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Danone must cut prices to compete with private label brands – analyst

By Mark Astley , 19-Oct-2012

The collapse in dairy product consumption in Southern European countries was reiterated in Danone's Q3 report.
The collapse in dairy product consumption in Southern European countries was reiterated in Danone's Q3 report.

Danone must cut the prices of its branded dairy products significantly in parts of Europe to compete with lower-price private label brands, French banking giant Societe Generale has claimed.

The call came just hours after French dairy giant Danone announced its Q3 2012 results, which revealed continuing dairy product consumption deterioration in Southern European countries such as Spain.

Initial concerns about the collapse in European dairy consumption led to the issue of a profits warning by Danone in June 2012.

The firm’s Fresh Dairy Products division reported solid Q3 sales growth in emerging regions, the US, and Russia, but was let down by its operations in Europe – reporting a consolidated sales increase of just 0.7% for the period ending 30 September 2012.

Sales in Southern Europe fell by more than 10% in Q3 compared with the same period of 2011.

According to a note from Societe Generale managing director of European food production research, Warren Ackerman, price cuts of at least 30% will be necessary to compete with cheaper private label dairy brands and aid consumption recovery.

No short term fix

“Danone’s fresh dairy businesses in Spain, Italy and Germany all saw revenue declines of more than 10% in Q3 12. Although the rest of the businesses, particularly emerging markets, are performing well, group growth should be hampered until we see signs of stabilisation here,” said Ackerman.

He added that “stabilisation” is unlikely to be seen in the short term.

“In Spain and Italy, where Danone’s price points for yoghurts are double those of private label equivalents, LFL sales fell 10%. Danone confirmed that it is only now starting to take pricing down, and at this stage, was reluctant to say by how much.”

According to Ackerman, significant price cuts by Danone will be necessary to tempt back consumers in countries such as Spain, Italy and Greece, where unemployment is currently as high as 25%.

“We think price cuts of at least 30% are needed, plus more promotions, as well as a strong launch programme of cheaper SKUs. As a result there could be a major impact on LFL growth from price cuts in 2013,” Ackerman added.

Reconfirmed targets

Danone reported company-wide sales of €5.257bn for the third quarter of 2012 – a 9.4% increase on Q3 2011. On the back of the results, Danone reconfirmed its June 2012 adjusted full-year targets.

“Danone reconfirms its full-year targets for 2012: sales growth of +5-7%, operating margin down 50bps, and free cash flow of €2bn,” said the firm’s Q3 financial report.

But according to Sanford C. Bernstein analyst Andrew Wood, Danone is more likely to “limp across the finishing line.”

“Indeed with just 5.6% growth YTD, Danone might just limp over the finishing line in terms of its FY organic growth target of 5-7%,” he said.

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