FMCG

by Greg Thain

  Then the landscape changed yet again. Europe’s rapid movements towards a single, fully integrated market prompted BSN-Gervais Danone to consider a major Europe-wide acquisition strategy. With sales still predominantly in one country, and with fully international competitors such as Nestlé and the American giants eyeing up the imminently borderless European market, management realised they would be sitting ducks. Bigger players could easily build unassailable positions in other countries that would both exclude BSN from real competition. Inside France, much greater size resources and scale would also prevail.

  European unification sparked another trend, big retail cross border alliances, which had the power to transform BSN-Gervais Danone into what it had been, just another regional supplier in what everyone else recognized as the world’s largest single consumer market. To survive and thrive, companies needed to have top brands not simply in a single country but across Europe. So at the end of the 1970s, BSN-Gervais Danone began a series of international expansions, initially targeting southern Europe, where the retailing trade was less concentrated and thus less powerful. The company was very flexible. It would first buy minority stakes on a temporary basis until its own brands, Danone yoghurts in particular, had become established, when BSN would then take over.

  For the most part, expansion was focused on sectors in which the company already competed; thus beer brands were bought in Belgium, Spain and Italy, pasta and ready-to-serve brands in Belgium, France, Italy and Spain and .dairy products in Greece, Italy and Spain (where the by then independent Danone SA was partially reacquired in 1992). Mineral water acquisitions in Spain, France (including the Volvic brand) and Italy made BSN-Gervais Danone the world’s largest bottler of mineral water. There were new products too: confectionary acquisitions in France and sauce/condiments businesses in France, Italy and the UK, including the iconic HP. There were expansions into frozen ready-to-serve dishes in France, Spain and Italy, and even into the champagne market. The biggest leap was a major expansion into biscuits: the Europe-wide Générale Biscuit Group in1986 and Nabisco’s European subsidiaries in 1989. The company duly became the world’s second-largest biscuit maker. It also continued to acquire bottling manufacturers.

  But the prolonged food acquisitions campaign had also made BSN Europe’s third-largest food business. Further, Danone was now not only a Europe-wide yoghurt, it was also an American brand, following the 1982 reacquisition of Dannon from Beatrice Foods. And as shifts away from glass bottles in food packaging made the vertical integration increasingly redundant, parts of the company’s glass jar and glass tableware operations had been sold off in 1985.

  Then, just as the company paused for breath in its race for scale and reach, a new consumer market opened up right on its doorstep, potentially even larger than the European Economic Community. In 1989, as regime after communist regime crumbled, the whole of the Eastern Bloc flung open its doors. Antoine Riboud immediately galvanised the company around an ‘unforeseeable strategic opportunity with practically limitless potential’, which contained ‘400 million people wanting better food’. Dairy foods and biscuits were to lead the charge and the first concrete move, an agreement with an East German dairy to produce Danone fruit yoghurt, came only four months after the fall of the Berlin Wall. Between the collapse and the agreement, company products had been imported through distributors.

  Similar Danone joint ventures followed in Czechoslovakia, Hungary, Bulgaria, Poland and Russia. Given the ramshackle distribution systems and inefficient retailers, the company knew it was flying almost blind, but BSN was determined its brands would be known and accepted before completion arrived and before consumers lost their love of all things Western. As it had with previous acquisitions, as soon as products were up and running, BSN took over product quality and distribution – key factors in the yoghurt business – by acquiring their joint venture partners. Biscuits were different. Because they were much better established in the former communist markets thanks to the Eastern Europeans’ sweet tooth, the company acquired well-known local brands, Cokoladovny in Czechoslovakia and Bolshevik in Russia, for example, then invested heavily to modernise facilities and finally inserted its own brands into the portfolio gaps.

  Eastern Europe early was a key development. As the first man in, huge benefits accrued from the initial appeal of Western brands to millions of consumers with significant money to spend. The process was facilitated by the low costs advertising in the early days of Westernisation and unsophisticated existing retailers, who were falling over themselves to get any Western brand at all onto their shelves. It all added up to a unique opportunity both to shape consumer taste and brand preferences together and to achieve dominance at the point of sale. The Eastern European ventures grew quickly and profitably right from the start.

  With Eastern European expansion came an almost simultaneous move into overseas markets, employing precisely the same logic. The main overseas push began in 1990, when, in a joint venture with India’s Britannia Biscuits, RtR Nabisco’s Asia-Pacific businesses were acquired along with a 25% stake in Britannia itself, India’s largest biscuit company. The company’s Asia biscuit presence was further extended in 1992 with joint ventures in China and, in 1995, Indonesia. Similarly, there was a raft of dairy and bottled water joint ventures and acquisitions in a host of Asian and Latin American countries, together with several targeted moves into the likes of Canada, New Zealand and the US.

  In addition to all the joint ventures and acquisitions, the company had also found time to extend the core yoghurt product range with the launch, in 1994, of Actimel (DanActivein North America), an innovative pro-biotic yoghurt drink designed to cash in on the rapidly growing health and fitness craze. By 1995, the company’s sales outside Europe had almost trebled from their 1989 level, contributing to a doubling of total company sales over the same period to over $16 billion, of which well over half was now coming from outside France.

  At this high point, BSN’s Chairman and guiding light, Antoine Riboud, retired; his son, Franck Riboud, succeeded him. Franck’s first priority was to take a hard look at the company’s now somewhat extended product line-up. 25% came from dairy products under the Danone brand name, 20% in pasta and groceries, 14% in biscuits, 9% in beer, 9% in mineral water and 8% in, as it were, glass containers. Franck concluded only three of those categories, dairy, biscuits and water, where it was globally number one or number two, were essentially worth keeping and expanding, via the usual approach of joint ventures leading to full acquisition. Most of the other categories would be sold off when suitable opportunities arose. Not in any sense a fire sale, but a phased retrenchment into three core global categories.

  So, in 1997 and 1998, half the grocery products and all the confectionery businesses were disposed of, followed in 1999 by half the glass containers business, followed by the remainder in 2003. In 2000, most of the European beer brands were sold and, in 2002, some European meat businesses and the Chinese beer brands went, leaving just the HP and Lea & Perrins sauces businesses and Bledina, the leading French brand of baby food. While this shedding of the superfluous was going on, and in a growth-side change of tack, a joint venture was set up in 1996 with Coca-Cola Company to sell refrigerated juices and yoghurt drinks in Europe and South America under the Minute Maid and Danone brand names, a deal which gave both companies critical distribution mass in a sector neither had formerly dominated. After Nestlé, Phillip Morris, Unilever, ConAgra, PepsiCo and Coca-Cola, Danone was now the world’s seventh-largest food company, number one in dairy and sweet biscuits and number two in bottled water behind Nestlé.

  Franck’s second move had been to rename the company Danone. The logic, as with the company’s past series of expansion moves, was compelling. While the BSN name, which the company had been using since the merger, was widely known in France, with a 93% recognition level, it was almost unknown in markets like Italy and Spain, with recognition levels of just 7% and 4% respectively, despite the company being the leading food p
roducer in both markets. It was also a far from unique name. Spanish and Malaysian banks, a Japanese cable TV channel and an American clothing business all had BSN in their names, plus high awareness factors in their home markets. And BSN in Danone’s case was a relic, a leftover from its glass bottle days and without any sort of recognisable logo. In short, in an era when globalisation was pushing company names like Nestlé and Kraft to the fore, it was a pretty hopeless branding device. So the choice of Danone as the replacement was obvious: it was after all by the world’s biggest dairy products brand, second only to Coca-Cola for name recognition across Europe, although somewhat fragmented and localised elsewhere. The Danone name and new logo of a boy reaching for a star would be rapidly applied to the company’s water and biscuit brands. And Daniel Carasso, the boy in the logo, was still alive to see his dream of rivalling the world’s largest food companies become a reality.

  It was also a company of big brands: Danone fruit yoghurts, Actimel (which had gone from strength to strength after its 1996 launch), and Danette, a cream dessert developed by the French business unit and rapidly rolled out internationally. Evian and Volvic mineral waters were big global brands, whilst Indonesia’s Aqua, with over five billion litres sold a year, was the world’s largest brand of bottled water and accounted for over half of Danone’s entire water bottling output. Lu biscuits brand was by far the company’s biggest, being market leader in Europe. While making big brands bigger was the company’s primary focus, along with nurturing a raft of strong local brands, it did not ignore growing trends. In 2001 it acquired 40% of the US organic yoghurt company Stonyfield Farm, taking its usual majority stake two years later. It also developed Sur, an innovative new concept of flavoured waters, for which its Argentinian business was responsible. Sur was rapidly rolled out internationally.

  How International Is It?

  Before the merger between Danone and Gervais, and apart from the then separately owned Dannon in the US and Danone SA in Spain, Danone had only expanded as far as Belgium and Morocco, while Gervais had set up shop in Belgium and West Germany. But the merger provided both the means and the strategic direction to expand further afield: into Brazil, Mexico and Italy. Diversification had also followed the merger with BSN: the 1978 acquisition of a minority interest in the Belgian brewer Alken, followed a year later by minority stakes in two more beer companies, Mahou in Spain and Wührer in Italy. In 1980, BSN’s thirst for beer companies took it into Africa with the purchase of two breweries in Nigeria – one of the largest beer markets in the world. The same year a Japanese joint venture in dairy got BSN into Asia to give it at least a foothold on every continent bar North America.

  Dannon had shifted yoghurt from comedians’ one-liners to the fastest-growing category in the nation’s chillers. By 1967, the company was selling around one-third of the 100 million half-pint cups of yoghurt consumed in the US annually, with flavours spread across ten varieties. The shipping depots in Boston, Detroit, Philadelphia and Washington prompted Dannon’s somewhat optimistic claim to be the first company to establish national distribution for a perishable food. Even so, in the highly fragmented, localised US dairy industry, it was market-leading stuff.

  As the yoghurt market continued to expand almost exponentially - 1.3 billion containers a year by 1981 - Dannon had maintained its 30% market share and was now truly national. Highly automated plants across the nation were producing fifteen varieties of yoghurt together with a frozen example under the brand name Danny. Throughout this period of dramatic growth, Dannon had been headed by one of the original three founders, Juan Metzger, a natural marketer who had been named Marketer of the Year more than once by the marketing trade press. Juan retired just before BSN bought the company back for $84 million, a price well worth paying to regain control of the brand in a large and fast-growing market.

  The first few years of BSN’s ownership of Dannon were less than spectacular, with market share slipping to 21% by 1985, albeit in a still strongly growing market. Most of the growth had come historically from expanding distribution across the country, coupled with consumer base far wider that expat Balkanites and dieters. But per capita consumption now seemed to have stagnated. As is so often the case, innovation would now be the key factor. Dannon’s success had virtually every dairy in the country launching its own brands of yoghurt. Three new products a year and a doubling of the advertising budget got market share moving in the right direction: 26% by 1986. By 1992, Dannon was selling two million cups of yoghurt a day in a vast range of varieties, flavours and pack sizes. Three years later, market share was up to 37%, right back where it had been two decades before, at 37%, with product provided by two mega-plants in Minster, Ohio and Fort Worth, Texas. The US was now a substantial contributor to Groupe Danone’s total sales and profits.

  Back in Europe, the 1980s acquisitions had taken the company into just about every Western European market in one or more of its product categories. Further afield, it acquired, in 1984, a minority stake in Pakistan’s Continental Biscuits Limited. The post communism dissolution of trade barriers had taken it from East Germany in 1990 to Russia and Poland via Czechoslovakia and Bulgaria in 1995. That same year, the company identified its next targets: India, Indonesia, Malaysia and China for its core categories of fresh dairy products, water and biscuits. And it expanded further into the key Latin American markets of Brazil, Argentina and Mexico.

  Danone’s approach to China began as usual: joint ventures with leading local players. The biggest, in which Danone held a 51% stake, was in water, with China’s leading beverages company, the Hangzhou Wahaha Group. This time, however, the whole enterprise scheme was thwarted by Wahaha’s General Manager, Zong Qinhou, who hadn’t become China’s richest man by selling businesses that were obviously going to be very profitable. The relationship turned sour and ended up in the courts, although by then the company had other Chinese joint ventures in place. Danone, extremely single-minded in turning joint ventures into buy-outs, also failed to get its own way in India. Having bought 25% of India’s Britannia Biscuits, it fell out with the controlling family there too. The 25% was sold back. But with its non-core categories disposed of, Danone could concentrate more easily on global reach, as joint ventures emerged in several formerly uncharted markets: Saudi Arabia in 2001, Vietnam in 2006 and Columbia in 2007. Following the company’s 2007 acquisition of the baby food company Royal Numico (see below), the balance of overseas business shifted more decisively towards emerging markets: China was Royal Numico’s single largest market.

  How Is It Structured?

  At the merger of BSN-Gervais Danone in 1970, one of the first tasks undertaken by the new general manager of the foods side of the company was to establish divisions based on product sectors. Evian had acquired two French baby food companies in 1965, which were split off from mineral water to form what the company refers to as distinct Product Lines, a practice carried through to today. Another enduring feature of company structure is the fact that fresh dairy has always been local, and always will be while products have an 18- to 21-day shelf life. So the logical management outcome was a highly decentralised approach based on local decision-making and locally run operations. Group coordination was achieved by initiating a strict management by objectives approach with regular overviews at the regional or global level depending on the complexity of the product line. Thus, dairy, with its multitude of business units, joint ventures and local brands would have a strong geographical regional level oversight while waters, a much smaller group of predominantly global and strong national brands, would be managed globally.

  So, by 1996, the business had diversified its way to much greater complexity, the organisation was an amalgam of product line and regional structures. Each business unit reported into one of ten business lines: Fresh Dairy Products Europe, Groceries and Fresh & Frozen Ready-to-Serve Meals, Pasta and Canned Foods, Biscuits, Beer, Mineral Water, Glass Containers, Asia-Pacific, Americas & Africa and Exports.

  Over the coming year
s, fresh dairy would generally be managed at the regional level (where sufficient critical mass existed), other product lines run globally, whilst regions without sufficient critical mass would be grouped together. As joint ventures and acquisitions continued to grow the business, the number of country and productline-specific business units increased, whilst the focus strategy was decreasing the number of distinct product lines. The structural outcome was that each key product line – dairy, waters and biscuits – ended up with regional structures of varying complexity. The 2007 sale of biscuits (see next section), plus the acquisition of Royal Numico, thus resulted in four distinct business lines: Fresh Dairy, Waters, Infant Nutrition and Medical Nutrition.

  On the R&D side, each business line initially has its own dedicated function, conducting fundamental research which it then passed down to the business units, whose own development departments made the transition from research to production. Some two-thirds of the company’s research personnel now worked in the business units.

  But this changed in 2000. The three product line R&D teams were combined to form one multidisciplinary centre, the Daniel Carasso Research Center, where activities were refocused on a limited number of key strategic projects which all had nutrition at their heart. So, by 2002, the balance of personnel had shifted, with around 500 working in the centre as against 300 in the business units. Highly decentralised as they were, the business units were also highly innovatory. Danone responded well, fostering a culture of networking, both informally and through more formal ‘marketplace’ events, where teams from the subsidiaries could compare notes.