Danone - a year of transition

By Liam O'Neill

Danone, the giant French-based dairy and beverage company, with sales of over €12 billion is increasing its presence on the Irish market. The main Irish competitors are Glanbia, Kerry and Dairygold in the chilled food sector. It competes with Kerry in the bottled water market.

Global sales at Danone rose 9.7% on a like for like basis over 2006. The company recorded an operating income of €1.6 billion and an operating income margin of 13%.

Net income of €4.2 billion was recorded, of which €3.1 billion relates to the once off gain on the disposal of its biscuit activities. Some of the highlights for the year are set out in the Key Points panel.

There was significant activity within the Danone Group during 2007 with the disposal of its biscuit activities, purchasing Numico and reporting its Joint Venture in China under the equity accounting method from July.

Figure 1 shows the shift in the company's product mix over the last 12 years. The company is 100% health focused at the end of 2007.

The Group disposed of its biscuit division at the end of November 2007 for €5.3 billion. This resulted in a net gain on the sale of €3.1 billion. For the 11 months to 30 November 2007, sales in this business grew by 6.5%.

It purchased Numico, the Dutch baby food maker, during the year for €12.2 billion. The Goodwill calculated on the purchase is €9.5 billion. This purchase added Nutricia and Cow & Gate brands to its product portfolio and made it Europe's biggest producer of nutritional products for young children.

Dairy products

Overall sales in this division grew by 12.3% to €8.8 billion in 2007 compared with 9.2% growth in 2006. This arose through a 7.2% rise in sales volume and a 5% increase in prices.

Operating margins improved by 0.6% over 2006, despite the significant increase in the cost of dairy products. Commenting on the performance, Chief Financial Officer Antoine Giscard d'Estaing said: "2007 was an outstanding year for dairy products.'' Operating income for the division was €1.3 billion for the year end 31 December 2007.

Numico

Numico had sales of €2.8 billion for the year end 31 December 2007 of which €2 billion relates to baby foods and €800 million relates to its medical nutrition business. Sales for the year grew by 11%.

Danone is only recording the months of November and December in its accounts following the purchase, contributing sales of €450 million.

Following the purchase, management at Danone realigned the company in line with Group policy.

It reduced the stock levels held, revised its sales strategy and terminated some contracts. This resulted in a marginal fall in the profitability margin from 18.8% to 17.4% (for every €100 of sales, there was €17.40 of profit generated). The division recorded an operating loss of €17 million for the months of November and December, compared with a profit of €339 million for the previous 10 months.

Balance Sheet

There is a significant change in the company's balance sheet with an increase in borrowings to finance the Numico purchase. Borrowings went from €398 million at 31 December 2006 to €8.6 billion at year end.

Sustaining profit margins and optimum efficiency is of particular importance going forward in order to reduce these debts.

Effectively, the borrowings at year end represent a portion of the goodwill that Danone paid for Numico.

In a time of increasing milk prices, how much consumers are willing to bear for the end product will be a critical factor. In 2007, the company was successful in offsetting price increases and passing them on to the end consumer, therefore aiding operating margins. But there are limits on what consumers are willing to spend on products.

Strong performance in the Irish market

Danone continued to perform well in the Irish market in both its dairy product range and bottled waters.

Its product offering continued to expand and, in June 2007, it launched Danone Essensis to its fresh dairy product range.

Since its arrival in Ireland in 1997 the company has gone head to head against well established Irish brands such as Yoplait, Sno and Low-Low in the chilled dairy sector.

In 2006, Danone purchased a 37% equity stake in the Offaly-based yoghurt company, Glenisk, through its British subsidiary Stonyfield Europe.

Since 1997, it is reported that the fresh dairy market has grown at a rate of 226% and Danone has taken full advantage of this growth trend.

In bottled waters, its Evian and Volvic brands compete with Kerry Spring, Tipperary and Ballygown.

Volvic had a 23.1% share of the Irish bottled water market in December 2007 and Evian sales increased 43% year on year.

Contracts

Through the purchase of Numico, it has a number of contracts in place to purchase milk powders from a number of Irish-based dairy co-operatives.

Also during the year, the High Court action between Danone and Glanbia was heard.

Danone had sued Glanbia for infringement of its Irish Trademark 'Essence' with Glanbia having a brand called Yoplait 'Essence'.

Glanbia counterclaimed, arguing that Danone had not put its Irish Registered Trademark to genuine use within Ireland.

Danone lost its action against Glanbia.

Tipperary Co-op wins prestigious Danone Numico supplier award

Tipperary Co-op has won a prestigious major international quality and service award for its specialised milk powder used in infant formula manufacture. The 'Partners For Growth Awards' are presented annually by the giant Danone Numico Corporation and were announced at a ceremony in Amsterdam last week. Danone Numico provides a range of specialised nutritional products to the very young and the elderly.

Tipperary supply product to the Danone Numico plants at Macroom and Wexford.

Tipperary Co-op is the first Irish Co-op or Dairy Company to receive such an award, which recognises the Co-ops excellence in quality, service and innovation. The significance of the award is reflected in the fact that Danone Numico secures ingredients from major dairy manufacturers throughout Europe, Asia, U.S.A. and Oceania.

Tim Dullea expressed his delight on behalf of the Co-op.

"This award represents further international recognition of Tipperary Co-op as a supplier of quality dairy products and ingredients. It pays tribute to the commitment of our milk suppliers, management and staff that helped to deliver this award''.