Iconic French food manufacturer Danone once had a diverse portfolio ranging from bottles to baby food and beer. Now, having settled on just three sectors – dairy, water and biscuits – its growth strategy is less clear-cut but it’s a model that seems to be working. Catherine Sleep reports.
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Whatever the specific nature of their product, food manufacturers are united by a common yet elusive goal: how to achieve sustainable growth. Some put their energies squarely behind their core business and strive for organic growth. Others raid their war chest to buy up smaller rivals that will generate synergies with their existing portfolios or simply boost group sales.
But for the most agile, a thoughtful balance of acquisition and innovation is a sure-fire path to growth, and none has demonstrated this more clearly than Danone.
A veteran of the food manufacturing sector, it is fair to say that Danone has tried a variety of growth strategies over the years. Between 1966 and 1996, the company was an aggressive buyer but the last decade has proved a period of more measured consolidation, chairman and CEO Franck Riboud told delegates at the recent CIES World Food Business Summit in Paris.
Even so, in the last ten years Danone has made around 50 acquisitions in 30 countries, mainly snapping up small or mid-sized companies. Crucially, they have neatly complemented the company’s core operations, helping Danone to achieve average internal CAGR of 6.6% between 2000 and 2005 – no mean feat at a time when many manufacturer brands are struggling to compete with private label. Compare this with the lacklustre 2.5% CAGR reported in 1996, when Riboud took over the Danone helm, and one begins to see why he is considered one of the most capable captains in the industry.
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By GlobalDataDanone’s recent exploits in the organic dairy sector exemplify its hybrid strategy. In 2001, the company acquired a 40% interest in US organic yoghurt maker Stonyfield Farm, whereupon it sat tight for three years before raising its stake to 80% in 2004. With Stonyfield brands and balance sheet gaining strength, last month the French company created a European organic subsidiary, Stonyfield Europe, which it immediately used to acquire a 37% stake in the leading Irish organic milk producer Glenisk.
To the uninitiated, Stonyfield Europe’s investment in a small family-owned Irish dairy may come as a surprise. Glenisk is insignificant in comparison with the organic production of many British dairies and has no presence outside Ireland. However, organic consultancy Organic Monitor believes it is a well thought-out deal.
“By acquiring the Irish organic dairy, Danone has secured organic milk supply for yoghurt production,” Organic Monitor told just-food. “The UK market, the target of Stonyfield’s expansion plans, is experiencing organic milk undersupply. Glenisk also brings expertise in the organic sector to Stonyfield Farm, which has little knowledge of the European market. Danone, although a multinational food company, has limited experience in marketing organic dairy products.”
This facet of the acquisition is not surprising, given Riboud’s business philosophy. For Riboud, acquisitions not only give access to new sectors, but also provide a rapid means of obtaining market experience and expertise. “While organic growth is at the heart of Danone’s expansion strategy, tactical acquisitions can be a quick way to capture skills not already within the company,” he told the CIES conference.
In this sense, the Glenisk deal follows a pattern established with Danone’s purchase of the “V” energy drink, part of its 2002 acquisition of New Zealand’s Frucor Beverages, where the original management team was retained. The Cleary family, which holds the remaining 63% of Glenisk, will continue to manage the business.
Opportunistic investment may make the headlines but Danone’s strategy is based around clearly defined organic growth goals. One of these is to exploit what it terms ‘new frontier countries’ where dairy, and in particular yoghurt, consumption, has great potential. These include China, Indonesia, Mexico, Russia and, perhaps surprisingly, the US, where consumption lags far behind that in Europe.
Another key tenet is to strengthen the company’s health positioning, building on the success of brands such as Actimel, Danone, Danonino and Activia. To this end Danone, has invested heavily in research and development at the Daniel Carasso Research Centre. Riboud sums up Danone’s wider ambition as a desire to “bring health through food and beverage to as large a number of people as possible”.
This focus has attracted a great deal of investor attention. With health and wellness driving many acquisitions in the food sector at the moment, Danone may find out how it feels to be the hunted rather than the hunter. Both Pepsi and Kraft have been cited as possible buyers in recent months, and Riboud confided to his audience in Paris that he felt “more of a target than a buyer at the moment”.
However, for the time being at least, Riboud can relax. The French Government is committed to defending Danone from a hostile bid, having included the group in its controversial list of 20 companies that will be prevented from falling into foreign hands. This leaves the company at liberty to cultivate its garden with its proven strategy of watchful waiting, concentrated brand development and well-timed acquisition.
