By Carol Ryan 

Despite a focus on trendy health foods, Danone has lost investor support this year. Winning it back will be hard work as business becomes more competitive.

The Paris-based company that makes Dannon and Activia yogurts announced on Monday plans to reduce costs by EUR1 billion, equivalent to $1.19 billion, over the next three years and return to its pre-pandemic operating margin by 2022. It will give country managers more power, strip out head office costs and sell parts of its portfolio. It recently put its Vega protein powder brand under strategic review, for instance.

European peers Nestlé and Unilever began this kind of restructuring three years ago. A 30% fall in Danone's stock this year shows why it is moving now. Shares in Nestlé and Unilever are more or less flat, as are those of U.S. food businesses Kraft Heinz and Campbell Soup, which own less wholesome brands.

Management recognizes it has a problem with shareholders. It hasn't helped that Danone will miss a 16% operating margin target previously set for 2020, which cannot be blamed entirely on the pandemic. Of Europe's three biggest food companies, Danone is the only one whose margins fell in the first six months of the year compared with the same period of 2019.

It now has to impress investors just as competition hots up in important markets and product categories. While Danone was early to spot the potential of plant-based foods with its $10.4 billion purchase of dairy-alternative brand WhiteWave back in 2016, trendy rivals like Blackstone-backed vegan milk business Oatly are catching up fast.

In China, meanwhile, local baby food company Feihe is taking market share from international brands made by Danone as well as Nestlé and Reckitt Benckiser. They may also be fighting over less business as China's birthrate is projected to fall 8% this year, according to Barclays. The French company's baby food unit is by far its most profitable.

Danone ticks many boxes for today's investors. It has been a leader on environmental, social and governmental issues and began reporting a pioneering carbon-adjusted earnings per share metric earlier this year. A portfolio of plant-based brands and products that boost immunity plays into consumer trends, particularly in the wake of a pandemic. A new focus on healthy aging has the potential to offset some of the higher competition it faces in baby food. So far this year, sales of brands such as Protinex adult nutrition drinks have grown by 20%.

Even if the right ingredients are there, though, investors still need proof that Danone can make the best of them.

Write to Carol Ryan at carol.ryan@wsj.com

 

(END) Dow Jones Newswires

November 23, 2020 09:16 ET (14:16 GMT)

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