China Food

Danone global executives “feel the pulse” of the Chinese market

With the global senior management team “in place” for nearly a year, French food giant Danone, which owns brands such as altami, pulsation and Evian, has a more unique understanding of China’s business.

During the recent Barclays fireside talk, Antoine de
Saint affrique, CEO of Danone, and others focused on the latest “business experience” in China, involving Danone’s acquisition of Dumex’s China business, the progress of pulse repair, and future product opportunities.

Next, let’s have a look.

Chinese milk powder

As the main business segment of Danone China, infant milk powder has become one of the focuses of discussion, including taking back Dumex after many years.

Juergen Esser, Danone’s global chief financial officer, revealed at the meeting that the acquisition of Dumex was a “by-product” of its dissolution of the relationship with Mengniu. “But this is not so much about (valuing) the Dumex brand as about the industry platform and formula, because it is definitely a driving factor for us to continue to strengthen the Chinese label strategy, production localization, scientific research localization, and ensure that we are close to Chinese mother and baby groups.”.

Snack generation introduced that Dumex has Shanghai Jinqiao production base and early life nutrition research and development center. In addition, Dumex currently holds a number of registered formulas, including sheep milk powder that Danone is optimistic about.

Esser also pointed out at the meeting that the acquisition of Dumex enables Danone to “perfectly embrace” the whole milk powder strategy, and the company has also made other acquisitions to strengthen its localization capacity. Xiaoshidai introduced that the company has successively acquired McGonagall Qingdao factory and reached strategic cooperation with Hunan obijia. Together with Dumex, this is Danone’s third acquisition of China’s milk powder Market in just two years.

He also said that the local acquisition is one of the steps to improve the resilience of the milk powder business, and Danone will make good use of the acquired factories. “What we have done is not to announce the immediate takeover of the (Dumex) factory. It still needs to meet some conditions (the transaction agreed by both parties is completed), so it may take weeks or months for us to take the factory and make good use of it”.

In the context of the gradual decline of neonatal dividends, Danone is still willing to “pay for” Chinese milk powder, which is inseparable from the fact that it is a business with ideal profit margin.

Xiaoshidai noticed that Danone was asked at the meeting whether Danone was confident in maintaining a profit margin of more than 35% as China’s infant powder market might not grow. Esser responded that in China, not only the company’s infant powder profit margin was high, but also the whole category. Some of our peers “were also trading at a very good profit margin”.

“In order to maintain the profit margin, we often have to continue to win in the market. You can see that we have won in the past few quarters. Our market share in China has been growing, and our market share at the international level has also been growing. We have a strong brand asset, Atami, which is what we are cultivating.” Esser also described that today’s shelves in Chinese mother and baby stores have been “unable to live without love and beauty”.

In addition to increasing share, Esser also stressed that success also means controlling product prices in China’s infant powder market.

“This is also where we are very successful in our business model, mainly through a digital business model, which is a very effective business model and maintains our current profit margin.” He said that he believed that the profit margin would be maintained in the future. Therefore, Danone was investing in brands.

In fact, Danone’s “ambition” is not only ordinary baby powder, but also special milk powder.

“We are not only relying on one leg in China. We are building with the Chinese team, but also building more structural resilience outside China.” Esser said, “our profit margin in specialty milk powder is also attractive. This business is developing very fast, and we are reinvesting it.”

It revealed that in the professional special nutrition business of Danone Group (Note: including infant formula powder, special formula milk powder, adult medical nutrition, etc.), the Chinese market accounts for one third. According to Danone’s 2021 annual report, the sales of its professional special nutrition business was 7.230 billion euros (now about 49.311 billion yuan).

Pulsation problem

Xiaoshidai noticed that at the meeting,

The second question concerns the Chinese market. “In the past five years, Danone has tried to make pulse’s business better, but it failed. Why do you think it will succeed this time?”

Sheng Ruian first answered the question about pulsation. He said that the pulse is symbolic, (the repair work on it) symbolizes the work being carried out by Danone. He said that in the past few months, the Chinese team has been conducting in-depth research on this, discussing how to repair this business, and reaching a consensus and implementing the repair plan, “until recently, we have found the root cause of the problem”.

He pointed out that pulsations need to be sold in freezers. Previously, the cost of innovation was invested in many products that failed to achieve the expected results, or at the expense of the arrangement of core products, which were out of stock. Due to the lack of rotation of other products, some dealers are trapped in idle cash, and the products cannot be sold.

“To solve this problem, we must first clearly recognize that innovation also depends on quality and how to implement it in stores.” Sheng Ruian said that in addition, we should be prepared to break the cycle of blind innovation, expand the product series blindly, and spend some time cleaning up the product portfolio. “Prepare to eliminate some SKUs that are inconsistent with the overall plan (even if they can be sold) for tens of millions of dollars.”

Sheng Ruian said that to this end, we need to make difficult decisions and ensure the consistency of implementation while doing a good job of implementation. “This process takes a little time.” He said, however, the fundamental thing is to seek truth from facts, face the truth and find out the truth. Only in this way can we decide whether to repair (this business).

“At present, I see that (the repair of pulse business) is progressing well, although it has not reached the level I want.” Sheng Ruian stressed that this work will be done carefully.

Antoine de Saint affrique, CEO of Danone (information picture)

For international beverage products such as Evian, Sheng Ruian described them as “absolutely great brands”. Taking high-end restaurants where Evian wants to cover key markets as an example, he pointed out that (operating these brands) is a “game” about channels and regions.

“Because Evian water is limited, all resources are limited, which is a good thing.” He said that this has also created high-end products. Looking forward to the future, these brands will continue to promote high-end.

General direction

The general strategic direction of Danone was also the focus of discussion at the meeting. Xiaoshidai once introduced that in March this year, Sheng Ruian once told investors that the categories operated by Danone are in line with the current trend and are growing.

In this regard,

In response, Juergen Esser acknowledged that the discussion was fundamental. After reiterating his previous discussion on investors, he stressed that implementation is not the only element that affects Danone’s performance in its category. In addition, there is insufficient investment, insufficient attention to core products, and insufficient innovation and marketing.

“We believe that although the market has given us many opportunities for growth, there are many reasons behind it.” He said that from the perspective of different categories, Danone has a trend that needs attention.

In the professional special nutrition business, Esser said that the proportion of specially prepared milk powder in this business was 40%, and the growth rate in most of Danone’s markets reached double digits. Therefore, expanding the volume of these businesses will naturally lead to growth.

For bottled water, this is closely related to factors such as population and category growth. “In Indonesia, Mexico, Brazil and Turkey, the population is growing and the category is also growing. We have seen this trend before and after the epidemic and will benefit from it.” Esser said.

As for the plant base, he said that there are more and more elastic vegetarians, who sometimes eat animal protein and sometimes plant protein. “In our market, about 30% of consumers are in this situation, which means that we need to touch the remaining 70% of consumers to enter our category. This is a huge potential. We also see the penetration rate increasing quarter by quarter.”.

Finally, for dairy products, Esser described it as a very important part of Danone’s product portfolio and may also be the “most exciting” part. Because the epidemic has obviously made consumers rediscover the power of dairy products and fermented dairy products. “Therefore, the (whole) category is recovering growth. We have seen the trend in Europe and North America. What we need to do now is to seize the renewed vitality and momentum to promote growth”.

Sheng Ruian also said that the discussion on how to treat the beverage business has been going on for some time. “It’s the easiest thing to sell it and get rid of it.” However, this is not the best way to create value, he said. He said that Danone has deep professional ability in beverage, but it is weak in distribution, so it needs to find a suitable partner to create value with a long-term perspective. “It takes more time, but it’s more reasonable for the company.”

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