Danone CEO defends staying in Russia as he sets out global strategy

Danone’s new chief executive has defended continuing to operate in Russia despite a western corporate exodus and ruled out selling any of the group’s three main global businesses as he set out his strategy for the first time.

At an investor conference in Evian on Tuesday, Antoine de Saint-Affrique unveiled his multiyear turnround plan for the French maker of dairy and plant-based milks, baby formula and bottled water.

It includes a significant cut to profit margins from this year to free cash to invest in product innovation and advertising as it strives to reignite revenue growth after years of underperformance. Danone employs 700 people in Ireland.

Hit

On top of the turnround effort, Danone faces a hit to its business from the war in Ukraine and its fallout in Russia where economic sanctions have begun to bite. Bernstein analysts reckon the company earns about 6 per cent of its €24 billion in annual revenue in Russia, making it the most exposed of Europe’s large consumer groups.

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Asked whether staying in Russia would risk damaging Danone’s reputation, Mr De Saint-Affrique said : “It is very easy to get drawn into black-and-white thinking and demagogic positions, but in the end our reputation is about our behaviour.

“We have a responsibility to the people we feed, the farmers who provide us with milk, and the tens of thousands of people who depend on us.”

Danone has about 8,000 employees across more than a dozen production sites in Russia, where most of its revenues come from dairy and yoghurt sales and its most popular brand is a local one called Prostokvashino.

Danone said on Sunday it would not commit new investment to Russia, and that it would continue to monitor how the situation evolves. Similar pledges on investment have been announced by fellow European consumer groups Carlsberg and Henkel, and none have pulled out of Russia to date.

Analysts say Mr De Saint-Affrique, who took over in September, will be judged on whether his strategy can actually boost growth across Danone’s three businesses.

Previous boss Emmanuel Faber was ousted after a boardroom power struggle triggered in part by his failure to deliver on a 2015 pledge to achieve 5 per cent annual organic sales growth by 2020. That metric, which is closely tracked by investors, had improved only slightly, from 2.1 per cent in 2016 to 2.6 per cent in 2019.

Sales

The pandemic made the task harder by denting sales of bottled water while pushing up costs from transport to raw materials, and Danone still has not returned to 2019 sales levels. Last year, organic sales growth rebounded to 3.4 per cent, after declining 1.5 per cent in 2020.

Instead of big asset sales, Mr De Saint-Affrique has opted for a more methodical approach. “I don’t see a need to fundamentally reshape the portfolio, but we will manage it much more actively than in the past,” he said, adding that the aim would be for portfolio rotation of about 10 per cent of net sales.

He admitted that about a quarter of the business was “underperforming” and needed to be fixed quickly. “And if we are not capable of doing that, then all options will be on the table to find other ways of creating value.”

The refusal to consider major disposals may disappoint some investors who had hoped for a bolder strategy, such as offloading its bottled water business that includes the Evian and Volvic brands. It is Danone’s smallest and has lower margins than other categories.

Danone also set out new financial targets that have recurring operating margin falling to 12 per cent this year - its lowest level since 2002 and down from 15 per cent before the pandemic. Organic sales growth will come in between 3 and 5 per cent this year, largely led by price increases to offset inflationary pressures.

Growth

For 2023 and 2024, Danone said it would aim to deliver the same organic growth, while increasing its recurring operating profit faster than net sales. No target was given on recurring operating margin.

The shares were largely flat in morning trading amid a 2 per cent rise for the French blue-chip CAC 40 index. Bernstein’s Bruno Monteyne called it a “modest but sensible start,” while Martin Deboo of Jefferies said the medium-term targets “feel ill-defined”.

Mr De Saint-Affrique said: “This plan is a renewal of the company and reset of our culture and as well as of our financial targets and execution.” – Copyright The Financial Times Limited 2022