Danone Unveils €1 Billion Cost-Cutting Program as Growth Slows

15 Feb 2017 --- Danone has forecast slower profit growth this year and said it will seek to cut 1 billion euros ($1.1 billion) in costs by the end of the decade as the world’s largest yogurt maker grapples with an expected surge in milk prices. The maker of Activia and Actimel has said that it is targeting earnings per share growth of more than 5 percent, which would be the slowest in three years.

Last year, profit rose 9.3 percent on that basis. The company blamed the slowdown on problems in Europe, including the relaunch in Europe of its Activia yogurt product and weak sales in Spain. New regulation in China also weighed on baby food sales there.

CEO Emmanuel Faber’s comments: “With the upcoming addition of WhiteWave, we will soon start a whole new and exciting chapter of our alimentation revolution journey. While we delivered a robust performance leading to a very strong recurring EPS growth in 2016, the challenges we faced, including a slower turnaround of dairy in Europe and major market volatility, are a clear case to step up in our ability to seize consumer opportunities and improve our efficiency.”

“Today's announced changes will drive horizontal collaboration and vertical delegation across our entire organization, making us more agile to grow, closer to consumers, and driving consistency in resource allocation. On one hand, I have decided to address our efficiency agenda in a radically new way, and to launch a comprehensive, company-wide program allowing us to spend better and more sustainably and to work more efficiently. On the other hand, fueled by resources generated from higher efficiency, our new integrated growth and innovation process will gradually bring our brands into an entirely new level of relevance with their communities of consumers, which is the core of the alimentation revolution.”

“These decoupled mid-term growth and short-term efficiency agendas, linked by our seamless resource allocation process, will allow us to reach both our short and mid-term financial objectives, beyond the benefits of the future WhiteWave acquisition. On behalf of my whole executive team, I would like to share my pride for all Danone teams, working hard every day to provide great and wholesome products: better for our health, better for our planet.”

In a statement, the company reported: “In an increasingly volatile and complex environment, Danone has decided to address its efficiency agenda in a radically new way. Danone is therefore launching a comprehensive program of efficiency on its Selling General & Administrative (SG&A) Expenses, called “Protein”, designed to deliver €1 billion savings by 2020. The objective of Protein is to enhance Danone’s competitiveness by amplifying its efficiencies. It consists in creating the best conditions to spend better, buy better and work more efficiently in a sustainable manner. Danone will consider how best to re-invest part of those savings into relevant growth projects to fuel its strategy and mission.”

In 2017, Danone assumes that economic conditions will remain particularly volatile and uncertain overall, with persistently fragile or even deflationary consumer trends in Europe, and specific contextual difficulties in a few major markets, including the CIS, China and Brazil.

In addition, Danone anticipates a year-on-year mid-single digit rise in the cost of its strategic raw materials. In this context, the Company will continue to strengthen the resilience of its model through a range of initiatives aimed at offsetting inflation and limiting its exposure to volatility in some raw materials while ensuring the competitiveness of its products.

More specifically, Danone anticipates a steep rise in milk prices over the year, with variations from one geographical area to the next:
- A low to mid-single digit increase in Europe and the United States, and;
- a strong rise in emerging countries such as the CIS and Latin America.

Regarding other raw materials, including plastics, sugar and fruits, Danone also anticipates inflationary conditions overall.

In 2016, Danone’s Fresh Dairy Products division reported sales up +2.0% like-for-like, after a +0.6% growth in 2015. This performance reflects mainly an acceleration in growth in the CIS and North America1 region, in line with expectations.

In the United States, Danone generated solid growth throughout the year despite a more competitive environment in H2 2016. Successful brand innovation and activation have contributed to reinforcing Danone’s leadership and more generally its fundamentals, in the face of a category expected to become more challenging in 2017.

In Russia, Danone demonstrated the resilience of its business model for the third consecutive year, in a difficult economic environment. The enhancement of its brand portfolio’s value through mix management and the strength of its brands has offset lower volumes and generated solid sales growth.

In Europe, sales trends have been impacted by Activia’s performance and aggravated market conditions in Spain in Q4. At this stage, Activia’s sales results are below expectations as the relaunch has not delivered the brand’s turnaround. Given the ambition of the transformation, this turnaround will take time, local execution plans are being reworked and teams have already started to implement them country by country.

The ALMA region generated strong growth in 2016. However in an economic context experiencing high inflation and fragile consumer spending in Latin America, the fall in volumes observed in the first nine months of the year continued into the fourth quarter, particularly in Brazil, and is expected to last in 2017.

In 2016, the Waters division reported sales up 2.9% like-for-like. Excluding China, the division’s overall performance was at mid to high single digit, supported by strong category dynamics related to consumers’ switch to healthier hydration options and a constant focus on brand innovation and activation.

Early Life Nutrition sales rose by +3.5% in 2016, on a like-for-like basis. This performance includes a decline in ‘indirect’ sales to China. Excluding these, division growth remained strong at mid-single digit growth.

Medical Nutrition growth was very strong at +7.4% in 2016, on a like-for-like basis and was balanced evenly across the division's geographical areas.