Danone becomes latest to warn of worsening inflation pressures

By Oliver Morrison

- Last updated on GMT

Image: Getty/Nantonov
Image: Getty/Nantonov

Related tags Danone Inflation

Growing inflationary pressures were the standout theme of Danone’s third-quarter results.

What do Danone’s latest results tell us about food and beverage market trends? Inflationary pressures are set to worsen, at-home consumption is expanding, the plant-based trend is continuing, while decreasing fertility rates are curbing infant formula sales.

Growing inflationary pressures were the standout theme of Danone’s third-quarter results. Sales rose 3.8% in the period, a 0.8% drop compared to the previous quarter.

Chief Financial Officer Juergen Esser said he expects cost inflation of at least 8% in 2021 to worsen next year driven in particular by freight rates for shipping from Asia and by shortages of some plastics and carboards.

“Like just about everyone across the sector and beyond, we see inflationary pressures across the board,”​ he said. For a case in point, Danone rival Nestlé expects even higher input costs in 2022 amid spiking prices for commodities and higher transportation and packaging costs.

“What started as increased inflation on material costs evolved into widespread constraints impacting our supply chain in many parts of the world,”​ continued Esser. “That said, we are putting even greater focus on productivity and pricing actions to mitigate the impact on our performance, thus re-iterating our FY 2021 guidance.”

Despite rising costs, the consumer goods giant has stuck by its 2021 guidance. It expects its full-year 2021 recurring operating margin to be broadly in line with the 14% achieved last year and forecasts a return to profitable growth in in the second half of next year.

This being said, Antoine de Saint-Affrique, who took over as CEO in September, highlighted the scale of the challenges he faces. He told analysts it was too early to "formulate a credible path forward",​ adding that he is focusing mainly on “sustainability, innovation and flawless execution”​.

Still, investors appear assuaged that Danone’s productivity and pricing actions will allow it to successfully deal with rising input costs. “We stay convinced of the long-term potential in Danone's brands and the stock,”​ wrote the team of analysts at investment bank Jefferies.

Stifel equity analyst Pascal Boll agreed Danone’s guidance should be achievable thanks to pricing and further efficiency gains. “We see limited downside risk from here,”​ he wrote. “We expect capped upside in the short run as many investors wait for a strategic update, but we stay convinced of the long-term potential in Danone's brands and the stock.”

Barclay’s equity analysts noted that Danone’s approach is moving from a more selective one to a more broad-based approach. “We continue to believe the brand will be divested with the new CEO,”​ they wrote.

Elsewhere, Danone’s Essential Dairy & Plant-based division, which makes up 54% of its sales, benefited from at-home consumption and delivered sales growth of 4.1%.

Essential Dairy performance was again driven by the Probiotics and Protein platforms, led by Actimel and YoPro, which saw double-digit sales growth. Alpro delivered another quarter of double-digit growth, notably led by the strong performance of the recently relaunched Oat range. Plant-based products grew by double digits in Europe but were burdened by supply chain/logistic disruptions in North America.

Waters sales increased by 4.6% thanks to increased mobility in Europe. Infant nutrition returned to a growth path, led by China, where it grew by double digits. But in Europe, infant nutrition sales were flat in a declining market.

“Danone grew slightly ahead of market expectations, which should be taken slightly positively by the market,”​ noted Boll.

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