December 13, 2012 / 12:17 PM / 6 years ago

Danone seeks more savings in austerity Europe

PARIS (Reuters) - French food group Danone (DANO.PA) will cut more costs and could shed staff to cope with the economic downturn in Europe that is the main drag on its core dairy business.

A general view with a giant jar of yogurt is seen outside the exhibition to mark the 90th anniversary of the French foods company Danone, in Paris April 2, 2009. REUTERS/Jacky Naegelen

The world’s largest yoghurt maker, which faces pressure from U.S. activist shareholder Nelson Peltz to improve its performance, said it planned to save around 200 million euros ($261 million) in Europe - roughly 2 percent of group annual sales.

The maker of Activia and Actimel yoghurt faces a sales slump in Southern Europe, particularly at its dairy division in Spain where cash-strapped shoppers are switching to cheaper private labels as the country struggles with its second recession in three years.

Danone warned in June that its operating profit margin would fall by 50 basis points to 14.1 percent this year and investors have been bracing themselves for a similar decline next year as economies deteriorate. Danone has yet to give its official outlook for 2013.

By 6:54 a.m. ET, Danone shares were up 1.5 percent at 51.12 euros as investors welcomed the move to cut costs. Its shares have lost 2.8 percent since the June profit warning, underperforming a 12 percent gain in the European sector .SX3P.

“This news is the first positive one since the profit warning in June and demonstrates that the top management is highly focused on fixing the business in Europe,” said Natixis analyst Pierre Tegner.

The plan, which may involve cutting administrative and managerial jobs, will be in addition to ongoing annual productivity savings of 500 million euros.

Danone has a global workforce of 102,000 people, including 27,000 in Europe, of which a third occupy managerial functions, Laurent Sacchi, senior vice president, communications said.

Aurel BGC analysts said any job losses would be “rather exceptional for the group” and “reflects the seriousness of the situation on European markets”.

Some analysts, who say Danone lags its peers in terms of productivity measures such as sales per factory and sales per employee, had suggested savings could be made by closing factories in Spain where the group has six dairy plants out of 77 worldwide.

Danone said on Thursday it does not intend to close plants.

The company has started to cut its prices, notably in Spain which generates 8 percent of its sales and 11 percent of profits, in response to falling demand.

But Danone, which competes with Nestle NESN.VX and Unilever (ULVR.L), has also been suffering from a steady weakening of its dairy market share in Europe as innovation has slowed and it has cut advertising.

To regain market share, Danone has vowed to focus on product innovation and renewal to justify the brand premium it commands over private labels, but this strategy will require money and time, analysts say.


Last month Peltz, co-founder of U.S. investment firm Trian Fund Management LP, said he had bought a 1 percent stake in Danone for 310 million euros.

Sacchi would not say whether Peltz and Danone had been in contact but commented: “This (cost-cut) plan has nothing to do with Peltz. It takes more than a month to make this sort of decision.”

The billionaire businessman, who often challenges management at companies he considers undervalued or poorly managed, said Danone’s stock had the potential to rise by more than 60 percent to 78 euros by the end of 2014.

Peltz has said he supports Danone’s management but improvements were possible through boosting operating margins, cutting more costs and abstaining from mergers.

He wants Danone to boost its profit margin by 1 percentage point by 2015 from an expected 14.1 percent in 2012.

Natixis’ Tegner estimated that the additional savings Danone announced on Thursday would represent the bulk of this target.

But a key question was what proportion of the savings Danone would reinvest to boost sales growth and how much it would use to support margins, Tegner said.

Details of the cuts, which will be spread over 2013 and 2014, were not disclosed as Danone has yet to submit the plan to its works councils. Talks with staff are due to take place by March 2013.

Reporting by Dominique Vidalon; Additional reporting by Noelle Mennella Editing by Christian Plumb and Erica Billingham

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