Economic analysis of Groupe Danone's market exposure and vulnerability

Economic Analysis for a Company

Introduction to the Firm and its Markets

Over the last several years, the dairy and health food industry has been undergoing a tremendous amount of changes. Where, there has been a consistent focus on increasing sales and profits by taking more of an international view. This is because the industry has been seeing a steady decline in sales, in developed markets over the last 30 years. Part of the reason for this is consumers are preferring bottled water and carbonated soda, over dairy products. At the same time, the aging population in these countries is helping to contribute to the slow down, as the older demographic is consuming less dairy. These two elements have caused many of the mature markets to see consistent declines in sales. To mitigate these effects, a variety of companies have begun focusing on ways to be able to increase profits in developing markets, where demand for dairy products is increasing. (Allen 2007, pp. 123 -- 124) In the case of Groupe Danone, they are involved in: the dairy, biscuit and beverage industries. With the company owning a number of different brands to include: Dannon related products (i.e. yogurt), Evian bottled water and Stoneyfield Farm just to name a few. (Plunkett 2009) This is significant, because it shows how the company has been focusing on both markets, to increase their overall profitability. However, to understand the performance of the business, the implications of the global economic recession and creating a strategy for 2010 / 2011, requires looking at the company in comparison with key competitors. To achieve these objectives you must examine: the company's exposure to the markets and its macroeconomic exposure. Together, these different elements will provide the greatest insights, as to the underlying performance of Groupe Donone in relation to its competitors.

Vulnerability of the Firm

Groupe Danone is exposed to large swings in the economy through: changes in the economic cycle, the currency and the increases in commodity prices. These different elements are important because, they can expose the company's underlying business model, to uncertainty in numerous instances. (Plunkett 2009)

GDP Development and Income Inelasticity

Group Danone is exposed to various changes in the GDP. Where, this can have an impact upon the underlying levels of income, as the changes in the economic picture can have effect prices and demand. Where, inflation is causing, the price of raw materials to increase or decrease. This will have an effect on income inelasticity, as the changes in the economic cycle and the inflation will cause consumer demand to increase or decrease.

Customer Structure and Degree of Dependence

The company is clearly dependent upon consumer spending to remain strong, in order to maximize profits. That being said, they have also diversified into many different areas, to address changes in consumer demand, by offering certain products that are in need at all times. This is how the company is able to protect its bottom line, against large amounts of volatility. (Plunkett 2009)

Competition and Price Elasticity

The industry is filled with a variety of competitors who offer similar product. This has an impact upon Groupe Danone, as the prices they are charging for various products will depend upon what competitors are charging. As a result, this will cause the underlying prices to become more volatile at certain times, based upon competitor actions. (Plunkett 2009)

Macro Economic Exposure

The biggest challenge that Group Donone faces from macroeconomic forces, is sharp changes in consumer spending. Where, this number will work together with the underlying amounts of inflation. If wholesale and consumer prices are consistently rising, it could be a sign that the economy may be overheating, which would result in a sharp contraction in consumer spending. To determine the underlying effects that this will have on the company requires: examining sales between 2004 and 2009. In 2004, Groupe Donone was posting sales growth of 7.8% or 13.1billion Euros. In 2008, the company would post an increase of 16.1% in sales or 15.2 billion Euros. In 2009, this number would decline by 1.2% or 14.9 billion Euros. The below chart illustrates the overall amounts of sales growth that have taken place between 2004 and 2009. (Financial Info 2010)

This is significant, because it shows how the underlying sales of Groupe Donone will depend upon the amounts of inflation and its impact on consumer spending. As periods of price increases, will be followed by: a severe slowdown in sales. In many ways, this highlights how the company's vulnerability to extreme changes in the economic cycle.

In the case of General Mills, they are following a similar kind of trend with, net sales for 2004 coming in at $11.0 billion or 5.3%. In 2008, the company would post sales of $13.6 billion of 9.8%. While in 2009, General Mills posted net sales of $14.6 billion or 8.0%. The below chart illustrates the economic growth of the company between 2004 and 2009. (10 K. General Mills 2005)

This is significant, because it shows how General Mills is facing a similar trend, as far as their economic exposure to the economy is concerned. Where, a decrease in consumer spending will mean that they will see a decrease in sales. However, why you compare this with Groupe Donone, it is clear that their sales are more stable during times of severe economic contraction.

In the case of Nestle, they are exposed to changes in the underlying macroeconomic forces and in the currency. Evidence of this can be seen by look at 2004 sales for the company, where they declined 1.4% or 60.1 billion Euros. In 2008 sales would increase by 38.9% or 83.5 billion Euros. In 2009, sales would decline by 2.0%, coming in at 81.7 billion Euros. The below chart illustrates Nestles' exposure to changes in the economic cycle. (Nestles Sees Profit Growth 2005) (Consolidated Income Statement 2008) (Consolidated Income Statement 2009)

This is significant, because it shows how the volatility of Nestles' sales is exposed, to changes in the underlying macroeconomic conditions and in the currency. These two factors mean that the company is seeing more volatility, as part of their sales in comparison with Group Donone and General Mills. (Consolidated Income Statement 2009)

Material Price Fluctuations

Like what was stated previously, Group Danone is exposed to large swings in inflation. This will cause the underlying raw cost that they are charging, for various goods to rise or fall. At which point, it will have an impact upon the overall bottom line. (Plunkett 2009)

Exchange Rates

The currency exchange rate will have an impact upon the profit margins of the company. As a rising / falling Euro in comparison with the major currencies will have an impact upon the company's profitability (because of the fluctuation). (Plunkett 2009)

Government Intervention

Government intervention is when the government in particular country can have an impact upon Group Danone's profits based upon: the various regulations, taxes and the nationalization of key industries. Depending upon how these different policies are applied, this will have an impact upon the earnings of the company and its competitors. (Plunkett 2009)

Protection

Brand Development and Price Positioning

The way company develops different brands is through making strategic acquisitions. This is mainly accomplished by purchasing products that will compliment the underlying business model and give them greater pricing control. This can be seen within the various divisions that the company has, as each one will serve to compliment the others. (Plunkett 2009)

Economies of Scope

In general, Group Danone has engaged in bundling, by offering numerous products in a variety of different markets around the world. Where, they will offer these products, in various packages. This is designed to reduce the overall marketing costs, while increasing the profitability of the company. (Plunkett 2009)

Technology

Groupe Danone will use numerous forms of technology when marketing their various products and as way of protecting their profit margins. Where, the different tools can help executives to see in real time the possible negative effects that various economic or market forces could have on the company. This allows them to adjust for changes that are occurring, as the use of technology will help them to adapt. (Plunkett 2009)

Low Cost Production and Economies of Scale

The low cost of production has allowed Groupe Danone to purchase other competitors and to diversify in other markets. The reason why are: these low production costs increase the overall profit margins of the company. This will allow them to aggressively expand into other areas (economies of scale). (Plunkett 2009)

Current Strategic Positioning and Strategic Advantage

The current strategy that the company is using has allowed them to able to protect their earnings against some of the uncertainty that is occurring. This helps Groupe Danone to maintain market share and to take advantage of the new economic opportunities that are presenting themselves. Where, they can use the current recession to be able to purchase brands that have been severely impacted by what has been occurring. Over the course of time, this strategy will allow the company to be able to increase its overall dominance among competitors. At the same time, this increases the strategic advantage of the company, by allowing them to be able to expand into other areas. This is because the company has used a strategy that will diversify it into a number of different areas. (Plunkett 2009)

How does the Analysis Explain the Performance of Groupe Donone?

When you analyze the performance of Groupe Donone, it is clear that they have been exposed to variety of forces the most notable would include: sharp increases in the wholesale costs. This is important, because sharp increases can have an impact upon the underlying business model of the company. An example of this can be seen with the changes that the company experienced in organic growth rates between 2008 and 2009. Where, Groupe Donone would experience: an 8.4% increase in earnings for 2008 and increase for 2009 of: 3.2%. At the same time, the company has been experiencing volatility in its net sales. With there being a decrease in sales between: 2008 and 2009; of 300 million Euros. This above the sales numbers of 13.1 billion Euros that were seen in 2004. This is significant, because it shows how Groupe Donone has been able to maintain consistent earnings growth, despite volatility in wholesale prices and a sharp slowdown in consumer spending.

When you compare this with General Mills and Nestle, it is obvious that General Mills has been having similar effects on their businesses. While Nestle was exposed to large changes in their earnings because of: exposures to the currency and inflation. In the case of General Mills, they were able to see better organic growth rates than Groupe Donone. With the company reporting an increase in organic growth of: 9.0% in 2008 and 7.3% for 2009. At the same time, they reported an increase in sales between 2008 and 2009, to $14.6 billion from $13.6 billion. This above what the company was seeing in 2004, when sales were coming in at: $11.0 billion.

In the case of Nestle, they have been facing more volatility as far as their exposure to the markets and macroeconomic forces. Evidence of this can be seen with the company's organic earnings growth going from: 78.2% in 2008 to a decline of 40.0%. At the same time, Nestle would experience sales declines from: 83.5 billion Euros in 2008 to 81.78 billion Euros in 2009. This is above the sales figures for 2004, which are 60.1 billion Euros.

What the analysis shows, is that the underlying amounts of organic growth and sales for all companies have been impacted by the recession. However, in the case of Groupe Donone and General Mills, they were able to continue to deliver solid growth, despite the severe economic conditions. While Nestle, was more negatively affected, by the changes in the currency and economic situation. As a result, this highlights the diversified businesses that company is in and the responsible practices of managing the organization; have allowed them to be protected from the sudden changes in economic conditions.

What are the implications of the performance strategy for Groupe Donone in the U.S. And global recession of 2008 -- 2009, for a strategy in 2010 -- 2011?

The implications of the strategy utilized by Groupe Donone during 2008 and 2009; will have profound impact upon the strategy that they are using in the future. Where, the cost cutting strategies and the ability of managers to be able to protect the company, from the volatility that is occurring will help to establish a foundation, for growing the company in the future. The reason why is: during times of severe economic contractions, the strongest companies will be able to deliver some kind of positive organic growth. In the case of Group Donone, they were able to deliver positive earnings growth and reduce the impact that the slowdown would have on sales. These two factors are important, because in 2010 and 2011 the company can be able to see an increase in earnings and bottom line growth, even through the economy could be going through a jobless recovery. Over the course of time, this strategy of diversifying their exposure will help the company be able to prudently increase earnings, while reducing risks as much as possible. Once this takes place, is when Groupe Denone can be able to adjust to changes in the economic conditions, while continuing to deliver consistent growth.

When you compare Groupe Denone with its competitors, it is obvious that the company could be able to increase their overall bottom line results in the future. This is because managers / executives have engaged in strategy of: reducing costs, diversifying the underlying risks and prudently increasing growth (despite the fact of a severe recession occurring). These different factors have allowed Groupe Denone to reduce their underlying levels of risk, so that the company could continue to see consistent performance. This is a similar strategy that has been utilized by General Mills, as they have been showing similar kinds of numbers and results. While Nestle, is exposed to changes in the currency and inflation. As these two forces, will cause the underlying amounts of organic growth and sales to become more volatile. In this aspect one could argue that the strategies being utilized by Group Deonone, have allowed the company to maintain its competitive advantage, while reducing the overall amounts of risks. Those businesses that can utilize such a strategy as part of their plan will be able to take advantage of the opportunities that the recession has presented. Where, the decreases in consumer spending will mean that weaker competitors could be forced out of the marketplace. At which point, companies such as Group Denone can be able to increase, their market share by filling these obvious voids. As result, one can infer that the strategies being utilized by the company are helping to achieve this objective. With managers, maintaining consistent growth, which will helps the company remain dominant among a number of key demographics. It is through examining this aspect of the company's business model that provides the greatest insights, as to how they are coping with the recent challenges they face.