Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Danone has unveiled a manifesto to decouple its agendas for growth and efficiency. It is bringing together horizontal collaboration and vertical delegation to create the next orbit in its journey to a food revolution.

Cut through all the management gobbledygook and it reads: growth is slowing, so we need big cost savings to preserve our margins. Things should perk up once our pricey acquisition in a chichi category kicks in, but until then it's all about cuts.

Investors gave the company no reward for its promises, and shares were flat from yesterday. They're right to be wary, as Danone SA seems particularly exposed to the challenges facing all of the big food groups. 

The company said Wednesday its profit expansion would slow this year, with the first few months being particularly difficult. It hasn't given a forecast for organic growth for 2017, saying only that it expected "moderate" top line growth. But it is targeting earnings per share growth of more than 5 percent. That's down from 2016's 9.3 percent, and the lowest in three years. The company aims to save 1 billion euros ($1.1 billion) by 2020.

Poor Showing
Danone sales slump shows the strain from the changing consumer landscape
Source: Bloomberg Intelligence

Danone isn't the only big group to suffer from falling food prices in developed regions and emerging markets running out of steam. 

In the face of sluggish consumers, the big groups have turned their attention to bolstering margins -- think Unilever NV's zero-based budgeting. Danone should probably have trimmed its expenses sooner.

Anemic markets are also in part why rival Reckitt Benckiser Group Plc has paid $16.6 billion for Mead Johnson, following on from Danone's own $10 billion purchase of WhiteWave last year, and why Unilever is adding grooming brands such as Dollar Shave Club. Whether through desperation or enchantment with millennial-friendly categories, M&A's a way to turbo-charge the top line. 

Ulf Mark Schneider, the new chief executive of Nestle, may on Thursday drop the company's long-held organic sales growth target of 5-6 percent. That would wisely free him from a rigid and unrealistic constraint as he prepares to make changes at the Swiss consumer giant. He could also accelerate cost reduction plans to fatten margins.

Danone, meanwhile, has faltered as it deals with the new reality. Its revamp of its power brand Activia hasn't worked. In fact, the company said on Wednesday that a reboot won't deliver results until next year. And it faces a squeeze from an increase in dairy prices.

Late to the Party
Danone's valuation lags peers as it falters in its battle against the industry storm
Source: Bloomberg

The WhiteWave acquisition is due to complete in the first quarter, and should reinvigorate sales growth. But, as Gadfly has argued, the mis-steps with Activia don’t exactly instill confidence in Danone's ability to sprinkle its magic dust on the maker of dairy alternatives.

Buying WhiteWave also meant Danone skipped Mead Johnson. That's now agreed to a takeover by Reckitt Benckiser. Even if the merits of that deal are questionable, Reckitt is likely to be a formidable competitor in the infant nutrition business.

Shares in Danone are flat on the year. They trade at a deserved discount to both Nestle and Unilever. With the challenges ahead, and the restructuring potential at rivals, it's hard to see it narrowing that gap.

One of Danone's favorite slides at its results presentation was a tree, illustrating the revolution in consumer habits. WhiteWave should be at the forefront of this, and Danone needs to make it work. If it doesn't, that tree isn't going to bloom any time soon.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net