China's Appetite for Baby Food Gives Danone a Growth Spurt
Danone’s sales of baby milk formula in China rose strongly in the third quarter, beating forecasts and sending the French food company’s shares to a record high.
Danone published its strong sales figures as Le Monde reported that chairman Franck Riboud, 61, is to stand down and hand over to chief executive Emmanuel Faber, 53, who will become both chairman and CEO.
Danone declined to comment on the report.
The company is the latest consumer goods group to come under investor pressure to improve results and it needs to deliver on a profit margin target it recently set.
Riboud, who took over from his late father Antoine in 1996, handed the CEO role to Faber in 2014 to prepare his succession at a time when Danone was facing weak sales and criticism from U.S. activist investor Nelson Pelz.
Riboud stayed on as chairman with expanded powers, focusing notably on the long-term, but these powers were expected to end sometime this year.
Le Monde said Riboud would hand full responsibility for Danone to Faber, who is increasingly focusing Danone on health-oriented products. A board meeting will rule on that on Wednesday, Le Monde said.
Chinese Babies
Danone is facing fierce competition in the China baby food market from Nestle and Reckitt Benckiser, but said on Tuesday it was gaining share in the country.
In China, the world’s largest market for infant milk formula, consumers are extremely quality conscious since a 2008 safety scandal killed several babies. Profit margins are high and Danone and its rivals are all trying to boost their market presence.
Nestle is the global market leader in infant formula, and new CEO Ulf Mark Schneider recently identified infant nutrition as one of the company’s key areas. Reckitt Benckiser recently jumped into the business by buying Enfamil maker Mead Johnson.
Danone finance chief Cecile Cabanis said there was strong Chinese demand for Danone’s high-end formula brands such as Aptamil and Nutrilon, and that it was also benefiting from its strategy of developing direct distribution.
Strong sales in China contributed to a 4.7 percent rise in underlying third-quarter like-for-like sales, far above analysts’ average expectation of 2.8 percent, and the 0.2 percent growth it reported in the second quarter.
“Danone is successfully harnessing demand in e-commerce and specialized Mom & Baby store channels, possibly at the expense of Mead/Reckitt in this period, we think,” Investec analysts said in a note.
Analysts also said Danone’s indirect e-commerce sales might have benefited from China’s decision to delay regulation of cross-border e-commerce until the first quarter 2019 from the first quarter 2018.
“The infant category is said to have accelerated but we also assume Danone has benefited disproportionately from the delay of the new regulations which has supported growth in consumer to consumer channel,” Barclays analysts said.
Danone shares, which rose to a record-high of 71 euros, were up 1.24 percent by 1212 GMT.
Danone has had slower growth overall than its rivals, which include Unilever, largely due to weakness in its dairy business in Europe which has had to contend with sluggish demand and private label competition.
Its dairy business was hit by a relatively unsuccessful Activia re-launch in Europe, while in China its baby food and waters businesses have had regulatory issues.
Sales at its ‘Specialised Nutrition’ business, which now includes baby food and medical nutrition products, rose 17.8 percent in the third quarter, accelerating from 5.5 percent in the second.
The company said the growth reflected a more than 50 percent increase in demand for infant formula in China where the market was now growing by 10 percent.
This has been helped by a sharp rise in birth rates tied to the end of the one-child policy, growth of urbanization and the affluent middle class. The performance was also helped by a favorable year-on-year comparison.
But Danone, also the world’s largest yoghurt maker with brands Actimel and Activia, said challenging conditions had hit its dairy business in Brazil, where sales fell by a double-digit rate.
The dairy business improved in North America, where Danone is integrating the U.S. organic food group Whitewave. But it also said sales remained negative amid challenging market conditions. It was confident sales in the region would turn positive in the fourth quarter, Cabanis said.
Danone reiterated its full-year guidance and said it now expected 2017 recurring earnings per share growth to exceed 12 percent at constant exchange rates, having previously forecast double-digit growth.
