In October 2010, following its latest financial reports, Danone stated that emerging markets, under which the group also includes the US, are the company’s priorities as drivers of both present and future growth.
Since this announcement the group has taken a number of further strategic steps to realign and strengthen its operations in its various emerging markets.
The group and Unimilk have finalised the merger of their Fresh Dairy Product businesses in Russia and other CIS countries while Danone has also made an acquisition in the US, purchasing the YoCream frozen yoghurt business for US$103 million.
Danone enters US frozen yoghurt category via acquisition
While the US is the world’s most industrialised economy, some of its markets, such as yoghurt, are still moderate in size and growing rapidly. US per capita consumption of yoghurt stands at just 6kg, while in France it is three times higher at 18kg, according to Euromonitor International data.
Danone has announced it plans to triple its US sales over the next two years without making large acquisitions, thus ruling out the purchase of Dean Foods, the largest US milk producer and long seen as a target for Danone. The reasoning behind the decision is that milk products are not a core focus area for Danone.
However, the company does not plan to achieve this threefold increase in sales in the US exclusively through yoghurt, but has entered a new, complementary category, frozen yoghurt, thanks to its latest acquisition of YoCream.
Frozen yoghurt sold through retail channels is currently a moderately sized packaged food segment. Danone is targeting the largest national market, the US, which accounts for over 50% of global sales.
However, over the 2010-2015 period this market is expected to contract slightly, while dynamic growth is forecast in neighbouring Canada, set to post a 4% CAGR over the same period. Globally, the frozen yoghurt markets for Danone to watch will be South Korea, the Netherlands and the UK, with expected CAGRs of 5%, 4.3% and 3.4%, respectively, over 2010-2015.
With this acquisition Danone will also gain access to an away-from-home distribution network in addition to its existing channels. The move highlights Danone’s current strategy for expansion in the US, in particular by increasing the frequency and number of places where its products are consumed.
Joint Danone–Unimilk operations in Eastern Europe
In November 2010, the group established a joint fresh dairy product venture with Unimilk covering Russia, Ukraine, Belarus and Kazakhstan, with Danone taking a controlling 57.5% stake in the new entity, with estimated joint annual sales of €1.5 billion.
The joint operations expect to benefit from their complementary geographic and category positioning across all price platforms. The venture’s geographic direction is undeniably focused on markets with good growth potential.
Category-wise, Danone’s currently high profit margins from operations mainly in added-value and functional segments could be pushed downwards with the addition of Unimilk’s lower-margin, largely milk, sour milk and cream portfolio, which also secures Danone’s presence in lower price platforms, ensuring a wide consumer base for the merged entity.
Russia’s dairy market remains a focus for many expanding dairy players. For example, most recently PepsiCo acquired a controlling stake in Russia’s leading dairy player Wimm-Bill-Dann, while Lactalis has acquired the Yefremovsky milk processing plant.
The country’s dairy market is expected to outperform the Eastern European region as a whole over 2010-2015 with a 4% CAGR, and in absolute retail value terms the country will account for some 60% of regional market growth over the period.
However, volume growth is expected to remain well below value growth, at less than a 3% CAGR, indicating an increase in unit price and stiff competition in the dairy market’s health and wellness categories, in which Danone is well positioned to compete with its strong and well-established research and development and marketing capabilities.
Emerging market expansion remains a core strategic objective
Although Danone’s international activities are strengthening year-on-year, Western Europe continues to account for the largest share of its packaged food sales.
Across all developed markets certain recessionary trends, for example trading down as a result of declining consumer purchasing power and more price-conscious purchasing decisions, continue to impact Danone’s mainly premium-positioned portfolio and its profitability, thus making emerging market expansion an even more important pillar of the company’s long-term growth strategy.