Danone feels the heat with ‘flat’ Russian sales

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Danone feels the heat with ‘flat’ Russian sales
Last year's severe summer drought in Russia has hit Danone’s third quarter (Q3) 2011 dairy sales in the country, with the French company forced to raise prices to end consumers due to higher ingredients costs.

CFO Pierre-André Terisse told analysts and investors during a conference call today that dairy giant Danone hoped to harness the real potential of its Danone Unimilk division – which was born following a December 2010 merger – from 2012.

Overall, Danone posted a 5.9 per cent growth in like-for-like sales in Q3 (4.4 per cent value led, 1.1 per cent volume led) to just over €4.8bn “in line with expectations”, ​but unfavourable weather in Western Europe hit the firm’s beverage business, while last year's drought in Russia meant stiff dairy price increases that dented sales.

The Russian and US markets were passing through a “transitional phase”​, according to Danone, although Terisse insisted that the former had stable sales, with low single-digit US growth.

Within fresh dairy, Danone recorded 4.1% topline growth in Q3 as sales slowed (5.5%: Q3 2010), and despite a market “negative on volume and flat on sales”​, Terisse said the firm remained confident about long-term prospects for the Russian market.

Innovation pipeline

Danone had introduced Tema probiotic yogurts in Russia, Terisse said, while he said the firm also had other products in a “pipe of innovation” ​to harness market potential from 2012.

Terisse said: “We said this year that we were not willing to push on volume and push on sales, but we’ve said as well that our priority was to build the portfolio, pipe of innovation, strong value brands for next year. We are proceeding well in this direction.”

RBS analyst Ian Simpson asked for more information about Danone’s growth ambitions for its Russian division – given the firm’s announcement in February that it hoped Unimilk would add 50-100 basis points to its group topline.

Simpson noted that it “seems like we won’t see”​ such growth in 2012, but Terisse said he was not willing to give the analyst any quantified guidance for 2012.

Danone’s one goal was to establish a wide, profitable platform to push on sales and achieve double-digit growth in Russia, he added. “Will we reach this in the first half or second half of 2013? I'm not willing to go into details – but all our work focused on this direction.”

Erskine asked what had changed in the last 9 months that had delayed Danone's Russian growth, and Terisse said: "It's simply the fact that we had a big heat wave in Russia in the middle of 2010, which caused raw materials to increase far above the pace of increase we have seen in the rest of world."

Typically Russian situation

This had led to manufacturers, including Danone, raising prices to protect profitability, but this had driven the Russian dairy category to "progressively neg volumes".

Terisse added: “That’s extremely typical in Russia – these are things we've been going through in 2005 and 2008. So it’s not the first time, and it probably won’t be last time. We have to live with it, but a heat-wave won’t change the plans for that type of acquisition.”

Answering a further question on Russia from Warren Ackerman, an analyst at Societe Generale, Terisse said consumers had seen 10-15 per cent inflation within dairy during 2011. He said: “With that kind of inflation in Russia, the market tends to stabilise a little bit before it grows again.”

Terisse added that he had no particular concern about the market, and in the long-term he expected Danone to gradually return to 10-15 per cent growth for its portfolio in Russia and throughout the CIS region, but that it would take “a few months and quarters”.

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