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Danone’s UK Operation and Market Position

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"Danone SA, incorporated on February 2, 1899, is a French-based company engaged in food processing activities. The Company's UK unit operates in four business lines, including Fresh Dairy Products, Waters, Baby Nutrition and Medical Nutrition. In Europe the Company's main markets are France, Spain, Germany, Italy, Benelux, United Kingdom, Poland and Russia. The Company's product Actimel, if consumed daily, helps to strengthen the organism's natural defences. The Waters business line includes activities focused on natural or flavored mineral water and on fruit-flavored or tea drinks, with a positioning concerned with health benefits. The Company's baby nutrition business line's activities consist mainly of producing food for newborns and babies. It also offers a diverse range of products for children aged 6 to 36 months. The Medical Nutrition business line develops nutritional products to prevent malnutrition and to improve its consumer's daily life. The Company competes with Nestle, PepsiCo, Coca-cola, Abbott, Mead Johnson and Fresenius. It has a workforce of 9600 people in UK.

The company's decline in sales has affected its revenue growth. In 2010, the company's revenue declined 1.56% to Euro2.25 billion, compared to Euro2.28 billion in fiscal 2009. The decline in revenue was principally due to decline in revenue from the Fresh Dairy Products, which declined to Euro855 million in 2010, compared to Euro869 million in fiscal 2009. The revenue from the Water segment declined 10.30% in 2010. This declining performance by the company is mainly due to the economic slowdown all around Europe, especially affecting the regions of company's operations. Despite individual customers being the end product users, Danone sells its products mainly to large retailers and grocery chains. In the fiscal year 2010, Danone's ten largest customers in UK accounted for about 24% of the consolidated sales. This concentration of sales within small number of customers poses counterparty risk in case of default and also increases the customers bargaining power.

As of December 31, 2009, the Company acquired Danone Clover and a 26.85% interest in Micropharma. In December 2010, the Company and Unimilk announced the finalization of the merger of their Fresh Dairy Product businesses. The company is defendant in various legal proceedings which affects the company's brand image and its operational performance. Danone agreed to sell its 51% stake in the Danone -Wahaha joint ventures to Chinese partners. Britannia Industries filed a case against Danone alleging that Danone's unauthorized usage of the Tiger Brand. Such litigations and legal proceedings usually result in fines, penalties or damages. Any adverse decision on these matters could have a negative affect on the company's operating results, as well as its reputation in the market."

[...] Traditionally, Danone group was highly dependent on fresh dairy product segment. It has vertically differentiated its product portfolio with R&D spending across non-core segments such as baby and medical nutrition. In 2011, research & development expenditure increased to million (2010: million). In United Kingdom, the company has horizontally diversified flavor and variant portfolios of its flagship and non-core segments to improve customer segmentation on long-term basis (e.g Volvic Tropical Fruit flavor launched in 2013). Further, it has aggressively diversified its portfolio in United Kingdom with launch of Oykos Greek yoghurt in March 2012 along with venturing into breakfast cereal marketspace (Activia Breakfast Pots in July 2012). [...]

[...] Further, it is aggressively expanding distribution network in United States (high growth and potential target market). Thus, Danone Group have actively reduced market risk on long-term basis. Thus, overall Danone Group has horizontally and vertically integrated product and pricing bargaining power worldwide. The improved advertising and promotional expenditure is enhancing long-term unique positioning across core markets such as Europe and United Kingdom. SWOT Analysis Strengths: The company has strong geographically diversified distribution network along with expansion into new channels such as pharmacies and drug stores in Austria and Brazil for its medical nutrition marketspace. [...]

[...] Further, the net debt stood at 6.63 billion i.e of group revenues slightly hampering short-term shareholder value and investor confidence (Datamonitor, 2011). In October 2012, the company reduced its operating profitability guidance to fifty points lower than stable. This has been predominantly attributed to its declining sales in Southern Europe and unstable macro economic conditions in Spain and France i.e. accounting for 20% of group revenues (Reuters, 2012). Opportunities: BRIC and South East Asia are fastest growing yogurt, fresh dairy and baby food markets worldwide. Danone Group has enhanced regional and local penetration across Asia and Russia with acquisition of Unimilk. [...]

[...] The aggressive spending on research & development along with affiliate partnership in microbiology with universities and not for profit think tanks will offer competitive advantage on long-term basis. Although, the company's flagship segment has witnessed slight legal bottlenecks such as authorities urged not to use Greek Yogurt for marketing its brand in local and national markets? (February 2013), its strong social media and television promotional campaigns will improve volume share (2013-2015). The strong diversification and focus towards volume based baby food and yogurt markets such as India. Indonesia, Australia and China will improve free cash flow margins. [...]

[...] The company is implemented SAP enterprise resource planning application worldwide to enhance cost savings. Higher foreign exchange currency fluctuation will hamper EBIT margins. In 2011, the company acquired Unimilk Group to enhance presence across Ukraine and Russia. Lower return on investment and long-term negative impact on operating margins attributed to acquired assets will hamper competitive advantage. Steep competitive pressures from private label brands in United Kingdom and worldwide is hampering net margins on long-term basis. On the other hand, economic turmoil and double dip recession in UK and United States is shifting consumer purchasing towards private labels. [...]

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