Danone CEO sees COVID-19 polarizing the food sector: ‘There won't be a middle class anymore’

The ‘first phase’ of the COVID-19 crisis has had a dramatic impact on what people eat and how they shop. These shifting dynamics were reflected in Danone’s first half results, the French dairy-to-waters company said last week.

Organic revenue dipped by 1.1% as plummeting water sales, down 19.1%, overshadowed growth of around 3% in Danone's dairy and plant-based (EDP) and specialised nutrition divisions.

According to Danone’s chief executive, Emmanuel Faber, water was particularly hard hit by the channel shift seen during the first six months of the year. With the majority of the out-of-home channels shuttered and demand for single-serve water dropping due to the various global lockdowns, Faber said the company has moved support for its water brands to the hypermarket channel.

Changes to shopper needs go deeper still. While out-of-home has been a clear loser in the COVID crisis, with sales down 30%, like many other FMCG brands Danone witnessed e-commerce rapidly accelerate, up 30% in the six months.

Elsewhere, Faber said the COVID crisis emphasised the importance of local.

“We've been improving the underlying business fundamentals with increased penetration for our categories, increased market share in a number of cases, continuing the local anchoring. You know that we've seen the food revolution that really something that roots food as part of local. And clearly, that lockdown has been an incredible period of demonstrating how relevant that's going to be for the future,”​ he said during a conference call with investors. 

Moving to ‘phase two’ of the COVID crisis

So, what do the various changes accelerated by COVID mean for the future of the food sector?

According to the Danone chief executive, the dynamics with sticking power are likely to become clear in what he describes as the second phase of the crisis.

“Phase two gives you a colour of how we are looking at H2… We call it stop-and-go reopening, which, from a macro standpoint, we would describe as this gradual reopening with resurgence of at least local lockdowns,”​ he predicted.

Fear of a second wave will impact consumer confidence and how businesses and governments manage the situation. This is a ‘very important moment’, Faber suggested, because while Danone will continue its focus to ‘protect people, cash and drive brand preference’ it is also a learning opportunity.

“We really want to learn about what is going to be sticking in the patterns of consumption that we see by channels, countries, categories across the globe right now, and what is conjunctural versus structural shifts. These learnings are going to be essential for us to prepare for phase three, which is going to be 2021 and onwards in terms of adaptation.”​

Phase three: 2021 and onward

Looking to the future, Faber said he expects ‘new norms of private consumption behaviours’ to emerge.

Consumer attitudes will likely be shaped by two factors: economic downturn and an ensuing 'social crisis' alongside the drive for healthier foods.

This, he suggested, will result in a ‘polarization of the market’ as people trade up and down reflecting their financial circumstances and the increasing importance of healthy eating.

“There won't be a middle class anymore in a way. Some of that middle class is going to go down and have to make trade-offs… downtrading…​

“On the other side, [we will see] up-trading because many people are going to be very demanding on health and quality. The relationship between food and health has never been as clear now for this generation [and] through the COVID crisis as well.​

“This whole question of down- versus up-trading is there in front of us, and we want to use the next several months of de-locking to understand where are the opportunities for us.”​

The ‘mindset and convictions’ with which Danone is preparing itself for ‘this new world’ mean that the company is looking at various adaption scenarios. This includes considering which brands the company wants to ‘keep and push’; channel strategies; efficiencies; and ‘new ways of working’.

On the channel shift, Faber said Danone is ‘pushing hard on availability’ in terms of e-commerce, proximity and convenience in the ‘new shopping environment’. On direct-to-consumer, Faber said this is a trend ‘we believe is going to stay’.

Faber was also upbeat on the positioning of Danone’s health focused portfolio in the new normal. He stressed the importance of Danone’s ‘health-focused portfolio, flexitarian diet promotion [and being a] leader in organic’.

Pointing to the UK’s new obesity policy, recently unveiled by Prime Minister Boris Johnson, Faber said that Danone’s focus as an Entreprise à Mission and its UK portfolio – 99% of which is ‘deemed for daily consumption’ – leave it well-positioned in this emerging regulatory environment.

“We believe we have the right portfolio to support governments and their efforts on this... [We are] prepared to be on the right side of the equation when incentives, whether positive or negative, will be put in place to do that.”​

'Now is the time to invest'

Danone said that it will focus on cost and efficiency moving forward - but stressed that this will not come at the expense of its brands or investments in building a more sustainable business model. 

In the first half the company cut brand investment by 23 basis points. "We expect to reverse that in Q2 to... emerge stronger as brands," ​Faber revealed.

Danone’s plans to maintain investment its Entreprise à Mission status, a model created by French law in 2019 that embeds mission’ within its articles of association. The French food maker is applying a new governance arrangement to oversee the progress of its environmental, social and societal goals.

In February, Danone unveiled ‘a very big investment plan’ to ‘adapt to the food revolution further’. The company plans to spend €2bn investing in ‘diets and agriculture’ as well as initiatives around ‘packaging circularity’ and ‘end-to-end’ digital.

Faber said that these efforts will strengthen Danone’s relationship with stakeholders and, eventually, consumers. “The B Corp journey is, of course, embedded in this approach and will be enabled by this new governance for acceleration. We now have 45% of our global sales now covered by B Corp certification… which has interesting resonating impact on these categories, our relationship with stakeholders and, gradually, consumers...​

"Reinvestment [will] continue to secure a stronger position for our brands. It's really a time to invest."​