Danone’s Growth Goals Set Back Six Months After Recalls in Asia

October 16, 2013 04:29 AM

After recalling some products supplied by Fonterra due to a warning of tainted ingredients, the world’s biggest yogurt maker saw its slowest quarterly sales growth since 2009.

Julie Cruz

Danone, the world’s biggest yogurt maker, said a product-safety scare in Asia has set the company back by six months in its efforts to restore "strong sustainable, profitable growth."

Sales of baby-nutrition products slumped in the third quarter after Danone recalled some products supplied by Fonterra Cooperative Ltd. due to a warning of tainted ingredients. That led to the slowest quarterly sales growth since 2009 and prompted the company to cut its full-year forecasts today.

"The Fonterra story has impacted us by six months in terms of delay in reaching what we wanted to do," Chief Financial Officer Pierre-Andre Terrisse said today on a conference call.

Danone fell as much as 5.2 percent in Paris trading, the most in about a year, as the company followed Unilever and Nestle SA in reporting slowing revenue. Growth in many emerging markets is weakening and the Activia maker has also been weighed down by bribery claims at its Dumex baby-milk business in China, where it has been fined for fixing prices of infant formula.

"While we expected that Danone would warn before February, we didn’t expect it now," Jeff Stent, an analyst at Exane BNP Paribas, said in an e-mailed statement. "But I guess better to get real sooner rather than later."

Baby-nutrition sales, representing about 20 percent of revenue, fell 8.6 percent on a like-for-like basis in the third quarter, hurt by the recall of infant formula in eight markets that subsequently proved to be a false alarm.

Danone is claiming at least 200 million euros ($272 million) in compensation from Fonterra, though the New Zealand company has said it "strongly denies" any legal liability.

Brand Positioning

Baby-food sales in September were 40 percent of the July level in the markets affected by the product recalls, Terisse said on the call. Danone’s priorities are to diminish high levels of inventory, reassure consumers and improve the company’s brand positioning, he said. Inventory levels will stabilize toward the end of the year, the CFO said.

Terisse said the recalls reduced sales growth by 3.2 percentage points in the third quarter and will have an impact of about 3 percentage points in final three months of 2013. The effect for the year will be about 1.5 percentage points.

Operational expenses of the recalls, margin reductions and action to revive sales will cost about 280 million euros this year, the executive estimated.

Danone’s total like-for-like sales gained 4.2 percent in the quarter, missing the 4.8 percent median estimate of 15 analysts. The company lowered its forecast for organic sales growth for the year to 4.5 percent to 5 percent, having previously been predicting at least 5 percent.

Unilever, Nestle

The stock was down 3.9 percent at 50.99 euros at 12:33 p.m., while shares of rivals also fell. Unilever, which this month reported weaker quarterly sales growth, dropped 0.7 percent to 27.72 euros in Amsterdam. Nestle, which announces third-quarter revenue tomorrow, eased 0.6 percent to 61.80 Swiss francs in Zurich. The KitKat maker in August reported the slowest first-half sales growth in four years.

Next year will be "very unbalanced" for Danone, Terisse said. The company will have "a high comparison base in terms of top line and in terms of margins" in the first half of 2014, he said. Yet the CFO doesn’t expect margins to weaken next year.

Danone narrowed its forecast for 2013 operating margins today. The company sees a drop of 80 basis points, compared with a previous range of 30 basis points to 50 basis points down.

In July, Danone said it would reduce prices for its main infant-formula products in China by as much as 20 percent after local government started a price-fixing probe.

Bribery Claims

Danone has also had to deal with bribery claims at its Dumex baby-milk business in China. The unit paid medical workers in the northern city of Tianjin to promote its infant formula, local government said on Oct. 14. An official investigation found that health-care staff had accepted payments from the French formula maker, prompting Dumex to take disciplinary measures and strengthen governance in China.

Danone’s water division provided a bright spot for the company in the third quarter, posting like-for-like growth of 17 percent amid the introduction of Bonafont aquadrinks for kids in Mexico and new-flavored Akmina aquadrinks in Turkey.

Like-for-like sales at the dairy unit rose 4.6 percent as consumers ate more Oikos Greek yogurt in the U.S. and the market started to recover in southern Europe.

The dairy market is stabilizing in France, Portugal, Spain and the U.K., Terisse said. The company doesn’t plan price increases in the western European dairy business, the CFO said.

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