People Don't Need Bottled Water in a Pandemic

(Bloomberg Opinion) -- “A new world: Deliver. Reshape. Review. Adapt.”

No one can disagree with the direction of Danone SA’s new strategic blueprint announced on Monday. Much more debatable is whether the French food group that makes Activia yogurt and Evian mineral water can actually achieve it.

Even before the pandemic struck, Danone was underperforming. Crowded grocery shelves and intense competition from nimbler upstarts left it struggling to lift sales and profit growth. Then Covid-19 hit demand in key segments such as bottled water and infant nutrition. As of Monday, the shares are still languishing around their March low.

The group has had some successes over the years. For example, after paying $10 billion for plant-based beverage company WhiteWave in 2016, it obtained an enviable position in dairy alternatives, which are growing faster than the traditional sector. But the company has also seemed accident-prone. A brand revamp of the flagship yogurt Activia in 2016 proved to be disastrous and sales slumped.

Danone forecast a revenue rebound in the second half of 2019, but this never materialized. It had to cut its full-year sales guidance last year.

A fresh organizational structure should bring focus. The company announced a new finance director and is shifting to a system of management that’s organized by geography rather than product. It is also reviewing its portfolio. Operations in Argentina and at Vega, a North American sports nutrition business acquired as part of WhiteWave, are the first to be examined. Together these account for annual sales of about 500 million euros ($588 million). This is a good start, but Danone should go further.

It would be wise to offload underperforming brands within the waters business, given pressure from consumers going out less and mounting environmental concerns over plastic. Duncan Fox, an analyst at Bloomberg Intelligence, says other good candidates for review would be some non-core dairy brands and parts of the nutrition business addressing specific medical conditions.

Danone should have an advantage: Many of its products, such as yogurt, are sold in supermarkets, which are benefiting from more food and drink being consumed at home. The pandemic has further focused consumers’ attention on their health, something that should also benefit Danone’s plant-based portfolio, as an increasing number of people adopt vegan diets.

But these factors haven’t yet translated into superior sales growth. The group also faces continued competition from the likes of Chobani, the U.S. greek yogurt maker, and now Oatly AB, the trendy oat milk manufacturer that is considering an initial public offering.

It’s not clear that the new strategy will be enough to propel Danone to the 3%-5% annual sales growth target it announced on Monday. Both its 2020 profit margin forecast of 14% and the revenue expansion goal are behind its previously held guidance for this year, of 16% and 4%-5% respectively.

Danone is currently trading at a record discount to rival Nestle SA on a forward price-to-earnings basis. That’s not surprising. Nestle’s chief executive officer Mark Schneider has done all the things that Danone says it wants to. He has reshaped the food giant, reviewed its portfolio, adapted to changing consumer tastes and delivered for shareholders. To close the discount, Danone needs to do the same. But it may already be too late.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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