Danone Groupe SWOT Analysis Company Report- Soft Drinks Industry Analysis Report
Danone, Groupe
Strategic Evaluation
Swot analysis
Strengths
·
Global bottled water behemoth –
Danone leads the way with a 13% volume share (2007) through a diverse portfolio
of strong pan-national and national brands, of which the primary labels are
Aqua, Wahaha, Bonafont, Evian and Volvic.
·
Strong emerging market profile
– Danone enjoys wide global coverage, including a robust presence in the
emerging world, particularly in Asia-Pacific and the core Chinese market. It is
well placed in Latin America (Mexico), as well as being active in Eastern Europe
and Africa and the Middle East.
·
Astute brand development – the
company has proved shrewd in expanding its Chinese bottled water brand Wahaha
into the fruit/vegetable juice, RTD tea and Asian speciality drinks sectors in
that country, and also the V energy drinks brand out of China and into
Indonesia (as Mizone) and into Europe.
·
Keen trend awareness – Danone
displays a good understanding of key market trends in its core bottled water
business with current strategy based on the development of flavoured variants,
involving both primary and secondary brands, and extension into the
wellbeing-driven functional water arena.
·
Financial acumen – having
streamlined its soft drinks portfolio, divesting assets in markets where it did
not hold a competitive edge, Danone is in a financially sound position, able to
undertake major launches and heavyweight advertising going forward.
Weaknesses
·
Asia-Pacific dependency –
Danone is over reliant on the Asia-Pacific market for its soft drinks revenue,
leaving its vulnerable to fluctuations in market conditions and disruptions in
relationships with regional partners.
·
Western Europe over exposure –
Danone is overly dependent on Western Europe, in particular the depressed
French market, for its bottled water revenue, in particular with regards to its
core high-margin brands Evian and Volvic.
·
Under-representation in Eastern
Europe – while the company has set about bolstering its presence in
Asia-Pacific (China, Japan), Latin America (Mexico, Columbia, Chile) and Africa
and the Middle East (Algeria, Turkey), it has yet to make a serious move in
Eastern Europe, with a lack of activity in the core Russian market a notable
deficiency.
·
Evian stasis – in light of
challenging market conditions in parts of Western Europe, and France in particular,
Danone's continued reluctance to extend its high-margin Evian brand in terms of
flavoured and/or functional variants, and in line with market trends, must be
seen as a weakness.
·
Wahaha weakness – the ongoing
legal dispute over Wahaha, with results de-consolidated in 2007, has slowed the
company’s progress in Asia-Pacific soft drinks and had a negative impact on
overall bottled water business growth.
·
Low-margin brands to the fore –
stronger performance in emerging markets, hence lower margin brands, is
negatively affecting operating profit and margin at Danone, while challenging
trading conditions in high-margin markets are not helping matters.
Opportunities
·
Functional fillip – functional
drinks, in particular functional bottled water, offers Danone the opportunity
to offset some of the malaise in standard bottled water in its core Western
European market.
·
Natural benefits – the
incorporation of traditional Chinese medicines into beverages is a growing
trend in China, with these TCM RTD beverages growing in popularity among
increasingly health-conscious consumers. This is a development Danone can
exploit.
·
Emerging market expansion –
continued emerging world expansion offers Danone considerable growth
opportunities. While the likes of China, India and Russia are obvious targets
for expansion, Turkey has also emerged as a key growth sales area.
·
Bolder market segmentation –
Danone has the ability to benefit from a bolder approach to its functional
drinks portfolio. Beverages which claim to lower blood pressure levels, make
the skin beautiful and increase fat burning are among the latest to emerge on
the market.
Threats
·
Rising raw material costs – the
price of raw materials such as packaging and fuels are expected to continue to
rise in the short term, a development which is certain to place greater
downward pressure on Danone’s profit margins and threaten development plans.
·
High level of industry
consolidation – the global soft drinks market is characterised by a high level
of consolidation, with the likes of The Coca-Cola Company, PepsiCo and Nestlé
all taking a much greater interest in bottled water of late. This will pose
challenges for bottled water-focused Danone.
·
Local level pressure – Danone
faces rising competition from local soft drinks companies in Asia-Pacific, in
particular in China, in its core bottled water sector as well as key secondary
categories. Continued growth will put increasing pressure on Danone’s margins.
·
Possible loss of Wahaha –
should Danone lose its rights to the Wahaha brand, or at least have them
diluted, its presence in the key Chinese soft drinks market will be
considerably weakened, a situation it is unlikely to be able to remedy
immediately.
·
Operating margin erosion – with
lower-margin, emerging market brands a key focus going forward and
higher-margin, developed market labels under intense pressure, operating margin
is likely to contract, and the goal of making products more affordable in China
may further compound this problem.
Prospects for Danone, Groupe in Soft Drinks
Core Businesses
·
Danone ranked third in the
global soft drinks market in 2007 in volume terms, with a share of nearly 6%.
Its status is based on leadership, with an almost 13% volume share, of the
global bottled water sector. The company enjoys a wide global presence, but
exhibits a notable Asia-Pacific revenue bias in soft drinks. In addition,
Western Europe, and most particularly the beleaguered French market, is a major
source of profits in terms of core bottled water. Danone's performance over the
2003-2007 period in soft drinks was stronger than all of its major competitors,
with an off-trade volume compound annual growth rate (CAGR) of 10%
outperforming both the overall soft drinks market (6%) and carbonates giants
The Coca-Cola Company and PepsiCo (both 4%).
·
Bottled water contributes
around 90% of Danone's off-trade soft drinks volume sales. Despite the weakness
of its core French market and legal troubles in China over Wahaha, the company
posted an increase of 13% in its global bottled water off-trade volume sales in
2007, as its emerging market brands performed robustly. However, on a global
scale, Danone (off-trade volume CAGR of 10%) under-performed its
carbonates-focused rivals The Coca-Cola Company (CAGR of 15%) and PepsiCo (CAGR
of 26%) over the 2003-2007 period as these companies invested heavily in
non-carbonates expansion.
·
Outside bottled water, Danone's
presence in soft drinks is relatively limited, with carbonates, fruit/vegetable
juice and RTD tea its only major secondary sectors. The company's presence in
these sectors is focused in Asia-Pacific, with it leveraging the profile of the
bottled water brand Wahaha in targeting fruit/vegetable juice and RTD tea, with
the launch of spin-off products. Danone (off-trade CAGR of 29% and 15% respectively)
markedly outperformed the global market in both sectors (5% and 9%
respectively) over the 2003-2007 review period, underlining the success of its
brand extension strategy. Strong advertising has helped underpin growth in
markets where increasing disposable incomes and rising health awareness have
helped drive the expansion of fruit/vegetable juice and RTD tea. However, the
ongoing dispute over Wahaha is a threat to this growth as the company faces the
possibility of losing its rights to the Wahaha brand and has already
de-consolidated its results for part of 2007.
·
Danone also has a presence in
Asian speciality drinks and functional drinks. The company's position in the
former derives from its RTD tea portfolio, with this category comprising the
majority of Asian speciality drinks consumption. Functional drinks is an area
the company has focused on in recent years, with its V energy drinks brand
enjoying double-digit off-trade volume growth in recent years. V was introduced
to the French market in 2007, following a successful launch in Indonesia under
the Mizone label in 2006, while Alcalyon continues to be rolled out in Japan.
Growth Opportunities
Chinese huge growth opportunity for Danone but it must resolve Wahaha dispute
·
It will come as no great surprise
to learn that China holds massive potential for Danone in soft drinks and in
particular bottled water, with the overall market (off-trade volume 2007-2012
CAGR of 9%) and this key sector (CAGR of 8%) set to markedly outperform the
global market (CAGR of 4% and 6% respectively). Looking at bottled water, the
sector is expected to benefit from its healthy image as consumers become more
concerned with maintaining their water intake and will be attracted by bottled
water offering good hygiene levels and a healthy mineral content. Notably, no
improvement in the poor standards of tap water is foreseen. In addition, the
growing economy will result in increasingly affluent workers commuting long
distances, with this demographic becoming a key bottled water consumer group.
Also of benefit to Danone will be the shift increasingly towards mineral water
and away from distilled water due to the former product’s healthier image.
Finally, there is the Beijing Olympics, the staging of which should cause a
significant spike in bottled water consumption.
·
Danone will undoubtedly want to
exploit the rising demand for bottled water in China; however, at present a
cloud hangs over its ability to do so, with the breakdown in the relationship
with Hangzhou Wahaha Group over the Wahaha brand stalling its progress in the
market. While the intervention of the Chinese and French governments has helped
bring an end to a bitter deadlock, the matter has yet to be resolved, which
poses an immediate threat to its capability to benefit from increased sales
during the Olympic Games. Thinking further ahead, should Danone lose the rights
to Wahaha in China, and it has already de-consolidated the brand from its
financial results which suggests it is preparing for a development of such
proportions, its capability to take advantage of growth in the Chinese market
will be temporarily, at least, restricted. Its global rivals and local ones
will be quick to exploit Danone’s ill fortune.
Turkey offers bulky growth for Danone
·
Away from its troubles in
China, it is clear the emerging world holds tremendous opportunity for Danone
in bottled water, the capitalisation of which grows increasingly important as
core developed markets sag under the weight of maturity. India (off-trade
volume 2007-2012 CAGR of 13%) and Russia (CAGR of 13%) are key developing
markets whose potential has been widely lauded; however, beyond these markets
there is another that warrants similar attention and that is Turkey. Turkey was
the world’s fastest growing bottled water market in 2007, with consumption per
household at 584 litres for the year, up from 334 litres in 2002. Only Mexico
has a higher consumption rate. Danone, having purchased an 80% stake in local
bottled water player Calgar in 2007, is in a position to tap into the expansion
of the market.
·
A striking characteristic of
Turkey's bottled water market is the predominance of 19-litre containers
(demijohns), which account for upwards of 80% of total still water volume.
Danone would have to adapt its offer to suit this particular market but the
potential exists, with growth set to be driven by rising disposable income
levels and the short supply of potable water, with improvements in this supply
thought to be a long-term consideration for the government. Danone should identify
this unbranded volume as a target for share-of-throat gains over the medium to
long term, with more aggressive marketing and distribution initiatives in those
regions where unbranded bulk water is likely to give a strong return on
investment.
Danone has the brand equity to tap into growing TCM RTD beverage market in China
·
Returning to Asia, and in
particular China, the development of the traditional Chinese medicine (TCM) RTD
beverage format offers Danone an opportunity for growth. These herbal drinks
are growing in popularity with health-conscious Chinese consumers increasingly
favouring products with a “green” or “natural” positioning. Although there are
no published figures for the total sales of TCM drinks, industry experts point
out that the category has been experiencing robust growth and this momentum is
expected to continue in the short to medium term. The star performer is the RTD
tea brand Wong Lo Kat (a TCM blend in ready-to-drink format) owned by Guangzhou
Pharmaceutical Holding. So far, The Coca-Cola Company seems to be the only
multinational exploring TCM drinks. However, PepsiCo has trialled a soya drink
called Xi Yi Dai in a couple of major cities in early 2007. Danone has brand
capacity to join this race and with its Nutri-Express dairy/juice blend it is
showing the innovative desire to do so.
Is functional drinks expansion the answer to bottled water malaise in France?
·
A greater focus on
fortified/functional drinks could also help Danone achieve new growth in its
core developed markets. There has been a rapid rise in fortified/ functional
soft drinks, which include products which have been “enhanced” with such
ingredients as vitamins, minerals, other dietary supplements, fibre and added
probiotics. These products are often expensive, retailing at prices 20-50%
above standard soft drink offerings, a positioning that offers the company an
opportunity to offset a slowdown in sales of its established high-margin
products. Notably, functional drinks is expected to post robust growth in France
in the short term (off-trade volume 2007-2012 CAGR of 14%), while functional
water is also expected to perform healthy, bucking an otherwise flat trend.
Danone has recently launched its V energy drink brand in this market and would
do well to continue to back it with considerable resources.
Limited Potential
French bottled water set to shrink as outlook for Western Europe is underwhelming
·
Perhaps one of the greatest
challenges facing Danone in the short term, alongside the resolution of its
problems in China, is generating forward momentum in its domestic market. The
outlook for the French bottled water market is grim (negative off-trade volume
2007-2012 CAGR of 1%). Market maturity is a key factor behind the growing
malaise in bottled water in France, but also contributing is mounting
ecological concerns as consumers increasingly view bottled water consumption as
irresponsible and harmful to the environment. This forecast is echoed across
other core Western European markets. Illustrative of this emerging view point
in France was the decision of the mayor of Paris in 2007 to stop buying still
bottled water for his administration while also recommending that Parisians
drink tap water. As a result of this trend, water filters are expected to
constitute the main rival for bottled water in the short term, in particular
for still bottled water. Water filters comprise an easier, more ecological and
more convenient way to drink water than buying bottled water. Danone will also
be concerned at the slowdown in demand for flavoured water, with the format
having difficulties in keeping its customers and the withdrawals of some brands
in 2007.
Will advertising and lingering doubts of health limit the popularity of tap water?
·
Returning to the rise in
popularity of tap water in France and other major Western European markets,
while Danone should be alert to this trend, the impact may not be as strong as
some are expecting. While public opinion is moving towards an anti-bottled
water sentiment, the shift is not happening in great volumes and indeed, the
general public remains heavily persuaded by advertising. Bottled water will
continue to be backed by massive promotion budgets while tap water is only
being backed by selected government and interest groups. In addition, there
remains a lingering doubt over the quality of tap water in Western Europe,
despite its comparatively cleanliness, which is a factor that puts bottled
water at a distinct advantage.
Rising competition threatens to affect Danone’s key market development plans
·
Focusing on the maturity of key
markets, Danone faces the prospect of its core soft drinks brands coming under
increasing competitive pressure in the short term as the likes of The Coca-Cola
Company and PepsiCo continue to target growth in non-carbonates and local
players, in particular in Asia-Pacific, expand their coverage. The growing
interest of The Coca-Cola Company and PepsiCo in bottled water is a threat to
Danone on a global scale. Both are heavily backing their non-carbonated brands,
with The Coca-Cola Company’s move for Energy Brands in 2007 set to further
strengthen the behemoth’s position not only in bottled water, via the Glaceau
label, but also in functional and energy drinks. Specifically in emerging
markets, Nestlé’s recent distribution deal with Grupo Modelo, giving it
invaluable geographical coverage, poses a real danger to Danone’s robust
position in Latin America, while Kirin has indicated that it is targeting
expansion in soft drinks in Asia-Pacific in collaboration with San Miguel, a
development that will only add to the strain on Danone in the region.
Furthermore in Asia-Pacific, local Chinese soft drinks players, such as Nongfu
Spring and Master Kong, are in the ascendancy and are beginning to pose a major
threat to Danone’s regional market share. The prospect of continued wrangling
over Wahaha and the detrimental effect on development will not make combating
this rising competition any easier for Danone.
