‘There are growth opportunities we are not seizing’: Danone plans further price rises and productivity step-ups after posting better-than-expected results

By Oliver Morrison

- Last updated on GMT

The better-than-expected results were largely driven by the recovery in its bottled waters division as COVID restrictions lifted around the world. GettyImages/Image Source
The better-than-expected results were largely driven by the recovery in its bottled waters division as COVID restrictions lifted around the world. GettyImages/Image Source

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The French food maker beat sales expectations when it posted its fourth quarter and full-year results. However, Danone now expects to battle significant cost headwinds with pricing and efficiency gains.

The better-than-expected results were largely driven by the recovery in its bottled waters division as COVID restrictions lifted around the world. But the company identified areas of improvement. More details on the company’s strategy will be given at its Capital Market Day on March 8.

In the meantime, Danone said it would focus on price and productivity. The company has raised prices by the most in seven years to offset higher packaging, milk and transportation costs.

“This is the name of the game for the year 2022, that we need to find the right level of pricing to counter further accelerated inflation,”​ Chief Financial Officer Juergen Esser told analysts on a conference call. 

“We will double down on productivity,”​ added CEO Antoine De Saint-Affrique. “We will do what it takes on our pricing within reason. We will have to manage the balance between competitiveness and pricing.”

Danone said it achieved a record of more than 5% productivity in the second half of 2021. Doubling that “would not be possible unfortunately”,​ the CEO said.

He added that while the company delivered ‘a solid growth with a good mix contribution’, “our growth model remains somewhat unbalanced as our volumes were down again this year. While short-term market shares are looking better, we continue to lose market shares in too many places. In other words, we do not fully capture the potentials of our markets.

“There is a lot to be happy with this 2021 performance,”​ concluded the CEO. “We delivered a better growth dynamic. We reached our productivity targets and delivered a good level of cash.”

He added: “There is still plenty we can improve from our growth model to the quality of our execution and investment model. This will require a greater discipline on the basis, greater focus on execution, strengthening step-by-step, some of our capabilities and driving what Danone was known for, with consumer centric and a brand and innovation driven model.”

“Danone found itself back on the growth path in the second half of the year and delivered a solid margin result thanks to faster-than-hoped efficiency gains,” ​said Pascal Boll from investment bank Stifel.

“Danone achieved a 13.7% operating margin despite material cost headwinds thanks to pricing and good progress in its efficiency programmes. Further pricing initiatives are on the way, which should help to mitigate ongoing cost pressures. However, pleasingly progressing efficiency results need to continue in order to battle inflation, in our view.”

With details thin on the ground, analysts speculated on where Danone will seek out future growth.

Boll expects Danone to commit to its three existing categories, establish new values of transparency, innovation and execution and set clear targets and start to deliver on that (reducing earnings volatility and disappointments) in order to regain trust among investors. On top of that, he anticipates pledges on how to better serve customers, drive innovation and step-up in investment behind the brands (stopping structural underinvestment) are also expected, as well as a focus on product mix in the future. “I don’t think De Saint-Affrique will comprise long-term competitiveness for short term margin support,”​ he said. “Therefore, he will rather focus on a balanced approach on pricing and not reducing too much of investments behind the brands, even if that hurts margin for now.”

He expects there are no further job cuts planned beyond the ones part of the “local first” efficiency program.

“Price elasticity is larger in emerging markets and we have seen the impact in EDP already in Q4, where volume was negative but pricing high,”​ he added. “In the short-term, growth will come back due to low base effects especially in Waters and Specialised Nutrition in Q1 and Q2. In the long-run growth has to come from better mix and more innovation.”

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