Investors in the French food group may be forgiven for not sharing this view.
The world’s biggest yogurt maker said on Monday that sales growth would be miss its 3 percent to 5 percent target for 2016. That’s after a revamp of its key Activia brand failed to live up to expectations, particularly in Spain, where it faces competition from cheaper rivals. The shares fell as much as 3.1 percent on Monday, making the company the worst performer in the Euro Stoxx 50 index.
Fresh dairy products accounted for almost half of Danone’s sales in 2015 so it must get this category right
The company’s not the only big consumer goods group to report slowing sales growth. They’re all facing the twin challenges of emerging markets running out of steam, and changing tastes in developed countries, as millennials prefer niche rather than mainstream products. Danone SA needs to show it’s up to the challenge.
Nestle SA in October forecast the lowest full-year sales growth in more than a decade. The same month, Unilever NV reported an unexpected decline in volumes, while even star performer Reckitt Benckiser Group Plc cut its outlook for sales growth this year.
Consequently, manufacturers of food and toiletries are trying a range of approaches to boost sales and margins. Unfortunately, the early signs aren’t good.
Danone raised its margin target for the second time this year, saying its recurring operating margin would be slightly ahead of its forecast expansion of 0.5 percent to 0.6 percent. But that’s not a straightforward move. For one, Unilever’s spat with Tesco Plc over raising the price of Marmite underlines just how difficult it can be to pass on the pain to retailers.
Volumes have fallen as Danone has lifted the prices of its fresh dairy products
But Danone looks like its raised prices too aggressively in Activia and other categories. With too little innovation — Nestle spends five times more than Danone on research and development, says Bloomberg Intelligence’s Duncan Fox — the volume of sales has fallen.
The other route to offsetting slow growth is acquisitions. It’s the path Unilever has taken as it seeks to bolster its position in the fast-growing premium grooming market. The string of deals, the latest of which is high-end hair care brand Living Proof, further cement its position in the home and personal care business, and diversify it away from food.
Danone’s also trying this solution, with its $10 billion purchase of WhiteWave Foods Co. the U.S. maker of organic food and plant-based dairy alternatives. WhiteWave is the fastest-growing U.S. food group, according to Canaccord Research.
That deal was expensive on conventional measures, as my colleague Chris Hughes noted. The hope is that Danone will be able to strip out costs, and turbo-charge WhiteWave’s sales by putting them through Danone’s formidable sales and marketing machine.
But the hiccup in relaunching Activia is a warning that even groups with plenty of customer experience can trip up sometimes. For the yogurt king to have such a big miss with one of its most important brands doesn’t bode well for integrating a pricey acquisition.
Danone will have to take care assuring investors it’s got a grip on the tricky road ahead, or they will have even less to smile about.