| BUSINESSWEEK ONLINE : FEBRUARY 1, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- EUROPEAN COVER STORY
Danone Hits Its Stride (int'l edition) Franck Riboud is turning the French food titan into a world-beater In a 39-year-old photo of a Riboud family gathering, four-year-old Franck is screaming in protest. He has just discovered that the chocolate box in which his hand is fishing is empty. As the youngest in a family of overachievers, Riboud ''was always last to get his hand in the pie,'' recalls Barbara Chase Riboud, Franck's aunt. Few family members realized Franck's secret determination to equal the best among them. Now chief executive of French food giant Danone Group (DA), Riboud no longer comes in last. The son of legendary industrialist Antoine Riboud, Franck didn't start out on the fast track. When he got the CEO job in May, 1996, the company's shares sank. His earlier championships in skiing and windsurfing gave him a reputation as a lightweight, even though he later logged 15 years with Danone. Many assumed Antoine had maneuvered his youngest son into the top slot. And investors feared he couldn't follow his dad's impressive act. ''There isn't anything worse than that,'' Riboud says now, shuddering at the memory. ''I had no legitimacy.'' Like an athlete conquering prerace jitters and winning, Riboud has proved the skeptics wrong. He has refocused the sprawling, $15.8 billion company on its core products and reversed Danone's profit slide. He has successfully pushed into new markets around the world despite frightening volatility in the emerging economies. His performance has rivals on guard and investors applauding. Danone shares have nearly doubled, to $193, since he took over. Even as the scion of one of France's most successful dynasties, Riboud has not abandoned his laid-back style. He tells ribald jokes at morning meetings, strolls through headquarters in a pullover, and addresses most people with the familiar ''tu.'' In the streets of Paris, he prefers a motor scooter to a chauffeured limousine, chooses casual wear over elegant suits, and favors McDonald's over temples of cuisine. ''Little Franck really did it his way,'' says Aunt Chase Riboud. ''It was pure chutzpah, energy, and competitive instinct.'' But Riboud is in the early laps of his marathon. Danone still depends on Europe for 76% of its sales, with roughly 39% coming from France. His challenge is to transform the world's No. 7 food company from a European champion into a global front-runner with a big slice of emerging markets in Asia and Latin America. To do that, Danone must battle brand-name giants such as Nestle, RJR Nabisco (RN), and Coca-Cola (COKE) without the home-field advantage it enjoys in Europe. ''We need to be a truly worldwide company. That's not the case today,'' admits Chief Financial Officer Christian Laubie. SLIPPERY ROAD. Riboud has been racing to narrow the gap with the global goliaths. Over the past two years, he has sold off an estimated $1.2 billion in noncore assets and made about the same amount's worth of acquisitions, primarily in Asia, Latin America, Eastern Europe, and the U.S. (table, page 22). By unloading dozens of low-margin grocery businesses that his father had acquired, Riboud has narrowed Danone's portfolio to three areas where it can dominate in global markets: dairy products, bottled water, and biscuits. Analysts say Riboud is likely to meet his target of boosting revenue outside Europe to 33% of total sales by 2000, from 5% in 1992 when he took charge of international development. Riboud can't afford to slacken his pace. The Danone brand now ranks among the global top 10, and the company owns other premium brands, such as Evian mineral water, Britannia biscuits, and Kronenbourg beer. But the world's largest food groups are all trying to remake themselves from regional stars with diverse products into global leaders in a few businesses. And with Western markets largely saturated, the battle for growth will be in emerging markets, where such companies as Nestle and Unilever have a substantial lead over Danone. Both rivals generate some 15% of sales in Asia, vs. Danone's 6%. That means Asia's slump will hit Nestle and Unilever (UL) harder in the interim. But Danone must forge ahead in emerging markets despite economic uncertainty. In many ways, Riboud is suited to the challenge. Those closest to him say he makes decisions rapidly on instinct instead of pondering endless alternatives. And he prefers one-on-one meetings to committees. Whether it's the acquisition of a water company in China or a dairy-product launch in the U.S., Riboud reacts ''like a commando,'' says Jean Gandois, a Danone supervisory board member and ex-head of the French employers' association. Yet Riboud also delegates authority. Danone Asia manager Simon Isreal ditched a 25-year career at Sara Lee Corp. (SLE) when Riboud promised him he could manage Danone's acquisition strategy in Asia with minimal interference from headquarters. Isreal has spent more than $500 million on acquisitions for Danone over the past 18 months and more than doubled the French giant's business in the region, to roughly $1.7 billion, while raising margins by one percentage point a year. Like many successful heads of manufacturing companies, Riboud is obsessed with his products, gobbling Danone yogurt and chugging Evian at every opportunity. He is a fierce proponent of shareholder value who stands apart from France's political and industrial elite. And in a country where many still mistrust global capitalism, Riboud is a committed internationalist. As Danone's head of foreign operations from 1992 to 1996, he pushed for acquisitions in Latin America and Asia. In the U.S., he launched Dannon Water, now No. 1 in supermarket sales of bottled water in the U.S. PASSPORTS NEEDED. Besides his strategic overhaul, Riboud has broadened Danone's corporate culture. He has tied pay to performance, prepared Danone for its listing on the New York Stock Exchange in 1997, and diversified the executive ranks, which analysts had long criticized for being all-French. Over the past two years, Riboud has hired non-French executives from Sara Lee, Nabisco, and Campbell Soup. A Venezuelan runs Danone's global water business, a New Zealander manages Asia, and an American directs research and development. New managers are required to spend three years outside the country. Riboud's career at Danone has groomed him well for the global food wars. As a sales manager in the early 1980s, he walked the aisles of French supermarkets that sold Danone yogurt, scoping out the competition and making sure shelf placement was favorable. After taking charge of the Evian business in 1990, he helped engineer the $2.5 billion takeover of Nabisco's European biscuit operations in 1992. And during his stint as head of international development, he more than tripled sales outside Western Europe, to $2.7 billion. Yet according to family members, Antoine Riboud never intended to be succeeded by his youngest son, a sports enthusiast who wanted to work for Rossignol ski supplier but landed at Danone after two snowless winters. It was supervisory board member Michel David-Weill, chairman of investment bank Lazard Freres & Co., who suggested in 1992 that Franck might be the best-qualified heir to the CEO job. Antoine and David-Weill decided to watch Franck's performance over a couple of years, and although he kept a low profile, they were persuaded he could make the grade. The senior Riboud has never been afraid to take a chance. After the war, he joined his great-uncle's glass factory, Boussois-Souchon-Neuvesel (BSN), and in 1958 he inherited the company. Antoine shocked the French Establishment by making an audacious hostile bid for French glassmaker Saint-Gobain in 1968. Rebuffed, he changed tack and turned BSN into Europe's No. 3 food company, acquiring Danone-Gervais and later Dannon in the U.S. In 1994, he renamed the company Danone, after its flagship yogurt. Although he retired two years later at age 77, he still sits on the supervisory board. Young Franck will need his father's resilience in the food wars ahead. Take dairy products, which power 42% of Danone's total sales. Danone ranks No. 1 worldwide with a 15% market share. But 72% of those sales come from Europe, whose citizens eat more packaged yogurt than people anywhere else in the world. Although untapped markets offer growth opportunities, Danone has a tough marketing job ahead in most of Asia and Latin America, where yogurt is not part of the traditional diet. And in India, where yogurt is a dietary staple, nearly all of it is homemade. In Mexico, Danone is market leader with about 40%, and the market is growing at 15% a year. But that growth comes off a small base. To boost yogurt consumption, Danone is inundating the country with information about its nutritional value, sending nutritionists to schools, and setting up supermarket stands. WATER WARS. When it comes to the global market for mineral water, Danone faces bruising competition. The French group ranks No. 2 worldwide after Nestle and boasts powerful brands such as Evian, Volvic, and Badoit. Now, Riboud is seeking to extend Danone's reach by acquiring local water companies around the world. He recently snapped up water companies Aqua in Indonesia, Health in China, and Aquapenn in the U.S. (table). And to further his assault on the American market, Riboud priced Dannon Water at 89 cents for a 1.5-liter bottle, vs. $1.89 for a same size bottle of premium-brand Evian. But retailing heavyweights Coca-Cola Corp. and PepsiCo Inc. (PEP) have their eye on the market for bottled water, and they are bound to lower the price threshold even further. In December, 1995, Pepsi introduced a ''purified water''--filtered tap water--called Aquafina that is now the No. 1 seller in U.S. convenience stores and gas stations. Pepsi accelerated sales of its new water by introducing six-packs of convenient 24-oz. bottles. Industry sources say Coke aims to launch a purified water injected with minerals, called Dasani, in May or June. By using purified tap water, Coke and Pepsi will enjoy lower costs--and both companies have goliath distribution muscle. So far, Danone is holding its own. Only two months after its introduction, Dannon Water ranks fifth overall in the U.S. But staying power in the super-competitive water market ''depends on who wins in marketing,'' says Ann Gillen Lefever at Sanford C. Bernstein. Meanwhile, the U.S. launch resulted in losses of $17.8 million in 1998, putting pressure on the group's water margins. In the U.S. overall, Riboud has his work cut out for him to boost growth and improve profits. Despite Danone's No. 1 spot in fresh dairy goods, growth is sluggish, and operating margins run around 6%, far behind the company's 10% target and the 10.8% produced by the dairy division worldwide. ''They've tried all kinds of marketing innovations to get growth, but nothing has worked,'' says Andy Smith, an analyst at Schroders PLC in London. So Danone will continue spending heavily on advertising for its yogurt. ''If you want to grow more, you have to spend more,'' says Antonio Spagnolo, head of Danone's dairy-products business in the U.S. To offset the difficulty of building brand presence in the mature markets, Riboud is raising Danone's profile in Asia--especially China, India, and Indonesia. While the European market for bottled water is expected to grow at 3% annually over the next few years, the Asian market is forecast to grow 11%. So, over the past 12 months, Riboud has snapped up stakes in two Chinese breweries, Indonesia's leading water company, a drinks company in Singapore, and a mineral water company in China. Asia manager Isreal aims to double the group's $1.5 billion in sales over the next three years. Financial-market turmoil has only whetted Riboud's appetite for Asian companies. ''It's the chance of a lifetime. I won't change my strategy,'' he insists. CFO Laubie admits that Asia's economic crisis will slow the payback period for Danone's investments in the region. But he says that in many places, demand for Danone's product mix will nevertheless outstrip growth in Europe. ''Emerging countries will find their growth cycle again,'' Riboud says. GROWING PAINS. But Riboud's expanding empire hasn't been trouble-free. Profits at the biscuit division lag sharply behind those in water and dairy, and margins remain at a low 6.9% That leads some analysts to think Danone might spin off the business in the future. An acquisition of Argentine biscuit maker Bagley in 1944 ran into difficulty when rival Nabisco Purchased the competing local company and slashed prices. Bagley's margins plummeted to zero, from 9% in 1994. By restructuring and slashing costs, Danone engineered a turnaround, and analysts expect Bagley's margins to come in around 8% in 1998. Danone also bungled an opportunity in Brazil's yogurt market. By pushing high-priced, premium-brand products and neglecting the lower-priced segment, Danone blew a big lead in low-end yogurts and lost market share to Nestle. To catch up, Danone ''is paying a huge price,'' says Yves Moyen,a partner with A.T. Kearney management consultants in Sao Paulo. Slashing prices on its premium products to compete with cheaper brands, Danone is losing money. Worse, Brazilian supermarkets sometimes try to teach companies a lesson on pricing by keeping major products off the shelves or deliberately slowing down the replacement of stock. Despite such growing pains, Morgan Stanley Dean Witter analyst Sylvain Massot forecasts that Danone's overall profits will jump by 8.3% in 1999 and as much as 12.7% in 2000. And Riboud does not fret after he leaves the office. He leaves his job behind when he's off duty, attending rock concerts with his two teenage daughters or soccer games with his son. A fanatic who goes to games in the rain and when his team is losing, Riboud's hero is former soccer champion Michel Platini, organizer of the World Cup. ''He doesn't speak at all about Danone within the family,'' says sister Christine. ''He didn't try to become his father or part of the Establishment. He remained himself.'' Like the rest of his family, Franck Riboud has proved that being different can be a great strength. And if he can keep up the momentum at Danone, he will also have proved that the youngest of a famous family need not come in last. By Gail Edmondson in Paris, with Ian Katz in Sao Paulo, Elisabeth Malkin in Mexico City, Manjeet Kripalani in Bombay, and Dexter Roberts in Beijing To read a letter to the editor about this story, click here. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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 RELATED ITEMS EUROPEAN COVER IMAGE: Danone TABLE: Riboud's Game Plan RESUME: Franck Riboud TABLE: Danone's Buying Spree PHOTO: Minute Maid Juice PHOTO: Pim's Biscuits Achievement Is a Family Affair (int'l edition) PHOTO: Antoine Riboud with His Mother and Siblings, 1934 INTERACT E-Mail to Business Week Online | |||
