Danone India eyes cost cuts, doubled revenue in three years
Dairy company Danone India Pvt. Ltd, which also sells Farex baby food and Protinex supplements that it acquired from Wockhardt Ltd, is looking to cut costs and double its revenue in the next three years. Danone India plans to plough back its cost savings into advertising and marketing, managing director Rodrigo Lima said.
The Indian unit of Danone SA, Europe’s largest yogurt maker, also hopes to reduce production costs and cut the prices of its products over the next three to four years.
“Most of our products are premium today as we are operating at just half the capacity; investments and overheads are high,” said Lima, who plans to achieve his target of doubling revenues over the next three to four years by stepping up product launches and expanding distribution.
“As our volumes increase and we get closer to full capacity utilization, we would be able to reduce our prices by more than 20%,” added Lima. Currently, the company’s products are available only in urban markets in India.
“Reducing costs requires streamlining various activities such as procurement, logistics and also investments in modern plants and machinery which give higher yield and productivity,” said Dhanraj Bhagat, partner at Grant Thornton India LLP.
In the past six years, Danone has invested Rs1,800 crore in its India operations. The money has been spent on building manufacturing facilities in Haryana and Punjab, setting up the head office in Mumbai and the acquisition of Wockhardt Group’s nutrition business in 2011.
Reworking affordability will help drive penetration. “We are present in 200,000 stores and will increase this by 30,000-50,000 stores by the end of the year through distributors,” said Lima, adding that Danone also aims to increase the reach of its nutrition portfolio from chemists to groceries.
The firm is also scrutinizing procurement and other costs with the aim of channelling savings into expanding its sales force and spending more on advertising and marketing.
“We have identified that we can bring our non-productive costs down by 1-2% (as a percentage of revenues),“ said Lima. In the December quarter, Danone saved a few crore rupees by moving its procurement system online.
All the same, there are some costs the company cannot do away with. Quality costs, on average, are higher in India than in markets such as Germany as the company is setting up its processes and investing in plants and machinery.
“Every batch we produce right now is going to Europe for testing,” said Lima, who, after the Maggi debacle in 2015, is doubly aware of the potential damage that can be done and the speed at which it can be done, if stringent processes are not in place.
However, Lima said that while he was fine with making these investments, in return he expects a certain stability in guidelines and regulations for the next five years. “There are clear signs of improvement... but there still is a lot to be done,” he said.
To be sure, Danone’s journey in India has not been smooth. The company was in two failed joint ventures (JVs), from which it had to exit. The French company re-entered the market on its own in 2010 with the dairy business and in 2015 re-organized its operations to merge the dairy arm with its nutrition business, which includes the acquired nutrition business of Wockhardt in India.
In the 1990s, Danone had a JV with the the Wadia Group to build a biscuits portfolio for Britannia Industries Ltd; the JV lasted 13 years and included a dispute over the intellectual property of Britannia’s Tiger biscuits brand. The dispute ended as Danone globally exited the biscuits segment.
Danone ended its JV with the Rahul Narang Group in 2015, exiting from the beverage space in India where it had brands Qua and B’lue manufactured and distributed by two JVs—Danone Narang Beverages Pvt. Ltd and Narang Danone Access Pvt. Ltd. Globally Danone has four lines of operations—dairy, beverages, early life nutrition and advanced medical nutrition. In India it is focusing on dairy and early life nutrition and will also grow the advanced medical nutrition portfolio in the coming years, said Lima.