Due to this, the company said it has made three decisions to progress with its adaptation plans to a new COVID-world, with the objective to strengthen its ability to fulfill its mission and to rapidly reconnect with its mid-term objectives, including 3-5% profitable sales growth.
The company said it is reshaping the organization to best serve its strategy and execution. This includes the appointment of two macro-regional CEOs, respectively in charge of Danone International and Danone North America, and a COO in charge of a newly created strategic end-to-end design-to-delivery function, integrating research & innovation, cycles and procurement, operations (manufacturing and supply chain) and quality.
The second step is to conduct a full strategic review of the portfolio of brands, SKUs and assets to shape it for the 3-5% profitable growth agenda, starting with an immediate review of its strategic options for Argentina, for Vega brand, and possibly further assets.
Danone is also accelerating the finalization of a plan for the previously announced adaption strategy to counter the challenges and win growth and efficiency opportunities emerging from a new COVID-world, with implementation starting Q1 2021.
Emmanuel Faber, chairman and CEO, said, “Our Q3 results reflect how much the COVID-world and its cohort of sanitary measures, border closures, uncertainty in consumer sentiment and some structural changes affect our business. As we expect continued volatility in our other businesses in the short term, the return of EDP growth beyond 3%, both for Q3 and YTD (and stellar performance of plant-based) is a north star to our ambition to reconnect as soon as possible with our 3-5% mid-term profitable growth agenda. Our discipline on portfolio focus and capital allocation will be an additional enabler.”
In the third quarter of 2020, consolidated sales stood at €5.8bn ($6.81bn), down 9.3% on a reported basis, primarily driven by change in currencies against the euro which had an effect of -7.1% on the quarter sales. On a like-for-like basis, revenues declined by 2.5%. Volumes sequentially improved at -0.4% in the quarter (vs. -2.6% in Q2), remaining affected by Waters performance, and were flat (-0.1%) overall in the first nine months. Value also sequentially improved at -2.1% (vs. -3.0% in Q2), reflecting in Q3 negative country mix but stable pricing.
As in the first half of the year, variations across channels continued to impact performance.
In out-of-home channels (representing 11% of 2019 sales globally, mostly in Waters), sales declined by around -5% in the quarter on a like-for-like basis; sales of infant formula in China through cross-border channels contracted sharply (a drop of around 60%) given the continuous border closure and reduced tourism with mainland China. However, growth of global sales through e-commerce accelerated in the quarter (40% at company level compared to 30% in Q2 on a like-for-like basis).
In terms of regional dynamics, growth improved in all regions compared to the second quarter.
Like-for-like sales growth in Europe and North America improved in the third quarter from -3.5% in Q2 to -1.1%. North America continued to see solid momentum while sales trends in Europe improved but remained negative, mirroring continued decline in sales normally consumed away from home in Waters and soft category dynamics in Specialized Nutrition.
In Rest of the World (-4.1% in Q3 on a like-for-like basis), CIS returned to solid growth while China, Latin America, Indonesia and Africa saw continued pressure.
Essential Dairy & Plant-based (EDP) posted a significant acceleration in net sales growth at 3.7% in Q3 2020 on a like-for-like basis, reflecting a 4% increase in volume, and -0.3 % in value. All segments grew with probiotics and functional yogurts, organic milk and coffee creamers among the best performing, alongside plant-based which posted its third consecutive quarter of double-digit sales growth (high-teens in Q3).
Europe and North America continued their mid-single-digit momentum, sustained in Europe by further market share gains thanks to Actimel, Danette, and Alpro, and in North America by growing at-home consumption benefiting to Silk, So Delicious, Horizon brands growing at double-digit rate. In the Rest of the World, CIS returned to solid growth while Mexico and Africa saw continued pressure.
Specialized Nutrition sales declined 5.7% in Q3 2020 on a like-for-like basis, with a decrease of 2.9% in volume and in value, hampered by the performance of China, which posted a steep double-digit sales decline in the quarter against a high base last year.
This resulted from headwinds related to channel logistics issue caused by COVID-19 (cross-border channels contraction) and pantry de-stocking dynamics. However, in the Chinese domestic market, Danone said it is continuing to see strong underlying consumer demand. Revenues in Europe declined at mid-single-digit rate, caused by hospital and prescription activity rate below pre-COVID levels and soft category dynamics for infant formula.
Other regions such as South East Asia, Middle East and US maintained their growth momentum benefiting from e-commerce and the launch of innovations under the Aptamil umbrella and local brands.
Looking into the remainder of the year, Danone said business remains difficult to predict as the environment is still volatile and much uncertainty remains about the implications of the pandemic as to how exactly lockdown easing, channel dynamics and consumer habits may evolve, notably the pace of recovery of out of home consumption and proxy channels, and the cross-border activity with mainland China.
Danone said the largest factor impacting its Q4 performance will be the channel dynamics driven by the COVID-19 pandemic and resulting global macroeconomic headwinds. Based on current rates, currencies are expected to remain a headwind.
Danone said its priorities for the next quarter will be to keep the market share momentum and continue to sequentially improve sales growth on a like-for-like basis albeit at a slower pace. Recurring operating margin is expected to remain impacted in the second half by COVID-19-related extra-costs and negative mix, but efficiency, cost control and tight cash management actions are in place to target for the full-year 14% recurring operating margin and the delivery of €1.8bn ($2.1bn) free cash flow.