Strong demand for baby milk in China helped Danone stem falling sales in Europe in the second quarter, as the company tried to reassure investors about growth in the Chinese market after it cut prices on infant formula.
Strong demand for baby milk in China helped Danone SA stem falling sales in Europe in the second quarter, as the company tried to reassure investors about future growth in the lucrative Chinese market after it cut prices on infant formula.
The maker of yogurt brands including Danone, Dannon and Activia on Monday confirmed its full-year targets, despite recent price cuts in China amid a probe into foreign makers of infant formula and inflation in raw-material prices.
Danone earlier this month cut prices for baby-milk products in China afterlocal authorities started probing foreign makers of infant formula for possible price fixing and anticompetitive activity. China—which has become one of the world’s largest infant formula markets—has been a key growth driver for Danone since the rise of the middle class there and as well as concerns about the safety of Chinese-made dairy products.
Switzerland’s Nestlé SA, Netherlands-based Royal FrieslandCampina NV and U.S.-based Abbott Laboratories and Mead Johnson Nutrition Co. are also under investigation. All companies have cut prices and said they are cooperating with authorities.
Danone pared prices by as much as 20%, while Nestlé sliced an average 11% from its Wyeth Nutrition line of baby products in China, where a can of baby milk powder can cost up to four times more than in Europe.
Analysts have said they are concerned such cuts could weigh on Danone’s margins, adding to continuing concerns over lackluster consumer spending in Europe and an inflation of raw-material prices recently.
Danone Chief Financial Officer Pierre-André Térisse said the price cuts will have some impact on the group but that this will be “manageable.†“We are fundamentally positive for the prospects of China,†he said on a conference call.
Danone aims for its second-half margin to be at least in line with the 13.3% posted in the first six months, which was down 0.49 percentage point from the same period last year, mainly from investments in boosting volumes in Europe. “We will try to do more,†Mr. Térisse said.
“It’s not entirely clear what the impact of price cuts in China will be,†said Société Générale analyst Warren Ackerman. “If input costs are going up for milk powder and prices go down, obviously your margin is squeezed but Danone may try to get back some of the losses from price cuts by investing less in promotions.â€
Sales of baby formula in China are projected to reach $29.5 billion in 2017, up from $12.4 billion in 2012, according to research firm Euromonitor International.
Foreign makers of baby milk like Danone have benefited from Chinese parents rushing to their products since a 2008 scandal—when dangerous levels of an industrial chemical killed at least six infants and made many more ill—scared them away from locally produced baby milk.
The rush to foreign-made baby milk has even led to some retailers in Europe rationing the purchase of baby milk as Chinese visitors would buy up cans of formula and bring or ship them back home.
This trend, along with sales in China and Hong Kong, helped drive 13.5% organic revenue growth at Danone’s baby-food segment in the second quarter.
Danone said sales for the three months ended June 30 rose 6.7% to €5.72 billion ($7.6 billion). Sales growth was solid growth in the U.S. and Russia. On an organic basis—stripping out acquisitions and currency swings—revenue rose 6.5%against analyst expectations for 5.7%.
In Europe, where sales have been falling sharply due to weak economic conditions, second-quarter sales fell 3% from a year earlier, organically, but that was a better showing than in the first quarter, when sales in Europe fell 5.1%.
For the first half of the year, Danone profit rose 10% to €972 million from €881 million a year earlier, reflecting a higher valuation of its stake in Moroccan unit Centrale Laitií¨re.
Danone’s €200 million European cost-savings plan is running on schedule and should also help buoy margins in the second half of the year, said Chairman and Chief Executive Officer Franck Riboud in a statement.
Source: WSJ
