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While Danone reported a 4% like-for-like rise in group revenues in 2015, this was largely driven by its waters and early life nutrition divisions. The group’s largest division, fresh dairy, saw more modest growth of less than 1%. Although its results were hindered partly by the fall in milk prices following the end of the EU milk quotas in March 2015, like-for-like sales in fresh dairy declined during the year. By contrast, the early life nutrition unit, which mostly consists of baby food, continued to see robust growth in 2015.
While the historically low milk prices contributed to a 6% rise in operating profit in 2015 in like-for-like terms, for 2016, the group will face challenges in sustaining both its sales and profit performances. It may focus more strongly on premium brands amid the more challenging environment in baby food, while in dairy, the modest growth opportunities in its main markets has encouraged Danone to expand in less mature and markets, as highlighted by the acquisition in February 2016 of the Egyptian cheese manufacturer Halayeb.
Baby food sales continued to benefit strongly from the company’s strong presence in China, with Aptamil and Nutrilon being well-established as premium brands. They also benefited from efforts to distribute both brands more widely in specialist baby products stores as well as through internet retailing.
However, the Dumex brand continued to suffer in 2015 as its image remained mired by earlier product recalls in consumers’ minds. From 2016, the Dumex brand will be under the control of Danone’s local partner Yashili, cementing Danone’s shift towards premium imported baby food. While this move will lead the group to lose a large chunk of its milk formula share, it will also help it eschew the cut-throat price competition at the lower end of the price spectrum.
In dairy, while its performance in Europe and North America remained modest in 2015, Danone recorded strong growth in Latin America, notably with the health and wellness brand Activia in Brazil; its sales reaching US$1.0 billion in 2015, and almost doubling between 2010 and 2015. However, the deep recession set to affect Brazil in 2016 undermines the prospects for such a premium brand.
Echoing arch-rival Nestlé, Danone is cautious for its 2016 growth prediction, citing volatile environments with continued weaknesses in demand in Brazil and Russia and lower growth in China, with analysts’ median consensus growth of less than 1%, despite a likely rise in milk prices set to boost fresh dairy sales, with a 2% increase forecast. Hence, the group will need to focus more strongly on value-added premium dairy products if it is to maintain margins.
In the same week as Danone announced the Halayeb acquisition in Egypt, Arla announced plans to invest in dairy production capacity in Nigeria, confirming its commitment to the market, which is among the six key markets on which it plans to focus under the Strategy 2020 programme. As several of Danone’s key emerging markets can no longer be relied upon to provide growth, expanding in Africa is set to become a stronger priority, albeit under longer-term goals, which for 2016 only are unlikely to be game-changers.