Business Strategy and Economical analysis of Danone

The term “Functional foods” is essentially a marketers’ term and is not recognized in law or defined in any dictionary.  For this reason there are different definitions of the term, one of which that seems to best summarize them all is:

The world market for functional foods, and therefore Actimel, is and has been expanding. This expansion is driven by demographic, social and economic trends. (18) Some of the factors driving this increase in demand include: (‎18)

•        Aging population, increasing interest in ‘healthy living’;

•        Increasing affluence and education among world populations;

•        Increasing understanding of the link between nutrition and health;

•        Emphasis on preventative measures to control health care costs;

•        General consumer dissatisfaction with conventional treatments, therapies and drugs;

•        Increasing scientific and clinical research to validate effectiveness and safety of         functional foods

•        Expanding press coverage of such research – Increasing consumer awareness and,

•        Increased marketing and advertising activities by suppliers.

Consumer awareness and demand for functional foods in the UK are responses to concerns for unhealthy lifestyles, increasing awareness of “we are what we eat,” a trend towards self diagnosis and a growing mindset that “prevention is better than a cure”. (8)

One major factor of an increase in consumer awareness of functional foods is health headlines in the media.

Product Life Cycle

Actimel entered the UK and European market in 1994 and has been enjoying a healthy rise in its sales values ever since, to the extent that it has been the market leader for some time now. Figure 2 shows the trend of sales of Actimel in the UK between 2005 and 2011 (Source Mintel) (15)

Figure 2 Sales of Actimel 2005-2011(Source Mintle.com) (15)

It can be observed that Actimel had a decrease in sales between 2005 and 2007; this may be because of the impact of the 2006 ASA ban of an Actimel’s advert. However Actimel is still the market leader and it is also visible from the above graph that the sales started to rise again in 2008 until 2010 when the sale started decreasing.‎(15)

It can be said that Actimel is a mature product and its sales have reached their “peak” (in terms of lifecycle of a product) as although the functional yogurt drink market is growing, sales of Actimel have not had a considerable rise within the past few years. It is also possible that Actimel is starting to enter saturation stage of its lifecycle as its sales are not significantly increasing and competition is increasing.

In order to prevent the product entering the “decline” step of the lifecycle it is important for Danone to introduce extension strategies for its product.

Future Trends in Market         

Tighter regulations from the European Food Safety Authority (EFSA) have also adversely affected the growth of sales values of functional foods. In the EU foods bearing health claims need assessments in order to validate such made claims. EFSA is responsible for verifying the scientific substantiation of the submitted claims.‎(12) EFSA assesses claims on a case-by-case basis, and its judgment is based on the provided scientific evidence supporting the claim. (12) However the retail value sales of the functional foods market and the yogurt drinks market could be increased through advertising campaigns clearly communicating the health benefits of the products. Figure 3 illustrates the forecast, until 2014, for the functional yogurt drinks market. (15)

Figure 3 UK retail value sales and forecast of yogurts, 2007-17(15)

As figure 3 (15) above illustrates the functional yogurt drinks market is to be increasing in sales values in the coming years. As it can be seen the functional yogurt drinks market although benefiting from a steady rise in sales is not expanding exponentially.

2.1 SWOT Analysis for Actimel

Strengths

        Here are some of the strengths of the functional foods and drinking yogurts:‎(15‎)(3)

• With a growing interest in self-diagnosis, consumers are adopting a more proactive approach to their health;
• A little over a tenth of consumers (13%) claim to have noticed improvements in their health since they started eating functional foods;
• A fifth of consumers claim to be buying more functional foods now, compared to a year ago;
• Diversification of illnesses that functional foods deal with will improve future sales opportunities;
• Greater interest healthy diets should open up opportunities for functional foods to target health-conscious consumers;
• Just over two thirds of consumers claim to prefer to eat functional foods rather than take vitamins;

• Four in five consumers see yogurt as healthy;
• Usage of functional foods in the UK is lower compared to some other European countries indicating room for further growth;
• The 55+ age group is highly engaged with yogurt;
• The ageing population and the subsequent projected growth in the over-55s will offer the functional foods market considerable audience;
• Active health yogurts can provide consumers with a sense of being in control of their well-being (and health) in turbulent times, also providing a quick and easy, tangible healthy action.

Weaknesses

• 78% of consumers believe functional foods are overpriced
• Two thirds of consumers agree that the health claims made to market them are exaggerated;
• A quarter of consumers prefer taking vitamin and mineral supplements rather than functional foods;
• Continued use of price promotions by supermarkets to increase sales of some yogurt drinks risks devaluing the category in the longer term;
• Nearly half the population don’t see yogurt as tasty;
• Yogurt drink is a discretionary item, not a necessity;
• The EFSA and Advertising Standards Authority (ASA) are clamping down on health claims made with products;
• Rises in the price of dairy have put pressure on profit margins.

Opportunities and Threats

        Opportunities exist for Actimel to boost its sales and market share by launching new flavours, advertising campaign and repackaging.  However the most promising way for Actimel to protect its status as the market leader and also to increase its sales is to achieve EFSA approval for its health claim; this however is not as easy as it sounds because Actimel claims to improve the body’s natural defences (the immune system). (26) DANONE states that there is not a very clear measurement of immunity and hence it is very difficult to prove to the EFSA that Actimel has an effect on it.‎(1)(‎4)

        Because of the EFSA’s tightened regulations the position of the big companies in the market will be re-enforced while the arrival of new small companies will be prevented due to the high costs of scientific research required to produce a product with a health claim. Therefore any threat to the market leader position and sales of Actimel will either come from a new product launched by a big multinational company or from products already on the market; which manage to acquire an EFSA approval for a health claim they have made. For example Benecol® yogurt drink is such a product and has managed to increase its sales and market share in the past few years; this puts Benecol® yogurt drinks as the major competitor and threat to Actimel’s sales value and market position.‎(5) Yakult is also another threat to Actimel’s position but its health claim was also rejected by the EFSA.  

Opportunities

• Health consciousness among populace
• Growth in awareness on digestive health
• Probiotic bacteria awareness

Threats

• New entrants
• Increased competition
• Stores own brand
• Increase in cost of milk and production
• Consumer unawareness on benefits of good bacteria
• Government regulation on health claim of probiotic brand
• Lower prices from competitors

2.2 PEST Analysis

The grid below highlights some of the factors that affect the market presently and therefore gives an idea on the way forward in the present market environment.
POLITICAL

Government policy: Political factors have a vast impact upon the regulation of Danon’s yogurt drink market. The UK Coalition Government’s ‘Responsibility Deal’ is being developed with an objective to enable, encourage and incentivise consumers to adopt a better diet and to increase their levels of physical activity as part of a positive decision to lead a healthier lifestyle eg. Five a day. ‎(14)

 The issues such as how stable the political environment should be in different countries, how government policies affect tax on the company, what the government’s policy on marketing ethics and economy is, and how long the payment cycle works in certain countries has always been the matter of consideration by Danone.

Economic

Economics factors include interest rates, taxation changes, economic growth, inflation and exchange rates which can effect on companies profitability. Actimel market environment is highly competitive. Multinational Brands such as Yakult, Benecol and stored own brand with their superior stature are the major competitors in the ambient grocery market.

Retailers are pressurizing FMCG (Fast-Moving Consumer Goods) producers to reduce prices of their products. This in turn has adverse effects of the Premier foods profits.

Consumers also do not want to buy expensive product or brands due to current economic tide. The UK economy analysis in 2011 indicates that UK had a difficult year according to the high unemployment, spare capacity and government borrowing.

UK gross domestic product (GDP) in volume terms decreased by 0.3 per cent in the fourth quarter of 2011 and a further 0.2% in the first quarter of 2012, causing concerns for a ‘double-dip recession’.‎(21)

Output of the production industries fell by 1.3 per cent, within which manufacturing fell by 0.7 per cent. (9)

Inflation picked up again during 2011. CPI inflation was running at 5.2% in September, building on the recent increases to give the highest rate since September 2008. The Bank of England left the base interest rate at 0.5% despite high inflation, but the recovery in the UK economy in the short term will continue to be modest and gradual

Social

Other economical factors such as Unemployment, Advert withdrawal and Migration could also affect the market.

Social factors

DANONE has a number of manufacturing facilities and suppliers all around the world which represent a substantial portion of its marketing plan. Therefore, considering the aforementioned, DANONE needs to contemplate the following factors:

• Age distribution and population
• Cultural aspects
• Attitudes towards foreign products and services.
• Effect of language upon the distribution of products onto markets

Knowing the social factors and trends in each country could help DANONE to make the best decisions on the methods of operating the products.

In 2008 DANONE started to built a yogurt factory in Bangladesh with a difference - what Professor Yunus calls a social business. This project is not profitable and mainly benefits the local children who have very poor diet.(29)

The scheme is not designed to make a profit, but it does have clear benefits for DANONE.

It is a good way for the company to learn how to market food in South Asia - a valuable lesson as it considers whether to enter the huge and lucrative market of neighbouring India.(29)

Technology

Technological factors can influence production speed, quality costs, and it might lead to innovation.

Research and development is important for companies as to apply technological advances to create opportunities for new, or to improve existing products and/or processes; and to improve service to customers in order to achieve a higher market share, to compete with new entrants or to reduce operating costs.

The R&D costs of £8.4m were incurred in 2011, which is a decrease from the figures from 2010 (£10.6m). A lot of research is going towards a healthier brand, with the goal such as;

• studying bacterial strains and their interaction with the gut’s flora
• functional formulation
• clinical research
• human physiology
• consumer sciences

Improvements in the packaging of the different brands were a key goal in 2011 for Actimel.

3. Strategic, social and economic choice

• Full-year 2012 sales of €20.9 bn, up +8.0% as reported and +5.4% like for like. (30)
• Solid 2012 performance, with contrasts from region to region: sales down -3% in Europe excluding the CIS; growth of over +10% in emerging markets and North America combined
• Q(quarter) 4 performance in line with Q3, with sales up +7.3% as reported and +4.9% like for like(30)
• Trading operating margin at 14.18% full year, down -50 bps from 2011, in line with thetarget as revised in June 2012(30)
• Free cash-flow of €2.1 billion, exceeding target set in 2009
• Dividend of €1.45 per share, up +4.3%.(30)

Consolidated net sales

Consolidated net sales increased by 8.0% as reported to total €20,869 million in 2012. Excluding the impact of changes in the basis for comparison, which include exchange rates and scope of consolidation; sales were up by 5.4%. This organic growth reflects a 2.3% increase in sales volume and a 3.1% increase due to the price/mix effect. The 2.5% exchange-rate positive effect reflects favourable trends in currencies including the US dollar, the Chinese yuan, Pound sterling and the Russian rubble. (30)(9)

Fresh Dairy Products

This Division recorded sales of €11,675 million in 2012, up 2.0% on a like-for-like basis relative to 2011. Sales in Europe decreased throughout 2012, mainly impacted by a severe deterioration in overall consumer demand in Southern Europe in the second half of the year. This deterioration was only partially offset by a stepping up of the pace of the activity in the CIS zone. In North America, the Division implemented in the second half of the year a new production capacity for greek-style yogurt that raised its market share by around 5 points, full year, in this fast-growing segment. The Division thus strengthened its leading position in fresh dairy products, where competition has picked up. (9)

3.1 Ratio Analysis

Table 1Table 1 Ratio Analysis for 2011 & 2012 (According to Yahoo Finance) (9)

3.2 Value-added chain analysis

This method helps to understand the part of the company's operations that create vale and those that do not. It shows how a product moves from the raw materials stage to the final customers.

Primary Activities

Inbound logistics: Superior handling of incoming raw materials to minimize damage and improve the quality of the yogurt. DANONE makes its yogurts with fresh products and the best ferments in order to improve the quality of its products.

Operations: Consistent manufacturing of attractive products and rapid responses to customers unique manufacturing specifications. The yogurt's packing is ideally designed to protect and maintain the quality of the yogurt. Furthermore the label of the product is designed to attract the consumers, to give the maximum information about the DANONE’s product.‎(18)

Outbound logistics: Rapid and timely product delivery to customers. Thanks to its daily production, DANONE, is able to satisfy customer demands at any time.

Marketing and sales: There is a strong coordination among functions in R & D, Marketing and product development. DANONE corporation believes that the product innovation is the key of success. Therefore the DANONE’s Institute is the one in charge of create new products and adapt the existing ones to the changes of consumer tastes in order to make them better. The marketing and sales department is the one who looks for those changes in consumer tastes, the one who look for new potential products and require it to the Danone's institute.‎(13)

Service: DANONE has a client telephone service that give responses to consumer doubts and to attend its opinions. Furthermore he has created another phone and e-mail service for the customers which desires to have healthy feeding habits and have some doubts about that.

Secondary Activities

Infrastructure: Highly developed information systems to better understood customer's purchasing preferences. DANONE implement several systems to better understand the customer such as; phone interviews, focused groups market research…

Human Resources: DANONE has compensation programs intended to encourage worker creativity and productivity.

Research and Development: DANONE makes investments in technologies that will allow them to consistently produce highly differentiated products.

Purchases: DANONE has some systems and procedures used to find the highest quality raw materials.

4. Strategic, social and economic implementation

4.1 Competitive analysis. Porter's five forces model

• Threat of entrants: It is quite difficult to enter the yoghurt industry because DANONE has most of the market shares and that makes it hard to make up a new brand. It would mean spending lots of money to arrive to a good position.
• Power of suppliers: In this case the power of suppliers is exclusively related to DANONE because it has more than the half of the market share and this provides a lot of power for taking decisions about price and makes it easier to invest in new yoghurts and desserts.
• Threat of Product: substitutes Product substitutes are not a huge threat. Actimel is awell known and novel product and the bacterial technolodgy behind that makes it even more difficult for other drinking yogurts which lack brand loyalty or whose prestige is not that big.
• Power of buyers: Buyers are the key element in order to know if the product is working or not in the market. In this case Actimel main target are consumers who wants to Have better and healthier diet. Danone with this product achieves it. The new marketing campaign in 2012 ‘The little bottle with a lot inside’ showcasing the ingredients ‘packed’ in Actimel, including its milk, fruit and vitamin content.
• Intensity of rivalry among competitors: The real intense rivalry among competitors happens between little companies. As DANONE represents more than the half of the market shares, this doesn't occur at that level.

4.2 Analysis of Competition

Actimel is the market leader by some distance, accounting for nearly half of the segment sales. While the brand was previously positioned as boosting immunity, its 2011 campaign under the tagline ‘Bring It On’ centred on ‘taking on everyday challenges with an air of resilience’. A change of tack in 2012 saw the focus move on to the theme of ‘The little bottle with a lot inside’ showcasing the ingredients ‘packed’ in Actimel, including its milk, fruit and vitamin content. ‎(27)

Figure 4 UK Yogurt Drink Market share 2011 (Source Mintel.com)(16)

Benecol has consistently had the largest growth rate in the yogurt drinks market and is certainly a major competitor with Actimel in this market. The reason behind this is the health claims made for the products. Actimel claims to “Help strengthen the body’s natural defences” when consumed daily.  Because of its L.Casei Defensis/Immunitas/Danone probiotic culture which has been studied extensively for more than 15 years and specifically selected by Danone’s international research centre.

This is where Benecol® yogurt drinks claim to “help lower chlosterol” when taken daily. This is because Benecol® products contains Plant Stanol Ester which helps block uptake of chlosterol in the gut, thus allowing less cholesterol to enter the blood stream.

The difference between the two claims made by Actimel and Benecol is that the latter has been approved by the EFSA, which in itself provides the product and the brand with great credibility. The marketing of Benecol® is led by an EFSA approved claim, and thus better engages consumers with the product, notably those who are sceptical of the health benefits of functional foods and probiotic yogurt drinks. ‎(6)

4.3 Segmentation and Targeting Recommendation

In the authors points of view by changing market segmentation the company can achieve a better position in competitive situations, identify the gaps in the market and therefore recognize the new buyers and the position of the product in market more effectively.

Actimel previously aimed exclusively at the older health-conscious consumer markets. However Actimel is now aimed at everyone from children to the elderly with a series of adverts aimed at different consumer demographics.  Danone UK spent £7.9 million in 2009 to advertise Actimel using a wide range of media and strategies to reach out to and connect with its target audience. Actimel has used celebrity faces in its TV campaigns to increase consumer awareness of its product; for instance in order to connect with mothers across the UK Actimel sponsored GMTV with Lorraine for three months. GMTV with Lorraine is a breakfast show on ITV1 hosted by Lorraine Kelly which ran from March 2010 to September 2010.‎(15)

5. Conclusion

DANONE’s strategy is designed to differentiate it's products from the competitors. The strategy based on differentiation is to create a good perceived as a premium by the customer, to create loyalty to the brand and therefore low price sensitivity. DANONE want to do that through the quality, the healthy and the real taste of its products. But also through the creativity, the innovation and the customer's service. This company makes huge investments in R & D in order to give responses to the market demands. The quality of the raw materials is high in order to make the most quality products. Furthermore DANONE offers detailed information of its products and the company so the customer feels more acknowledged when he makes the achievement.

A good example of this is Actimel. This product is currently the market leader in the functional yogurt drinks category and has been for many years. Actimel is part of DANONE’s FDP business line which generated the highest income for DANONE (between its four different business lines). Actimel has recently withdrawn an application of approval by the EFSA for its health claim; reason for this being ‘lack of clarity from the EFSA’.

If Actimel manages to get EFSA approval for its health claim it will increase its sales value and also its market share in the functional yogurt drinks market. In the meantime Actimel should try and target a wide range of demographics through advertising and marketing campaigns in order to keep up its sales.

The yogurt drinks category has been challenging for most participants in recent years, with weakened demand for functional drinks and EFSA’s rejection of key functional health claims, leading to a further fall of 3% in value sales between 2010 and 2011.

Three of the top four brands – Actimel, Müller Vitality and Yakult – all experienced sales declines in 2011, with Müller Vitality slipping into fifth place behind Yakult.

Trade sources argue that the higher price point of yogurt drinks versus spoonable yogurts is alienating some consumers, there is increasing evidence of brands relaunching their range of yogurt drinks with new wider positioning statements targeting the whole family, rejuvenating the range of flavors available and introducing new packaging.

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6. References

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29. James Melik2009 Danone's yogurt strategy for Bangladesh Business reporter, BBC World Service, Bangladesh
30. Danone 2012 Full sale results Press Release(Feb 2013)