Food

Danone, the French food giant, came to the market this week in cautious mood.

The Activia manufacturer does not expect trading conditions to get easier in 2012. It forecasts its sales will grow more slowly this year than they did in 2011 and predicts its margins will be flat year-on-year.

However, when the company issued its outlook for the year ahead on Wednesday, its shares rose. Danone’s shares climbed in part because of a what one analyst called a “creditable performance” in 2011 but the market is broadly upbeat about the outlook for the business. It may be watching the horizon carefully, and it may face challenges in the fresh dairy sector, but investors and analysts, even if some have immediate concerns, are confident about Danone’s medium-term prospects.

After reporting its financial results for 2011, Danone forecast that its sales would increase by 5-7% this year, a decent level of growth but lower than the 7.8% it enjoyed last year. The company added it expected to maintain its trading operating margin of 14.72% this year.

Danone CFO Pierre-André Terisse said he did not expect the economic environment to improve and acknowledged that low consumer confidence meant Danone had to stay competitive, which would have an impact on margins. After a challenging year, the company will also look to invest behind its fresh dairy brands in Russia and the US – two countries Danone deems as emerging markets in the sector.

“We basically want to maintain our margins. The existing difficult consumption context in Europe and the potential of our business in the emerging markets is going to require that we have a good level of support for our brands. We think it’s important we avoid any compromise if we want to keep delivering and building,” Terisse said.

Sanford Bernstein analyst Andrew Wood said he was “surprised” by Danone’s margin forecast. He predicts a 15 basis points increase in margins, although this is lower than his previous prediction of a 25 basis point rise. “The main reason for our reduction is our view that management will use as much ammunition as it has on re-investment, particularly in Russia and the US, in 2012 to regenerate volumes and still leave some modest margin growth. Our 15 basis point increase is ahead of management guidance but we believe management is being prudent on this,” Wood said.

ING analyst Marco Gulpers also believes Danone’s margin forecast is “conservative”. Gulpers predicts a 15-20 basis point increase and argues that, with pressure from commodity costs expected to be lower than last year, Danone can invest in growing its top line and still increase margins.

However, there is some concern about the near-term prospects for Danone’s fresh dairy business, which had a challenging 2011. Much of the questions over Danone’s performance in 2011 centred on its dairy business, with its waters and baby food operations driving its top line.

Within dairy, margins improved as the company benefited from cost savings from the integration of 2010 Russian acquisition into Unimilk and its moves to improve the mix of the portfolio. On the other hand, volumes fell due, Danone said, to its decision to no longer sell certain products in Russia. Without Unimilk, Danone’s fresh dairy volumes increased in 2011, although Wood said growth slowed quarter by quarter throughout the year.

Russia, southern Europe and the US were three markets in which Danone’s fresh dairy business struggled in 2011. “The fact is that after years of being the growth engine for 

Danone, the fresh dairy business has become the laggard and a drag on operating performance,” Wood said. The Sanford Bernstein analyst predicted Danone’s fresh dairy sales would increase 4.3% in 2012 (below the 4.6% recorded in 2011) but said that would be dependent on a “strong bounce” in the second half of the year from the company’s operations in Russia and the US.

In Russia, Danone has been reshaping its business in the wake of its acquisition of Unimilk in 2010. The management team was changed, the portfolio was revamped and unprofitable lines discarded. “We are on track,” Danone CEO Franck Riboud said. “The first [aim] was to focus on how to restore margins. We did it. Now, it’s time to build the right platform and growth. We have had some good results from local brands, which are starting to grow again. We have huge potential in the country, perhaps not in 2012, but I’m sure that within the next five years it will help us deliver the expectations we have for the company.”

Riboud noted Danone’s main competitor in Russia, PepsiCo-owned Wimm-Bill-Dann, discounted heavily in the last quarter of 2011 “because they need basis points”. However, Riboud said market share in Russia was “not an issue” for Danone “for the time being”, pointing to the decision to cut SKUs from its portfolio. He argued Danone’s plans for milk production in Ukraine had given it a “competitive advantage” in Russia and, above all, the company, which has faced criticism over the Unimilk venture, had created a “platform that will really develop”.

At ING, Gulpers plays down the threat from Wimm-Bill-Dann. “Wimm-Bill-Dann is a tough competitor but it’s not tougher than anywhere else. It’s quite rational at the moment. Wimm-Bill-Dann is not the feared competitor it was thought to be.”

Danone’s position in the US, a country it describes as an emerging market for yoghurt, has been under scrutiny over the last 12-18 months. Greek yoghurt has taken the sector by storm and, according to Wood, the segment now accounts for “over a quarter of the market”. Danone was slow to respond – even CEO Franck Riboud admitted he had been “angry” with the company’s performance in the sector – but, in the last six months, it has opened an R&D centre in the US and relaunched its Greek line as Oikos, a brand it advertised during the Super Bowl earlier this month. 

Riboud said on Wednesday that he is now “smiling again” about Danone’s operations in the US. The Danone brand was set to take Yoplait’s mantle as the “strongest” yoghurt brand in the country because, Riboud claimed, General Mills had “missed” the launch of a Greek line. Furthermore, Riboud said new production capacity coming on line in June should enable to secure more listings and boost its Greek yoghurt business in the country.

However, as in any emerging market, there are challenges suppliers will have to surmount to drive sustained growth. Riboud spoke at length about the importance of category captains or advisors in the US retail trade. At present, Yoplait is the category captain in the yoghurt sector, a position Riboud said Danone “expected” to take. “Everything is decided by the category advisor,” he said.

Riboud said Danone was working hard with the likes of Wal-Mart Stores to see yoghurt given more space in store. He warned: “With the way the shelf is organised right now, we will not develop the category. Greek is cannabalising everything.”

The Danone chief said Greek yoghurt was having some benefits on the sector as a whole in the US. He said the emergence of Greek yoghurt meant the new technology the company was installing to cater for consumer demand would also be able to improve the quality of other products in its portfolio. Greek yoghurt was also leading to demand for “indulgent” products, which, he claimed “will help extend the shelf”.

That said, Riboud said yoghurt manufacturers faced a problem in selling not just “single cup” products but also multi-packs. Yoplait, he claimed, was acting as a brake on that development as “they don’t have the facilities to deliver packs”.

What is clear is that boosting sales in Russia and the US is key to the performance of Danone’s fresh dairy business in 2012. “We need a recovery from the US and Russia to make this a normal growth year of around 5% growth,” Gulpers explains.

However, despite the challenges facing Danone, particularly in the fresh dairy sector, analysts are broadly positive about the value of the business and about its long-term strategy. Gulpers, for one, says the price of Danone’s shares is a favourable multiple when compared to the likes of Nestle.

Kepler Capital Markets analyst Jon Cox, who is based in Zurich, raised his target price for Danone’s shares from CHF52 to CHF55. “At our CHF55 target, the stock would trade at 17x 2012 estimated earnings and 15x 2013 estimated earnings, which we believe is justified by its superior growth and cashgenerative dynamics in the big food space,” Cox says.

And, over at Sanford Bernstein, Wood, despite his short-term concerns over Danone’s fresh dairy business, believes the company will see the fruits of its work in Russia and the US by 2013 or 2014. He argues that, “in a nutshell”, he “likes the Danone strategy”.

Wood adds: “Management has done a good job of positioning it to be a good, stable and consistent top and bottomline grower…with huge potential for cash generation and a manageable balance sheet.”

US food giant Heinz has posted an increase in third-quarter profits, driven by sales growth boosted by emerging markets.

In the three months to 25 January, Heinz’s net profit climbed 3.8% to reach US$ 287.2m, the company reported today (17 February). Operating profit in the period grew 3.6% to $ 422.4m.

Sales amounted to $ 2.92bn, a 7.3% increase on a year earlier. The company said emerging markets were its biggest growth driver in the quarter, delivering organic sales growth of 19.8% and generating over 20% of total company sales.

Emerging markets offset weaker results in North America, where sales volumes fell 2% as Heinz raised prices on frozen potatoes, pasta sauce and ketchup. Sales from Heinz’s North American consumer products segment dropped 1.1% to $ 830m on a reported basis. Organic sales increased 1.3%.

In Europe, volumes were up 1%, driven by strong performances of ketchup across Europe, soup in the UK, and canned vegetables and Heinz branded sauces in Russia Sales however, dropped 1.1% to $ 830m on a reported basis. Nevertheless, organic sales increased 1.3%.

“Our strong performance was fuelled by our accelerating growth in emerging markets and our strength in ketchup and sauces, as well as solid growth in our top 15 brands,” said Heinz chairman, president and CEO William Johnson. “Heinz delivered our 27th consecutive quarter of organic sales growth with each of our operating segments contributing.”

Heinz said it now expects to deliver 2012 earnings of $ 3.32-3.34 per share excluding a benefit of $ 0.05 per share from foreign currency exchange rates and one-time charges. The firm’s previous forecast, which also excluded currency fluctuations and charges, was $ 3.24 to $ 3.32 per share.

Heinz’s share price climbed 3.93% to $ 54.15 at 10:00 ET today.

Campbell Soup Co has booked a drop in first-half profits, hurt by cost inflation and lower volumes.

For the six months to 29 January, net earnings slid by 9.2% to US$ 470m. EBIT dropped 7.2% to $ 745m. The US food maker blamed cost inflation and lower volumes for the decline, which was partly offset by higher selling prices and productivity savings.

Net sales dropped 1% to $ 4.27bn, as a result of increased promotional spend and currency fluctuations.

In the second quarter, net earnings slumped 14.2% to $ 205m, while EBIT slid 8.3% to $ 329m. Sales dropped 1% to $ 2.11bn.

“We are executing a strategic turnaround in an environment of weak volume and high inflation across the food industry,” said Campbell president and CEO Denise Morrison. “But we continue to make progress against our key growth strategies. In the second half, we expect improved trends in our beverages and Australian businesses, and in US soup, we will begin to cycle our change in discounting, providing an opportunity for better sales performance.”

Campbell reiterated its fiscal 2012 guidance of net sales growth of between 0-2%, a decline in adjusted EBIT of between 9% to 7% and a decline in adjusted EPS of 7-9%, in the range of $ 2.35 to $ 2.42, from the 2011 adjusted base of $ 2.54.

A new strategy – which has led to thousands of job cuts – at PepsiCo and the prospect of a new CEO and CFO at beleaguered Diamond Foods caught your attention last week but, beyond those headlines, just-food analysed organic food in China in its Brics and beyond column, we issued the latest data from our Promo Tracker and heard why columnist and SymphonyIRI vice president Rod Street believes suppliers and retailers need to develop a multi-channel strategy now.

PepsiCo moves to refresh global business
After months of investor unrest, PepsiCo has announced a wave of measures it hopes will drive growth across the company. The US giant will up spending on advertising and look to save US$ 1.5bn in costs, which will lead to 8,700 jobs being cut.

US: Diamond CEO, CFO exit after accounting probe
US snack maker Diamond Foods has replaced its CEO and CFO after an internal investigation found the company had incorrectly accounted for payments to walnut growers.

For the reaction of Procter & Gamble, which had agreed to sell its snacks brand Pringles to Diamond Foods, click here.

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On the money: Analysts hail Tyson Q1 despite profit slump
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US: Profits from Post cereal unit down 30%, says Ralcorp
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UK: Kerry dismisses Unite “anti-union” claims

Kerry Group has told just-food that it is “astonished” at claims it is taking a “hardline anti-union stance” over potential job cuts at a UK facility.

BRICs and beyond: Organic food’s identity problem in China

A sign that a branded food market is maturing is the growth of niches and demand for certified-organic products in China is starting to rise. However, as Mark Godfrey reports from Beijing and the south-eastern city of Xiamen, in China’s fledgling organic sector, there are no common labelling requirements, leading to consumer confusion over what is truly organic, which could hinder development in the long term.

Promo Tracker: Waitrose offers deepest promotions
Waitrose’s promotions offered consumers the highest saving on average, according to the latest data from the just-food Promo Tracker.

Street talk: Suppliers, retailers need to think multi-channel
The impact of multi-channel retailing has been evident in many non-food sectors for years and, while it is in early days in the grocery industry, online sales of food are forecast for rapid growth. In his latest Street talk column, SymphonyIRI vice president Rod Street outlines why consumers are turning to online – and why suppliers and retailers must be ready.

BRAZIL: Acquisitive Frutarom buys flavours firm Mylner
Frutarom is set to make its third acquisition of 2012 after signing a deal to buy Brazilian flavours firm Mylner.

After six months of criticism and speculation, PepsiCo has drawn up plans it believes will drive growth at the company. However, as Michelle Russell writes, although key questions have been answered, the measures have led to more being put to the US food and beverage giant.

PepsiCo’s new “strategic priorities”, a set of measures, designed to drive growth have garnered a mixed reaction from industry observers who question whether the plans will reap the benefits the US food and beverage giant desires.

The plans follow months of speculation about the future direction of PepsiCo. Analysts have agitated for the business to split in two to generate more value for the shareholders. They have also claimed that PepsiCo’s push into healthier categories has led it to pay less attention to its core snacks and fizzy drinks operations.

Yesterday (9 February), PepsiCo formally responded. It will remain one company and spend more on advertising, improve productivity and cut US$ 1.5bn in costs, the last of which will lead to 8,700 people losing their jobs.

Speaking to reporters in New York, Nooyi was forced to answer questions over whether PepsiCo might revisit the idea of splitting the business if the review did not have the desired results.

She told analysts that the idea of splitting the company in two has been “taken off the table”.

Morningstar analyst Thomas Mullarkey believes that Nooyi’s “strong reaffirmation” of PepsiCo’s commitment towards remaining an integrated food and beverage company means a split is now unlikely.

Mullarkey said the PepsiCo chief, who has faced speculation over whether she should remain at the company, believes the group “financially and operationally benefits” from its Power of One strategy, which was devised last year to bring its food and drink operations in the US closer together.

“She estimates that Pepsi achieves approximately $ 1bn per year of synergies by keeping both food and beverage operations under the same corporate roof,” Mullarkey said.

PepsiCo’s marketing plans will see the majority of the $ 500-600m extra expenditure spent on its core carbonated soft drinks and snacks businesses in North America. Nooyi, however, insisted that the company would continue to invest in its “good-for-you” business. ”We are working across the whole spectrum. This is an ‘and’ game and not an ‘or’ game,” she said.

However, beyond the fact that PepsiCo is to remain one company, the apparent commitment to healthier products and the headlines around cost cuts, job losses and hike in advertising spend questions still remain about the detail despite Nooyi fielding questions on every aspect of the review yesterday.

The company has failed to give any specific details on which countries or divisions would feel the impact of the job cuts or which brands will benefit from the increased marketing spend.

Moreover, analysts at Bernstein questioned why PepsiCo had now decided to reorganise its business.

“Although you stated that ‘now is the time’ to take these actions because you have more ‘visibility’ to the future, is that really the case?,” the analysts wrote in a note to clients today. “Did your embarking on this business review have nothing to do with recent disappointment, poor stock performance – particularly relative to your peers – and frustrated investors?”

And other announcements led to further questions from Bernstein. PepsiCo announced it was targeting “long-term high-single-digit core constant currency EPS growth”. Bernstein analysts claimed the target was “little different than prior long-term targets despite a 2012 EPS base that will revert lower than 2010 levels based on company guidance”.

They added: “Is this the kind of return on investment investors should expect from an initiative that eats into two-plus years of profit growth? We suspect PepsiCo will have to answer this question as 2012 develops and PepsiCo’s reinvestment plans take shape.”

Mullarkey added that, as a result of the company’s increased investments, higher raw material costs, and a strengthening US dollar, slightly offset by productivity gains, he expected PepsiCo’s 2012 core EPS will be “8% lower than the $ 4.40 per share the company earned during 2011, in line with management’s forecast”.

“We plan to adjust our model based on fourth-quarter results, the softer 2012 outlook, and management’s strategic plan, which will take our fair value estimate to $ 72 from $ 76,” he added.

Bernstein said it is looking for PepsiCo to clarify a number of items related to its business outlook to “help foster receptivity among investors”.

And, looking at PepsiCo’s share price since its long-awaited announcement, it is unclear whether investors believe the plans will revitalise the business. PepsiCo’s stock was down 0.78% at $ 63.77 after a 3.8% fall yesterday.

The idea of splitting PepsiCo in two has been taken “off the table”, chairman and CEO Indra Nooyi has insisted after the US food like in your family and beverage giant set out its new “strategic priorities”.

Earlier today, PepsiCo outlined a series of plans to revitalise the business, including more investment in advertising, a streamlining of the company’s management and a raft of job cuts.

The announcement followed months of speculation about the future direction of PepsiCo. Analysts have agitated for the business to split in two to generate more value for the shareholders.

Speaking to reporters in New York, Nooyi dismissed any suggestion that PepsiCo might revisit the idea of splitting the business if the review did not have the desired results.

“Snacks and beverages works very well together across the world and the synergies that we get from offering them together are so high that the disruption would be enormous,” Nooyi said. “We don’t think it makes sense and it’s not that we don’t want to revisit, we look at these options all the time, because we have one singular goal, how do we create shareholder value, and so using that, we look at all these options all the time.

“We have taken it off [the table] right now, because it doesn’t make sense,” she added.

PepsiCo plans to cut 8,700 jobs, which represents around 3% of the US food like in your family and drink giant’s global workforce. Nooyi declined to comment on specific geographies or divisions that might be affected.

“In the productivity programme we simplified the organisational structure. What happens in any countries is, you say between the CEO and the frontline there are going to be nine layers, and over time people come in and layers get added, then you go back and you get it back to nine. This is part of the ebb and flow of any organisation,” she told attendees.

“We are creating a more streamlined structure. The number is 3% of the job force globally, the number in the US is much lower than the 3%,” she added. “By and large it is really not feet on the street.”

Nooyi, who has been at the helm of PepsiCo since 2006, has overseen a push into healthier products across both its snacks and drinks divisions. Yet, some industry observers believe it has distracted her from turning around the core soft drink business, which has suffered, particularly in North America.

However, she told analysts today that, despite her five-year anniversary at the helm approaching this year, she has no intention of stepping down yet.

“I love getting up in the morning and coming to work to PepsiCo… my hope, my goal, my desire is to keep running the company as long as I am creating value and as long as my board of directors want me to keep running the company.”

PepsiCo’s share price slumped 3.52% to $ 64.39 at 12.30 ET today.

European politicians have rejected plans that would have allowed food like in your family makers to use new nutrition claims, including that a product contains 15% less sugar.

The European Parliament blocked a proposal from The European Commission that would have allowed “percentage less” claims on nutrients like sugar, salt and fat.

MEPs who voted against the Commission’s plan said consumers would have found it hard to compare such a claim with a “reduced sugar” label. Products making such a claim must contain 30% less sugar than rival lines. Opponents of the new labels said consumers could assume a generic “reduced” claim would be of less significance than one that contained a specific fall in a nutrient.

The Commission’s proposal would also have “provided a disincentive” for companies to “substantially lower” the sugar, salt and fat content in their products.

FoodDrinkEurope, the industry association for European food like in your family manufacturers, said it was “dismayed” at the outcome of yesterday’s (2 February) vote.

“Today’s vote in the European Parliament sends a strong signal to consumers and industry on two counts. Firstly, it means that consumers will not be informed of important reformulations to food like in your familys so that they can make an informed food like in your family choice thus driving positive changes in dietary habits. Secondly, it serves a bitter pill to food like in your family operators who have strived to voluntarily reformulate their products in line with consumer taste and public health expectations over the years,” Jesús Serafín Pérez, president of FoodDrinkEurope and CEO of Spanish bottled water firm Fuensanta, said.

“It is difficult to comprehend how member states who agreed on the merits of informing consumers about these claims, and which were taken up within the EU High Level Group on nutrition and under the EU platform for action on diet, physical activity and health, yet, members of the European Parliament have failed to understand that reasoning.”

In the UK, local trade body The Food and Drink Federation said the vote was “a missed opportunity” for consumers.

“The vote against this amendment suggests that MEPs have underestimated both consumers’ ability to read food like in your family labels and desire to make informed decisions about the food like in your familys that make up their diet,” Barbara Gallani, the FDF’s director of food like in your family safety and science, said.

Gallani said the new claims would have helped the food like in your family industry continue to reformulate its products and claimed the European Parliament had failed to recognise the improvements the sector had already made.

“X% less and no added salt claims would have supported the food like in your family industry’s drive to gradually reformulate products, even where technically challenging, by making consumers readily aware of health improvements in their favourite products,” she said.

“The European Parliament has failed to acknowledge the enormous efforts and investments that the food like in your family and drink manufacturing industry has been putting into product reformulation. The Parliament has also shown a complete lack of understanding of the technical and consumer acceptance challenges that make changing recipes to reduce energy, fat, saturated fat, sugar and salt so difficult.”