of Kraft's recent takeover of Cadbury is likely to be disappointed. "Last year we opened two or three countries and we will continue to do it," Riboud explains. "The question is, how are we going to open the countries without starting from scratch? For example, in Egypt we bought a very, very small company, not because of the company itself, because that helped us to grow faster. You get the energy, you get the facilities, you get the trucks, you get the warehouse. In some countries you grow much faster by buying somebody - even if it's a very small company - than to start from scratch."

However, this doesn't mean that the only expansion route is through acquisition. Essentially each new territory is evaluated on a case by case basis: it could mean a completely new enterprise, the takeover of an existing company, a completely new product line or the promotion of an existing brand. It helps that Danone is already in possession of a network that already covers much of the globe. "More and more we are going to see how we can open new countries by launching new products or products existing in other countries, leveraging the organization we have," Riboud confirms. Thus the business already in operation in Russia can be exploited to extend the company's reach eastwards, while Shanghai's dairy business is seen as a jumping-off point to other Chinese regions. Given that, even at a comparatively early stage, offers a potential market three times the size of Belgium show just how important these geographical footholds can be.

Moving forward, it seems Danone has much to be optimistic about. Having negotiated a rocky few years with a great deal of success, the company's strategy has been vindicated and has left it in a strong position to continue its recent momentum. For Riboud at least, 2009's hard work has paid off, and 2010 promises more of the same. "We leveraged a crisis by not only resetting the brand, but totally resetting the company, just giving us all the tools we need to continue to build and accelerate," he says. "And the balance sheet is part of that. And in the end, I think it's a real good illustration of the confidence of the Board on the ability of the management to continue to build the company mid-term and long-term."

Healthy skepticism?

The latest chapter in the seemingly endless tussle between Danone and the European Food Safety Authority over probiotics was written in April 2010 when the producer of Activia and Actimel withdrew key health claims from EFSA’s assessment system. While cynics might suggest that this undermines the increasingly big promises some companies make about the health impacts of so-called functional foods, Danone contends that the withdrawal is merely a symptom of the frustrating opacity of EFSA’s certification process.

The story has a ring of Groundhog Day about it. It was almost exactly a year ago that Danone withdrew similar claims from EFSA assessment. Indeed, the claims were only resubmitted within the last six months, each backed with nearly a dozen specific clinical trials. So what’s the problem? According to Danone’s representatives, the virtual impossibility of acquiring status updates or even clear instructions on EFSA’s scientific requirements has left the company, as well as many of its peers, completely in the dark. Speaking of Danone’s decision, the company’s Vice President of external affairs and Head of EU regulatory affairs, Patrick O’Quin said: “This complete lack of contact is one of the main issues we and the rest of the industry has.” This statement is backed up by a letter recently sent to EC President José Manuel Barroso by the industry group European Health Claims Alliance, calling for major changes in the way health claim assessments are managed.

For Danone, attention is now being turned to the EFSA stakeholder meeting scheduled for June as the best chance to seek clarification and get the stalled approval process moving again. Until then, the company will temper the claims it makes about its products. Better that than risk its long-term health by staking its future on a decision seemingly being made in the dark.