Danone to Cut 900 Jobs In Europe Turnaround Plan
02/19/2013| 03:56am US/Eastern
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PARIS--French dairy company Danone SA (DANOY, BN.FR) is bracing for a slow recovery of its European business, highlighting the growing pressure on consumer-product companies from the euro zone's deepening economic malaise.
Danone, whose brands include Activia yogurt and Evian water, said Tuesday that rising demand for baby formula in China and Greek yogurt in the U.S. helped offset tumbling sales in Europe and limit a decline in profit margin. Overall sales rose 8% to 20.87 billion euros ($27.86 billion) last year, while net profit was flat at EUR1.67 billion.
But Danone's performance in Europe showed no signs of improving, with sales in markets such as Spain and Italy still falling more than 10% and France--the company's second-largest market--flat.
While confidence largely has returned to European financial markets and fears of a collapse of the currency have faded, the improved conditions have failed to translate into signs of stronger business activity. The euro-zone economy shrank at a 2.3% annual rate in the fourth quarter, the steepest decline since the height of the global recession in 2009.
Danone, along with other European consumer-product companies in the fourth quarter, has been hit hard in western and southern Europe, as rising unemployment, government-austerity programs and stalling wages pressured consumers to tighten their belts. The yogurt maker said it expects consumer trends in Europe to stay weak throughout this year.
"The crisis in Europe won't stop tomorrow," said Danone Chief Executive Franck Riboud.
Danone's sales in Europe, excluding buoyant markets such as Russia and Eastern Europe, fell 3% to EUR8.43 billion over the year, hitting its profit margin. "Clearly this situation is not sustainable and we will overcome it," said Mr. Riboud. "We won't just wait for the economy to get better."
Danone said it will cut 900 managerial and administrative jobs across its 26 European markets over the next two years as part of a EUR200 million cost-savings plan announced late last year. The company is also changing its packaging, reviewing existing recipes of key brands such as Activia and working on new product launches such as Greek yogurt to try and boost sales volumes and eventually profit, in the region.
Danone isn't the only company taking a hit in the region. Nestle SA (>> Nestle SA) said last week its European organic sales growth slowed to 1.8% from 4% a year earlier, the Swiss food giant's worst-performing region.
French retail company Carrefour SA (>> CARREFOUR ADR) last month said fourth-quarter sales dropped 2.4% in a "persistently difficult trading environment." Maurice Levy, the CEO of French ad group Publicis Groupe SA, recently said Europe remains the world's "sick child."
Diageo PLC (>> Diageo plc), the world's largest spirits maker, reported a sharper-than-expected drop in sales in Europe in the six months ended Dec. 31 with sales in southern Europe plummeting 19% as young drinkers in countries such as Spain, Greece, Italy and Portugal face high unemployment.
Some executives are slightly more optimistic as to when things will start to pick up. "There are encouraging signs," said Pierre Pringuet, CEO of Pernod Ricard SA (>> PERNOD-RICARD ADR) last week. "We don't see that at Pernod yet, but I don't see Spain deteriorating further."
With European sales set to decline or stall for some time, companies like Danone, Pernod Ricard and Diageo are increasingly relying on other regions for growth, notably emerging markets. Danone said it expects overall like-for-like sales growth of "at least 5%" for this year after posting growth of 5.4% in 2012. Like-for-like sales strip out acquisitions and currency shifts.
Shares in Danone closed up 5.9% to EUR53.15 Tuesday as investors cheered stronger-than-expected overall sales in the fourth quarter. Like-for-like sales rose 4.9% in the latest quarter, driven mainly by booming demand in Russia and the U.S. Analysts--who had grown increasingly cautious of the stock since Danone issued its profit warning in June--were also reassured by the group's guidance for the year, "might indicate that we may be close to a turning point," said Societe Generale analyst Warren Ackerman.
Contrary to other European companies such as Carrefour and U.K.-based caterer Compass Group PLC (>> Compass Group plc), which have started dropping operations in some struggling European markets, Danone said it plans to stay in all its markets in the region.
"It's not because we grow outside of Europe that we shouldn't take care of Europe. Nobody knows what will be the situation in five or 10 years," Danone's Mr. Riboud said.
--John Revill contributed to this article.
Write to Ruth Bender at Ruth.Bender@dowjones.com
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