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Jonathan Sheets

Groupe Danone (OTC: DANOY) is a French food and beverage company with revenues totaling nearly 12.8 billion EUR (18 billion USD) in 2007.^[1] Danone's largest consumer brands include Activia, Actimel, Vitalinea/Taillefine, Danonino/Petit Gervais, Evian, Aqua, and Blendina.^[2] The dairy brands, Activia, Actimel, Vitalinea/Taillefine, and Danonino/Petit Gervais, contributed 4.5 billion EUR to Danone's 2007 revenues making the Fresh Dairy Products segment Danone's largest source of income. ^[3] In order to take advantage of the growing Baby Nutrition and Medical Nutrition markets, Danone purchased Numico, a world leader in both markets. ^[4]

Danone competes with companies like Nestle (NSRGY), Unilever (UL), Kraft Foods (KFT), and Cadbury Schweppes (CSG) in the packaged food market. As retailers push private label products, the ability to earn and maintain shelf space at groceries, convenience stores, and other retailer outlets plays a large role in the profitability of packaged food and beverage companies like Groupe Danone. However, Danone's strong consumer brands help it maintain shelf space and profitability.^[5] Despite Danone's strong brands, the rapidly increasing costs of raw materials, such as milk which increased 14% between April 2007 and April 2008, increase Danone's production costs and compress margins.^[6]

Business Segments

^[7]

Fresh Dairy Products

Fresh Dairy Products was Danone's largest segment in 2007, contributing 68% of the company’s total sales. The division includes Danone's four blockbuster brands (Activia, Actimel, Vitalinea/Taillefine, and Danonino/Petit Gervais), which together generated 4.5 billion EUR in 2007 sales. Danone is a leading supplier of fresh dairy products with 22% of the market worldwide.^[8] Danone's dairy products focus on nutrition and compete with brands like Nestle Milk, Nestle Nutrition, and store brands.

Waters

Waters generated 28% of Danone's total revenues in 2007 making it the company's second largest segment. Danone produced 20 billion liters of bottled water in 2007 and captured 10% of the world market for bottled water.^[9] The group's bottled water brands include Evian, Volvic, and Aqua. These brands compete against brands like Nestle Waters, Dasani, and store brands.

Baby Food and Medical Nutrition

Baby Food and Medical Nutrition generated 4% of Danone's total revenues in 2007. The company is the leading producer of medical nutrition products in 19 countries, most of which are in Europe and Asia.^[10] Danone produces brands such as Blendina and Nutricia, which compete with products like Gerber and store brands. Danone added the Baby Food and Medical Nutrition in 2007 when it purchased Numico.

Business Financials

^[11]

Danone 2007 Revenues and Operating income^[12][13] ($ in millions)

All data for Groupe Danone converted using average 2007, 2006, and 2005 exchange rates.^[14][15][16]

Key Trends and Forces

Dairy prices on the rise in 2007-2008

From 2007 to 2008, the price of key raw foods used by Danone increased substantially; for example, milk prices increased by nearly 14% from April 2007 to April 2008.^[17] In response, Danone raised its average price per unit of goods sold by 4.2% during 2007.^[18] Since 68% of Danone's 2007 sales came from its fresh dairy products, milk and other dairy products are Danone's biggest production inputs. Danone's ability to continue passing on price increases will play a big role in its profitability if dairy prices continue to rise.^[19]

Consumers Demanding Healthier Foods

All of Danone's revenues come from sales of food and beverage items. Therefore, changing consumer demands for food and beverage items directly impact Danone's sales. These changes are sometimes seasonal; for example, consumers tend to demand more hot beverages such as coffee during the colder winter months.^[20] These changes can also take place over longer periods of time. For example, consumers have been demanding healthier options when eating out, which reflects a general increase in the importance of health and wellness to consumers.^[21] In order to take advantage of this trend, Danone has increased the money it spends on clinical studies to prove the health benifits of its foods by 15 times in the last five years.^[22] Additionally, the company purchased clinical nutrition and baby nutrition company Numico in 2007 to bolster its health-conscious product line.^[23]

^[24]

Strong Euro Hurts Danone's Sales

Because Danone reports its revenues in Euros but does 39% of its business outside of Europe, exchange rates affect Danone's revenues. When the Euro appreciates, any transactions recorded in foreign currencies will convert to less Euros and lower revenues for Danone. On the other hand, when the Euro depreciates the opposite is true and the weak Euro will boost Danone's sales. Between June 2007 and June 2008 the Euro appreciated in relation to the US Dollar, Great Britain Pound, and Japanese Yen.^[25][26][27] This resulted in a negative impact (-2.5%) on Danone's Fresh Dairy Products revenues in 2007^[28] In order to minimized the effects of exchange rate fluctuation, Danone purchases financial instruments such as swaps.^[29]

Key Competitors

Danone competes with other packaged foods companies as well as store brands from retailers such as Safeway (SWY), Wal-Mart Stores (WMT), Walgreen Company (WAG). Danone's main competitors are:

• Nestle (NSRGY)-A Swiss company that produces packaged food and beverages as well as products for the personal care market. Nestle is the worlds largest packaged food company and a worldwide competitor for Danone. ^[30]
• Unilever NV (UN)-A Dutch company that produces packaged foods and products for the home and personal care markets. Unilever is one of Danone's largest international competitors.^[31]
• Kraft Foods (KFT)-A U.S. company that produces packaged foods products. Kraft is one of Danone's largest U.S. based competitors.^[32]
• Cadbury Schweppes (CSG)- A U.K. company that makes confectionery and non-alcoholic beverages. Cadbury Schweppes primarily makes carbonated soft drinks, which don't compete directly with Danone's milk- and water-based drinks. However, its carbonated beverages are possible alternatives to Danone's beverages.^[33] According to the National Restaurant Association, more and more customers are ordering specialty waters (like Evian) instead of carbonated soft drinks. This could give Danone an edge when competing with Cadbury Schweppes.^[34]

Danone and Key Competitors 2007^[35][36][37] ($ in millions)

Note: Data for Nestle (NSRGY), Unilever NV (UN), GROUPE DANONE (DA), and Cadbury Schweppes (CSG) were converted to U.S. dollars using the average USD-CHF, USD-EUR, and USD-GBP exchange rates for 2007.

References

1. ↑ Groupe Danone 2007 Registration Document: Selected Financial Information, pg 5 Converted using 2007 average EUR to USD exchange rate
2. ↑ Groupe Danone 2007 Annual Report: Business, pgs 68-78
3. ↑ Groupe Danone 2007 Annual Report: Business, pg 70
4. ↑ Groupe Danone 2007 Annual Report: Business, pgs 68 and 78
5. ↑ Groupe Danone 2007 Annual Report: Business, pgs 68-78
6. ↑ Groupe Danone 2007 Registration Document: Risk Factors, pg 6
7. ↑ Groupe Danone 2007 Registration Document: Consolidated Financial Statements, pg 120
8. ↑ Groupe Danone 2007 Annual Report: Business, pg 74
9. ↑ Groupe Danone 2007 Annual Report: Business, pg 77
10. ↑ Groupe Danone 2007 Annual Report: Business, pg 68
11. ↑ Groupe Danone 2007 Registration Document: Consolidated Financial Statements, pg 121
12. ↑ Groupe Danone 2007 Registration Document: Consolidated Financial Statements, pgs 79, 120
13. ↑ Groupe Danone 2006 20-f: Consolidated Financial Statements, pg F-61
14. ↑ Monthly Average Graph (American Dollar, Euro) 2007
15. ↑ Monthly Average Graph (American Dollar, Euro) 2006
16. ↑ Monthly Average Graph (American Dollar, Euro) 2005
17. ↑ Jump in food prices biggest in 18 years
18. ↑ Groupe Danone 2007 Registration Document: Operating and Financial Review, pg 34
19. ↑ Groupe Danone 2007 Registration Document: Risk Factors, pg 6
20. ↑ Spectrum Commodities: Coffee Seasonal Chart
21. ↑ Consumer Demand for Ways to Fit Quality Meals Into Hectic Schedules Shape Restaurant Trends in 2008, According to National Restaurant Association
22. ↑ Group Danone 2007 Annual Report: Science, pg 32
23. ↑ Group Danone 2007 Annual Report: Business, pg 78
24. ↑ EUR to USD Exchange Rates
25. ↑ EUR to USD Exchange Rates
26. ↑ EUR to GBP Exchange Rates
27. ↑ 2007. EUR to JPY Exchange Rates
28. ↑ Groupe Danone 2007 Registration Document: Operating and Financial Reviews, pg 36
29. ↑ Groupe Danone 2007 Registration Document: Financial Information Concerning the Assets, Financial Position, and Results of the Company, pg 106
30. ↑ Google Finance: Nestle
31. ↑ Google Finance: Unilever NV
32. ↑ Google Finance: Kraft Foods
33. ↑ Google Finance: Cadbury PLC
34. ↑ Consumer Demand for Ways to Fit Quality Meals Into Hectic Schedules Shape Restaurant Trends in 2008, According to National Restaurant Association
35. ↑ Monthly Average Graph (American Dollar, British Pound) 2007
36. ↑ Monthly Average Graph (American Dollar, Euro) 2007
37. ↑ Monthly Average Graph (American Dollar, Swiss Franc) 2007