Danone company in India analysis

In early 1900’s a small yogurt producing factory with a vision to reach its scrumptious yogurts in every part of the world was started in Barcelona, Spain. Later Danone entered the biscuit industry in 1986 by buying General Biscuit and in 1989 it added to its portfolio of biscuit brands by acquiring Nabisco’s European subsidiaries [1] . Later Danone began aggressively venturing globally and took over 40 acquisitions in Asia, Latin America, Central Europe, Africa, and the Middle East. The Globalization vision would have been futile if Danone Group would have not entered Indian market where 1/6th of the world population resided. It took 7 decades for Danone to reach India with an immense hope of stabilizing its brand through a joint venture with Wadia group. Together they took over 51 percent holding of India’s leading biscuit manufacturer, Britannia Industries Limited. Danone did foresee this venture as a potential growth for one its core business lines of biscuits. Along with strengthen its biscuit portfolio, it saw strategical entry of the other two businesses of dairy products and beverages (specifically water). Antoine Riboud founder of Danone stated during unveiling of the companies from BSN to Danone that

“We wanted our name to be an added source of momentum for the global expansion that is now our priority. The food industry has in the past treated markets as discreet entities separated from each other by the culinary traditions of countries or regions, but it is now caught up in the same swing to globalization as others. This is because not only tastes, but also distribution and media are becoming just as global (Franck, 1996).”

Antoine Riboud and his successor Franck Riboud knew that they had to develop a response to this allegation by entering the Indian market to strengthen the growth of its biscuits, dairy products and beverages. However Danone’s association with its joint venture persuaded a change of strategy which eventually restructured its core business line and future actions. However, Danone stayed consistent with its priority of expansion globally and considering India to be important nation to pursue its vision.

About Danone Group

The Danone Group is a multinational food products company and currently consists of four principal business lines namely fresh dairy products, bottled water, baby nutrition and medical nutrition. Danone’s fresh dairy products sector represents 60% of the group sales according to 2009 report making it the number one company in fresh dairy products. The two lines of probiotic dairy products named as Actimel and Activia are the most accepted products of Danone [refer exhibit 2]. As for the other business lines, the bottled waters and baby nutrition products were ranked number two in the world and its medical nutrition products as number one in European market (Press & Pederson, 2000). The Globalization strategy of Danone products commenced in early 1990’s. Before entering India, Danone’s major business lines consisted of fresh dairy, biscuits, glass containers and beer [refer exhibit 3]. Based on world rankings in 1995, Danone was categorized as the world seventh largest food group, and the pioneer in fresh dairy products and biscuits. It was also ranked as number two in pasta, beer and glass containers. In May 1997 Franck Riboud announced the adoption of a new company strategy focusing on three core business areas namely dairy products, biscuits, and beverages (specifically water and beer)–in which the company had global leadership [refer exhibit 1]. These areas also represented 85 percent of group sales (Press & Pederson, 2000).

Background

In far far away land a small cookie making factory was started and K. Ranjan Pillai sobriquet as “Biscuit King” was crowned in the late 1980’s. The throne of Mr. Pillai resided with Britannia Industries Ltd (BIL), which was a pioneer in Indian Biscuit Industry. However the reign of the Biscuit King soon got over, as the 43-year old Biscuit-King was pleaded guilty to the charge and admitted he had authorised the release of the company’s funds to pay debt incurred by two of his cashew-trading firms. The biscuit tycoon was sent to Tihar Central Jail of India in 1995 and whose death in the same year closed what the Economic Times referred to as one of India’s most dramatic corporate sagas (Padmakshan, 2007). This closed the case of Rajan Pillai, however opened its empire and assets for auction.

Group Danone grabbed this opportunity and entered the Indian market by establishing a joint venture with oldest Indian conglomerate – Wadia Group. A marriage of two diverse entities was formed giving birth to two equal joint venture companies, UK registered Associated Biscuits International Holdings Ltd in 1992 and Wadia BSN in 1995. The Groupe Danone and Wadia together hold 50.96% in Britannia through Associated Biscuits International Ltd. The ABI Holdings, was a 50:50 JV between Groupe Danone and Wadia group. Nusli Wadia owner of the Wadia Group took over as a chairman for Britannia and Sunil Alag was appointed as the Managing Director. Sunil Alag was known as the Danone man as he was instrumental for Danone to join hands with Wadia.

This new entity, Wadia BSN India, was meant to manufacture and sell food products and beverages in India, covering all Danone products, but the venture did not move. As per the Wadia BSN agreement signed in 1995, in case of a deadlock between the partners, Danone is obliged to buy all the shares of the Wadia group at a `fair market value’. This agreement does not include Britannia’s holding firm, ABIH which has a separate agreement signed in 1992 and is subject to the British law (Chatterjee, 2007).

Expect the unexpected

On 29th June 2007, the French dairy major, Group Danone formally initiated arbitration proceedings to end its partnership with the Mumbai based Wadia group. The 15 years of foray came to an end leading to speculations of Danone’s growth in India. Eight days before the final declaration of end of relation of Danone and Wadia group the shares of Danone on 21st June 2007 fell by 1.1 percent, to 57.42 Euros in Paris as France’s benchmark CAC 40 stock index dropped 1 percent (Saikat & Ladka, 2007). Danone Secretary General, Philippe-Loic Jacob said that “We are addressing the current issues with our Indian partner,” and this was a priority as Danone wished to continue developing its activities in India.” It was revealed by both parties that this discontinuation was advantageous to both parties as Danone was no longer interested in the biscuits business line globally. Whereas The Wadia group having increased its stake in Britannia gained an opportunity to focus on its core business of Biscuits. Britannia’s core business was always biscuits, where it enjoyed 38 percent in value and about 32 percent in volume in 2007 (Babu, 2007). Further, the Rs 6,500-crore [2] organised biscuit market in India was growing at 14-16 per cent per annum (Archana Rai, 2003).

Issue 1: 2001

On 27th October 2001, Britannia formed a joint venture with Fonterra Co-operative Group of New Zealand, the world’s largest milk company, to explore the potential for dairy products (www.businessweek.com, 2009). Britannia took this stand even though it was associated with one of the most powerful leaders of dairy products-Danone. Fonterra was among the ten biggest dairy companies in the world and had integrated process where it included every part of the chain from procurement of milk to value-added products such as cheese and buttermilk (Krishnan, 2002). This was unlike as that of Danone who did market dairy products such as yoghurt, cheese and desserts.

Issue 2: 2003

On June 04, 2003, Sunil Alag was ousted as a CEO, but it was claimed that Danone was not informed until the last minute. There were speculations that Nusli Wadia had realized that outsiders were seeing Britannia as a one man show and Mr. Alag was its face. Alagh took all the critical operational decisions and had shaken up a company associated with staid biscuit brands-like Goodday, Marie and Bourbon-by launching Pure Magic and Tiger (Archana Rai, 2003). Mr. Alag had a support from Danone as he was a strong link between the two companies.. Apart from being a successful CEO, Alagh was also flashy, flamboyant, with friends among the Page 3 crowd in Bangalore, Mumbai and Delhi. So it’s likely that he helped his friends in some way, as is common with most Indian CEOs. To oust Alagh, Wadia devised the idea of the audit report, the logic being Danone would not support a ‘corrupt’ CEO (Archana Rai, 2003). An internal audit report, which was recently leaked to the media, did find that Alagh probably favoured ad agencies, media houses and ngos run by his friends. Other claims were that Wadia wanted to have a say in the company and eventually get his son, Jeh, on board (Archana Rai, 2003). Mr Alagh, 56, joined Britannia in 1974 and has been MD &CEO for over a decade (Chakravarty & Kurian, 2009).

Issue 3:

In June, 2006: Danone registered the Tiger trademark in over 70 countries without prior consent [3] . Due to this Britannia demanded royalty from Danone for use of Tiger brand that was registered under them. The tiger brand was the strongest brand of Britnannia which corporate to 20% of the company’s revenue [4] . To this Danone also asked Britannia for royalties for using its trademark recipes for Britannia’s product Little Hearts.

Issue 4:

In November, 2006 the Wadias dragged Groupe Danone to court over the French company picking up a minority stake in a Bangalore based bio-nutritional foods company Avestha Gengraine Technologies, through its subsidiary Daninvest.com SA (Sangameshwaran, 2007). This was in violation of the government’s Press Note 1, 2005, which requires a foreign company to obtain the consent of its Indian joint venture partner before pursuing an independent business in a similar area [5] .

Actions to be India

The allegation of not informing Danone’s partner for picking up minority stakes of Avestha Gengraine Technologies was denied by Danone. A letter dated 10th May 2007 was sent to the Indian Government that it is not a joint venture with Britannia and its 25 percent shareholdings in the biscuit company is a joint venture with wadia group ABIH through UK and not India (Chakravarty, 2007). Hence, Danone claimed that it dint have any direct joint venture in India and hence the Press Note 1, 2005 was not applicable to them. However, to this the government repeatedly told Danone that it would require no objection certificate as per the press note regulation governing the joint venture between domestic and foreign market (Chakravarty & Kurian, 2009). Shortly within few months, Danone had to address a court case in September 2007, for allegedly usurping the intellectual property rights (IPR). Vinita Bali the new managing director of Britannia, said: Danone paid 220 million rupees as fee for using the Tiger brand [6] . However, to this Danone asked Britannia to pay royalty for using its trademark recipe the brand Little Hearts. However this claim was turned around as Britannia had obtained Danone’s approval for it and was authorized to sell it elsewhere. Ironically the exchange of technical co-operation and intellectual property was approved during Sunil Alagh’s tenure as Britannia CEO, who was known to share a good rapport with the Danone top brass (Vijayraghavan, 2007). On April 14, 2009, Groupe Danone officially exited Britannia Industries by selling its entire 25.48 per cent interest to a Wadia Group company, Leila Lands, which indirectly held a similar stake in the biscuit firm [7] . In 2007, Danone sold its global biscuit business to Kraft Foods for €5.3 billion, enabling the American company to add the portfolio to its Nabisco cookies and crackers [8] .

Danone position now in India

Group Danone is now particularly keen on focusing on the dairy products in India. The Danone India, the firm’s fully-owned subsidiary in India, will manage the dairy and baby foods business, the water business will be managed separately through a new joint venture (JV) with Narang Hospitality Services, which is the distributor for Evian in India. Group Danone is particularly keen on the baby nutrition segment, especially after its $17 billion acquisition of Dutch firm Royal Numico, which made it Europe’s largest player in the baby foods category and the second-largest in the world after Nestle. According to Yakult group (http://yakult.co.in/), In 2005 Yakult Danone India (P) Ltd was formed with a joint venture between Yakult Honsha, Japan and Group Danone of France. The 50:50 Joint venture Yakult’s probiotic drink was launched in December 2007 [9] .

Conclusion

Danone’s main motive to enter Indian market was to seek potential growth for its products. Indian market being complex and diverse, the best option Danone predicted was through Joint Venture. However Danone when coming out of the Indian joint venture certainly learnt about the social environment, consumer behaviour and organizational cultures in India. With this it also got aware factors of strategic asset seeking. The trail and turbulence in the Indian market undoubtedly lost focus of the firm’s orientation where its earlier core business was of Biscuits, Dairy products and beverages. However during its reign in India Danone completely mislaid its establishment in biscuit sector and ended up having its new portfolio of nutrional and baby products instead of biscuits. In 2007 it swapped its world number 2 position as producer of cereals and biscuits for the same position in baby foods, having sold the biscuits division to Kraft Foods [10] . The 15 years of learning also allowed Danone to change from its diversification strategy to being focused in its Business line. According to Comment/ Jarrell (1995) companies with decrease diversification show better result in the market. This is eventually being true with Danone, however adding its risk due to focused diversification.

As observed in the case study, Danone did foresee growth in India. Also as per the Global Competitveness report [Exhibit 5] India ranked second in world which showed huge opportunity for the Danone’s growth. Danone assumed that the even though perceived distance of India and France and opposite, its establishment in India through joint venture would minimize any complexity. Moreover unperceived rules, regulations and laws of Indian company made the Danone’s existence in India more complex. However, one of the profound complexity Danone faced was adapting to the management’s working ethics. India’ corruption index is more than double to that of France. Positioning the French company as not to be affected by the political sway was challenging.

Lastly the Power Distance Index (PDI) according to Hoftede’s model shows that India had higher power index than the France. The higher PDI states that there is unequality of power and acceptance of rule by higher authority. This lead to monopoly in the Indian joint venture by giving rise to diverging and setting of incoherent rules. However, the French had lower power index than India, stating that challenging and opposing inequality was within them. Eventually this was perceptible and which lead French Danone to break its joint venture with the Indian partner.

Appendix

Exhibit 1

Consolidated sales report according to business lines in 1995

Source: http://www.danone.com/images/pdf/10_danone.pdf

Exhibit 2

Best sellers of Danone’s dairy range: Actimel and Activia

Exhibit 3

DAIRY PRODUCTS: Bledina SA; Danone GmbH (Germany; 99.9%); Danone SA (Argentina; 99.5%); NV Danone SA (Belgium); Danone SA (Brazil); Danone Inc. (Canada); Danone SA (Spain; 55.7%); Danone Kft (Hungary); Danone SpA (Italy; 99.7%); Danone de Mexico SA de CV; Danone Sp zoo (Poland); Danone Portugal SA (52.8%); Danone A/S (Czech Republic; 95.1%); Danone Clover SA (South Africa; 66.8%); The Dannon Company (U.S.A.; 89%); Galbani (Italy; 90%). Beverages: Aguas de Lanjarón (Spain; 78.5%); Aguas Minerales (Argentina; 50%); Alken-Maes (Belgium; 99.6%); Birra Peroni Industriale (Italy; 24.4%); Evian; Font Vella SA (Spain; 77.8%); Italaquae SpA (Italy; 91%); Kronenbourg; Mahou SA (Spain; 33.3%); San Miguel (Spain; 80.5%); Volvic.

Biscuits: Bagley SA (Argentina; 91%); Bolshevik (Russia; 72.8%); Danone Cokoládovny A/S (Czech Republic; 49.1%); Danone SA (Brazil); Griesson-De Beukelaer GmbH & Co.KG (Germany; 40%); Heudebert; Irish Biscuits (Ireland); The Jacob’s Bakery Ltd (U.K.); LU; LU Benelux (Belgique) (Belgium; 99.6%); LU Benelux (Pays-Bas) (Netherlands; 99.6%); LU España (Spain); Papadopoulos (Greece; 60%); Saiwa SpA (Italy).

OTHER: HP Foods Ltd (U.K.); BSN Emballage (44%); Amoy Food Ltd (Hong Kong; 90.3%); PT Aqua Golden Mississippi (Indonesia; 36.1%); Britannia Brands (Malaysia) SDN BHD (90.3%); Britannia Industries Ltd (India; 18.4%); Calpis Ajinomoto Danone Co Ltd (Japan; 25%); Continental Biscuits Ltd (Pakistan; 44.7%); Griffin’s Foods Ltd (New Zealand; 90.3%); Hangzhou Wahaha Co. Ltd (China; 41%); Shanghai Danone Biscuits Foods Co. Ltd (China; 54.2%); Shenzhen Danone Health Drinks Co. Ltd (China; 54.2%); Tangshan United European & Haomen Brewery Co. Ltd (China; 63.2%); Wuhan Euro Dongxihu Brewery Co. Ltd (China; 54.2%); Danone International Brands Paris; Great Brands of Europe.

Exhibit 4

The controversial tiger brand

Exhibit 5

Source: Global competitiveness report, world economic forum (2009-2010)

Link: https://members.weforum.org/pdf/GCR09/GCR20092010fullreport.pdf

Exhibit 6

Source: Corruption Perception Index (2010)

Link: http://www.transparency.org/policy_research/surveys_indices/cpi/2010/results