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2006 results and objectives
How would you sum up 2006 at DANONE?
Franck Riboud: It was another excellent year for Groupe Danone. Organic growth was well ahead of target at close to 10%, a performance that really sets us apart in the consumer goods sector and in our highly competitive market environment. The only real comparison in terms of momentum is with Numico—which makes our merger all the more logical.
Did temporary factors drive this performance, or do you see a more lasting basis for it?
F. R.: Market ups and downs always play a role. In 2006, for example, exceptionally strong fourth-quarter growth in China certainly had an impact, which is unlikely to last. But even allowing for that, and even if you re-weight fourth-quarter growth in China on the basis of normal levels of demand, we would still have beaten the 6 to 8% range we announced as our target for organic growth. That indicates that our performance was soundly based and not the result of some special event or clearly exceptional situation in one part of the world or another. A special reason for satisfaction with 2006 results is that all regions and all business lines made a positive contribution to growth, even those that have recently run into temporary difficulties such as France and Spain—both showed renewed pace last year after going through a troubled patch. .
You have revised your target for organic growth, setting it higher for the medium term. What are the reasons behind such confidence?
F. R.: Feeling confident doesn’t mean that we can take anything for granted. We’re going to keep our eye very much on the ball. But there are also good reasons for confidence. First of all there is the geographical balance in our business, with half of our sales outside Western Europe and a third on emerging markets. That means that our growth is not dependent on ups and downs in any one part of the world—with our broad geographical base, we can make up for the temporary lulls that are inevitable on any market. Secondly, a growing number of countries are reporting very strong growth. When you look at DANONE’s markets you see that the subsidiaries posting the strongest growth—that is, above the 8% at the top end of our target range—are making an increasingly important contribution to sales. In 2006 they accounted for over half the total. That will automatically generate momentum over time, which is cause for confidence. And our shareholders and investors appear to share our feeling, since DANONE shares gained over 30% last year.
Pushing into new markets and stepping up organic growth - doesn’t that weigh on profitability?
F. R.: Well, our operating margin was up for the 12th year running in 2006, which I think speaks for itself. It is a clear sign of a lastingly sound business base; proof that our growth, however strong, is under firm control and is not at the expense of profitability. Which is essential—if growth weren’t profitable it couldn’t be lasting, since we wouldn’t be able to fund it for long. That said, our business model is definitely designed for growth. We are not going to sacrifice growth, and with it our future, so as to give margin a temporary, artificial lift. Not that it would be hard—we could add a few basis points simply by cutting a few weeks’ worth of advertising at the end of the year. But that would be putting our future at risk. What we have to do is strike the right balance between improving our profitability and growing our sales. I think we have been successful in doing just that, and it shows in our financial targets for 2007. We expect sales to grow 6 to 8% and operating income to rise by between 7 and 10%. We are thus looking forward to firm sales growth and a slightly higher rise in earnings. Which shows, first, that we are not growing at the expense of profitability and, second, that improved profitability is not hampering growth and investment.
What are the main priorities in Danone’s strategy?
F. R.: We have a responsibility to build on the good results we’ve achieved. It would be a real waste if we now sat back and failed to make the most of the leeway and confidence this strong performance has given us. We need to harness current momentum to build the future. DANONE is now benefiting from the efforts we made ten years ago, and if we don’t want to find ourselves empty-handed ten years from now, we have to invent new reserves for future growth today. That means providing vigorous support for our brands, setting up new production facilities, making major investments in research, accelerating geographical expansion and opening up future frontiers.
