Building on blockbusters

by Josh Sosland
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BOSTON — While growth in its Dairy Division has eased from the torrid pace achieved in 2007, the outlook for the Groupe Danone business unit remains promising, said Pierre-Andre Terisse, chief financial officer.

Mr. Terisse discussed the Fresh Dairy Division in part of a larger presentation about the company Sept. 3 at the Lehman Brothers Back to School Conference.

The Dairy Division accounts for 57% of Danone sales, Mr. Terisse said. Even if sales growth has slowed, the division’s performance has been impressive. Operating income of Fresh Dairy in the six months ended June 30 was €604 million, a gain (as calculated by Dairy Business News) up 14% from €528 million in the same period of 2007. First-half sales of €4,358 million rose 10% while the operating income margin of 13.86% was 57 basis points better than during the same period last year.

Mr. Terisse said a significant price increase has helped bolster operating margins.

Sales growth of 10.5% in the first quarter slowed to 8.5% in the second, but sales growth in both periods lagged the quarterly rates of 11.2% to 13.9% in 2007.

"The slowdown in volume performance was expected," he said, commenting on first-half results. "Going forward, growth we see will be progressively driven more by volumes, less by price and still by mix. Dairy will produce the consistent growth we want for the group."

Elaborating on the importance of sales mix as a contributor to improved results, Mr. Terisse cited the success of four yogurt products with functional benefits and strong sales — Activia, which aids with regularity (€1,900 million in annual sales with sales growth of 26% in the second quarter); Actimel (DanActive in the United States), boosting immunity (€1,100 million in annual sales, up 8% in the second quarter); Vitalinea targeting weight management (€900 million, down 4%); and Danonino, a product line targeted at children with extra calcium (€800 million, up 6%).

"A big part of the success in dairy has been the blockbusters," Mr. Terisse said. "The key has been to incorporate into these products health benefits for the consumer."

A newer product, Danacol, has been introduced in 12 countries (not the United States). A yogurt product containing plant sterols, Danacol helps lower cholesterol. Sales in the second quarter were up 33% from last year.

"There is no doubt, it will be a source of growth going forward," Mr. Terisse said of Danacol.

Asked in questions and answers how Danone is faring versus private label and other companies developing dairy products with functional benefits, Mr. Terisse was optimistic on both issues. He said that in the French yogurt market, private label steadily has gained market share but only for products that do not offer specific functional benefits to customers.

"Blockbusters have kept growing and have not lost market share to private label simply because when a consumer receives a specific benefit he is willing to pay for it," Mr. Terisse said. "In our other products, private label has gained because consumers are more careful with spending, and we have not been strong enough in terms of promotions, something we will correct."

Turning to competitive pressures in the market for functional products, Mr. Terisse cited the opening of a research center and the completion of a number of clinical studies as steps the company has taken to protect and build its proprietary position.

"A lot of money and energy has been invested," he said. "I don’t believe given our size as the global leader by far in the dairy industry that any other player has our research capabilities. We have to keep working to be sure we not only keep our lead but increase it. That’s what we are doing."

This article can also be found in the digital edition of Dairy Business News, September 2008, starting on page 12. Click here to search that archive.

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