French dairy giant Danone has issued a profit warning for 2012 – reducing its operating margin target to account for the collapse of dairy product consumption in Spain and other Southern European markets.
Since the end of the Q1 2012 (January to March), consumption of Danone products in Southern Europe has deteriorated at a steeper rate than anticipated, particularly in Spain. Danone has attributed this to the growing rate of unemployment in the region.
Inflation of raw material prices, which was also stronger than anticipated, also contributed to the firm’s decision.
As a result, Danone reduced its profits forecast for 2012 - announcing that its operating margin was likely to decline by “50 basis points” on a like-for-like basis – a reduction on its earlier forecast of a “stable” margin.
Shares in Danone fell by nearly 7% following the firm’s lower profit forecast.
Despite the warning, Danone’s sales growth target of 5-7% and its targeted €2bn cash flow have been left unadjusted – buoyed by robust sales in its emerging markets including Russia, the Americas and Asia.
“Complex” European market
In a webcast supported its decision, Danone chief financial officer (CFO) Pierre-André Térisse said that an increase in unemployment and the introduction of new tax and austerity measures by governments to address problems in the Eurozone have created an increasingly “complex” region.
“Consumer confidence in Europe has indeed by affected by that,” said Térisse.
“This is the case in Europe as a whole, but even more so the case in Southern Europe, particularly in Spain, which as you know represents an important country for Danone.”
According to the presentation, unemployment in Spain increased from 22.85% in January 2012 to the current figure of 24.44%.
“Unemployment is clearly above the 20% mark now in Spain and above 30% in some regions. There is a clear link being made between the level of unemployment and the level of consumption. High unemployment has been pressing on consumption,” said Térisse.
“For us this has meant several things. First it means a slowdown in our categories. Fresh dairy as a category has turned negative since April and May of this year.”
“It means that private label have progressed and keep progressing.”
“The consequence for Danone is that we’ve been losing market share,” he added.
“Robust” emerging markets
Despite the reduced profit forecast, Danone has stood by its initial target for sales growth, which will remain at 5-7% for 2012.
“Robust” operational performance in Asia, the Americas, Africa and the Middle East and the CIS will continue to offset the poor Western European performance.
“The fundamental of our business are very good,” added Térisse. “Western Europe and emerging markets have had, interestingly, exactly opposite trajectory since 2007.”
In 2007, Western Europe represented 51% of Danone’s sales. This fell significantly to 38%.
Meanwhile, emerging markets’ contribution to the firm’s sales has increased from 38% to 51% in the same period.