Food Group Shifts Strategy to volume growth

Franck Riboud is famously impatient with the stock market’s short-termism. So when the
executive chairman of Danone in November disappointed analysts by downgrading growth
forecasts, he reacted in typical style.
‘The crisis is not our main concern; our main concern is to construct the next 15 years for this
group,’ he said.
With that in mind, Mr Riboud has shifted strategy to volume growth rather than sales growth.
His view appears to be that setting a high sales target in the current economic environment
would put undue pressure on managers, risking mistakes and shortcuts to achieve the growth.
Much better to cut prices and increase volumes than to shut factories, he has said.
Instead the group prefers to reinvest cost savings as it expands and deepen sales in new markets
rather than pledge to boost continually pro t margins.
The company sells its products – including Activia yoghurt and Actimel yoghurt drink, as well
as Evian, Badoit and baby food, including Milupa, to 700m people worldwide. It aims to
achieve its mission to ‘bring health through food to the largest number of people’ by selling to
1bn people by the end of 2011. Although its international sales are expanding, it still relies on
Western Europe for 48 per cent of its sales.
After 12 years at the helm of Europe’s third-largest food group after nestlé and Unilever, Mr
Riboud has transformed Danone from a conglomerate into a streamlined business that his
father, Antoine Riboud, whom he replaced, would not have been able to recognise. Now
focused on three main sectors – yoghurt, spring water, and baby food along with a small clinical
nutrition business – he jettisoned beer, biscuits, cheese and other ‘unhealthy’ food and drink
on the way.
Selling low-growth businesses helped Danone achieve one of the best organic growth rates in
the sector, making it a stock market darling – its compound annual growth rate was 8.9 per cent
between 2001 and 2007.
While there is no argument about the company’s ability to drive sales growth, its commitment
to share- holder value is more debatable, according to Alex Molloy, analyst at Credit Suisse,
citing Danone’s 12.3bn Euros takeover of Numico, the Dutch baby food business in 2007 and
this past year’s c3bn rights issue: ‘strategically the Numico acquisition was great but they paid
so much for it that it has not created shareholder value.’
In November Danone cut its sales target over the medium-term to ‘at least 5 per cent’ from 8–
10 per cent previously, citing changes in consumer behaviour. It also abandoned guidance on
pro t margins and earnings per share growth but said that annual free cash flow would reach
€2bn by 2012.
Analysts were disappointed. ‘Without a premium growth rate against its peers, we do not see
how the stock can return to a premium valuation,’ wrote analysts at royal Bank of Scotland.
Mr Molloy said: ‘the debate now is whether this crisis has washed out the trend for the great
sales growth there was between 1997–2007. Only time will tell but we are positive because
people like healthy and convenient food.’
For Danone, the shift towards volume rather than sales growth means targeting and expanding
sales in emerging markets. But because people in these countries are less wealthy than in more
prosperous countries, the company cannot expect to generate the same profit margins. Its
cheapest yoghurt is sold in Bangladesh at 6 euro cents in an 80g cup. In France, plain Activia
yoghurt sells for 26 euro cents for 125g.
Danone is experimenting with selling its Activia yoghurt in powdered form, which would allow
it to bypass expensive cold storage costs.
Source: from ‘Food group shifts strategy to volume growth’, Financial Times, 10/01/10
(Daneshkhu, S. and Wiggins, J.).
Discussion Questions
1. What environmental factors is Danone responding to by shifting strategy to volume growth
rather than sales growth?
2. Explain why Danone is focusing on only three main sectors. Why these sectors?
3. What rationale can you give for the fact that Danone has retained its water brands (such as
Evian, Volvic and Badoit) in view of recent criticisms of bottled water? Use the porter 5 force
model of competition to help build your arguments
 Balderton plugs into teenagers’ attention spans
Balderton Capital, one of Europe’s largest venture capital firms, has recruited a group of
teenagers to advise it on the latest technology trends.

Balderton, based in London, has invested in Bebo, Betfair and Codemasters. It manages $1.9bn
(£1.3bn) in committed funds.

Last month, the venture firrm invited 11, 15-year-olds to an hour-long private trip on the
London Eye for an inaugural meeting.

The teenagers named themselves ‘Prestige 11’, after the top accolade in a video game, and
were given iTunes vouchers as a thank-you. They plan to meet every two or three months and
continue to chat and swap ideas on a Facebook group.

Balderton hopes to understand how the teenagers of today will spend their time and money as
the adults of tomorrow.

‘We think very long term,’ said Roberto Bonanzinga, the Balderton partner leading the scheme,
who argues few VCs use the services in which they invest.

Mr Bonanzinga has two objectives: discovering new services before they hit the media or
investor radar; and testing new ideas pitched by entrepreneurs.

Information gleaned could be particularly useful in Balderton’s early stage investments, he

says. ‘Understanding how consumer behaviour is evolving is super important.’

For now, YouTube and Facebook remain by far the most popular websites among the group.
Facebook has completely replaced other email and instant-messaging services.

Immediacy is critical. ‘Three hours not replying to a text message would be really rude,’ said
Tomas Albert, of west London, one of the Prestige 11.

Few pay for music, with many using filesharing networks, believing that artists and labels
‘make enough money’. Movies are usually rented from a DVD outlet rather than from the
Internet, but only because downloading takes too long.

‘They don’t collect things,’ said Mr Bonanzinga. ‘They don’t have the need of owning, they
have the need of using.’
As a result, teenagers’ bedrooms are more likely to be stacked with boxes of video games than
the records that adorned their parents’ or even older siblings’ rooms.

A majority use the Internet on their mobile phones, with several using smartphones such as the
iPhone and BlackBerry.

Many are prepared to spend up to £10 ($15) to buy an application for mobiles or an iPod touch,
particularly for games, but the lifespan of an app is short.

‘We don’t stick to anything much longer than a couple of weeks,’ said Tomas.

Source: from ‘Balderton plugs into teenagers’ attention spans’, Financial Times, 18/06/10
(Bradshaw, T.).

Discussion Questions

1. What type of customer information is Balderton trying to uncover?

2. What other methods could Balderton use to gather this type of information?

3. What stages should Balderton use in conducting marketing research?

 Adidas kicks off US drive to close in on Nike
German sporting goods company is focusing on the global ‘epicentre’ of the sneaker market to
catch up with its rival.
They say a picture paints a thousand words but sometimes a number does it even better.
Nike, the Us sporting goods behemoth whose swoosh logo is as instantly recognisable as its
name, together with its Jordan brand have built up a share of nearly 60 per cent of the Us
trainers market. Adidas has just 4.4 per cent.
The German group is far more competitive in sports apparel and markets outside the US. The
duo are neck-and-neck in Western Europe, Adidas is a long way ahead in Russia, and Nike has
a narrow lead in China.
But Nike’s dominance in the world’s most important sneaker market gives it a painfully sharp
edge on Adidas, which is pushing a new strategy to claw back share across key sportswear
segments, with a strong emphasis on the US. With such a big gap to close in trainers, Adidas
has a mammoth task on its hands.
Outside the US there is much greater parity between Nike and Adidas. ‘But the US is the
epicentre of the global sneaker/“athleisure” market’, says Matt Powell, sports industry analyst
at research firm NPD, which calculated the market share data. ‘Ultimately to win globally,
sneaker brands must win in the US. Nike has a deep and rich understanding of the US sneaker
consumer.’
Nike has been a runaway success over the past five years. It is the world’s biggest sportswear
company by sales and in the year to June 2015 revenues rose 10 per cent, to $30.6bn. Adidas,
meanwhile, reported a 6 per cent rise in revenues on a currency- neutral basis to €14.5bn, for
the full year 2014.
Profit at Nike has risen at a double-digit rate – and that is despite its overseas business grappling
with a strong dollar that has made prices less competitive. Adidas will need to add sales at a
brisk pace to even maintain the existing gap with Nike.
The western European market shows how tough this race will be. Over the past three years, the
sales growth of the Nike brand has outstripped that of the German group’s Adidas and reebok
brands by roughly 10 percentage points on average, once currency fluctuations are excluded,
according to UBs analysts.
The result is that Adidas and Nike are now level in the region that has traditionally been the
German company’s stronghold. Euromonitor, a market research provider, calculates that both
groups had a 12.8 per cent share of the western European sports- wear market in 2014.
‘Alarmingly for Adidas, Nike has caught up in its core western Europe market, and may
overtake it in the short term,’ says Natasha Cazin, senior analyst at Euromonitor International.
Even maintaining the dead heat in which Adidas now finds itself with Nike could be hard, says
Zuzanna Pusz, an analyst at Berenberg. ‘Adidas is doing ne in Western Europe, but they should
be as they are spending 14 per cent of their sales on marketing,’ she says. ‘The question is
whether this is sustainable.’
A recent survey by analysts at UBS also found signs of Nike’s surge, particularly among the
young. The survey looked at how many times consumers ‘liked’ Facebook pages associated
with different sports brands, and found that Nike was far ahead of its rivals in all the big
European markets – and recently overtook Adidas in Germany.
UBS also found that the perception of Nike’s brand exceeded that of Adidas in London and
Paris, two of the six cities around the world that Adidas is targeting as part of its e orts to regain
ground on Adidas undoubtedly needs to improve brand perceptions among younger consumers.
But the good news is that we think it has a big opportunity to achieve this by placing a bigger
focus on social media, leveraging its sponsorship asset base, and creating more relevant product
for the target teenager,’ the analysts wrote.
Adidas’s recent overhaul of its football boot offering – it replaced its famous Predator and F50
lines with two newcomers, Ace and X – is seen as one way in which it can renew its appeal
among teenagers.
The company has also taken steps to improve its position in the fast-growing area of fitness
tracking, snapping up app developer Runtastic. Ms Pusz says focusing on sports software is the
right way to go, but adds that Adidas is playing catch up instead of setting the pace.
Nike is already by far the trendsetter in its home market. Not only does it have the financial
clout when it comes to endorsements, it was quick off the mark in recognising the importance
of social media and advertisements uploaded on YouTube. During the recent women’s World
Cup in Canada, although Adidas was the main sponsor, Nike emerged victorious in terms of
social media engagement. Its #NoMaybes campaign was 121 per cent more associated with the
World Cup than Adidas, according to Amobee Brand Intelligence.
But it is an area again where it has the potential to catch up and win over more millennials. It
plans to improve marketing, be more innovative with its products and bring them more quickly
to market. ‘Adidas has made the right decisions to move global product and marketing to the
US,’ NPD’s Mr Powell says. ‘Hopefully they will develop a less European-centric point of
view.’
It helps Adidas that the so-called athleisure wear trend is only growing stronger. As more
people wear casual sports clothes in situations – even work – that were previously considered
more formal, there is room for many companies to expand.
This also means there are more companies to overtake it. Under Armour, a relative newcomer,
last year sold more trainers, tracksuits and T-shirts than Adidas in the US.
And fashion is fickle. Some analysts question whether sports brands really benefit by overly
focusing on chasing trends or working with celebrities – as Adidas is doing with Kanye West
after the pop star dropped his relationship with Nike. Paul Swinland of Morningstar says that
for a company whose raison d’être is performance – which breeds loyalty – chasing fashion
ultimately only gives short-term gains and is ‘o brand’.
As Adidas works its new strategy in the US, Nike’s challenge is maintaining the pace of growth
investors have come to expect. ‘They’ve gotten such strong growth in apparel and basketball,
it just can’t go on forever; you can’t have 15–20 per cent growth for- ever,’ Mr Swinland says.
Yet being Nike’s rival must feel a lot tougher. ‘Impossible is nothing’, or so goes Adidas’s
well-known slogan. It will be hoping it does not prove itself wrong.
Rivals take different approaches.
When Adidas and Nike make headlines in China, it is often because workers at one of their
suppliers in the ‘world’s workshop’ have gone on strike in manufacturing centres such as
Dongguan. But as Adidas seeks to make up ground on Nike, the two companies are paying
attention to China as an important market in its own right.
In announcing its second-quarter results on Thurs- day, Adidas highlighted a 19 per cent
increase in its Greater China sales.
With second-quarter revenues of €564m ($615m), Greater China is Adidas’s third-largest
market, after Western Europe and North America. But it is also the German company’s second-
most profitable one, with a second-quarter gross margin of 59 per cent.
Similarly, Nike’s Greater China earnings in the three months to the end of June ($266m) were
almost as big as Western Europe’s ($277m), despite a much smaller revenue base – $829m in
Greater China com- pared with $1.2bn in Western Europe.
Reflecting the wealth disparities that make China both a manufacturing powerhouse and
coveted market, a pair of Nike’s LeBron basketball trainers sell for the equivalent of $275
compared with a monthly minimum wage in Dongguan of $210.
Analysts say that Adidas and Nike have adopted different approaches to the China market.
‘Nike has gone through the basketball route, focusing on celebrity endorsements, while Adidas
has taken a more grassroots focus aimed at youth culture,’ says Matthew Crabbe, a retail analyst
with Mintel.
Both will have to contend with a tougher retail climate as China’s economy is now growing at
its slowest annual rate for 25 years.
Source: from ‘Adidas struggles to catch up with Nike’s runaway success’, Financial
Times, 07/08/15 (Whipp, L. and Shotter, J.).

Discussion Questions
1 Why has Adidas seemingly lost ground to Nike?
2 Should Adidas only benchmark itself against Nike? Who else within the strategic group
should they focus on? What steps should it follow when conducting benchmarking activities?
3. Competitor analysis involves evaluating concentric circles of adversaries
Using the approach outlined in the course book, identify Adidas’s direct competitors within its
strategic group, also identify companies within the industry that are driven to overcome the
entry barriers to the strategic group that Adidas finds itself. Finally who constitute potential
entrants and substitutes of that industry?
4 Briefly using Lehmann and Winer (1991) four stages in competitor analysis provide suggest
how Adidas can identify opportunities and cope with the threat posed within the industry they
find themselves.