Danone will merge its Chinese infant formula brand Dumex with the infant formula business of local dairy giant Mengniu in order to build a "strong local platform" in the sector.
The French company, which holds a stake in Mengniu, said it will hand Dumex over to Yashili, the Mengniu-controlled infant formula group. In return, Danone will "increase its shareholding" in Mengniu.
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By GlobalDataCEO Emmanuel Faber said: "In China, we are strengthening our early life nutrition business model, building on the success of our international brands and reinforcing our partnership with Mengniu and Yashili."
Further details of the deal were not disclosed.
Danone said its sales of Dumex have failed to recover in China since it was hit by the 2013 safety scare involving supplier Fonterra when there were concerns an ingredient could be contaminated with botulism. It transpired that the recall was a false alarm but Danone said today (24 July) sales remain "well below" pre-recall levels. As a consequence, Danone revised downward Dumex's long-term sales forecast and registered an impairment charge of EUR398m (US$435.5m).
Sanford Bernstein analyst Andrew Wood said the decision to distance the company from Dumex "follows a long-standing Danone approach of solving problem businesses by simply shedding them".
Wood observed the deal "removes a problem business from Danone’s headline numbers in the knowledge that investors will overlook the P&L impact as one-off and non-cash. He added: "It largely draws to a close the problems experienced with this brand since the recall almost two years ago."
The company said the Dumex brand had also been negatively impacted by the shift in Chinese consumer shopping habits from traditional retail to online and specialist channels. The changes have, however, lifted the performance of its European infant formula brands, which generated double-digit sales growth in the second-quarter.
Danone revealed its second-quarter early life nutrition sales increased 11.1% on a like-for-like basis stripping out currency exchange. The result consisted of a 7.3% rise in volume and a 3.8% rise in value.
For details of Danone's first-half performance, click here.
