Danone rethinks biscuit strategy

Biscuit sales in Europe have been badly hit by ingredient costs, searing summer temperatures and the invasion of the low carbohydrate diet, and with consumers increasingly concerned about a possible obesity epidemic, the future looks far from rosy for biscuit makers hamstrung by a high-calorie image as the move to healthier snacking gathers momentum.

All of which is why the sale of Danone's British and Irish biscuit operations could be an indication that the French group has lost its appetite for biscuits. A withdrawal from the biscuit market would make sense. Strip out the biscuit operations and Danone's remaining businesses - fresh dairy products and bottled water - are both in strong positions to benefit from the health craze.

Danone's recent history would certainly suggest that the biscuit arm is something of a poor relation - the French group has invested heavily in its water business, in particular in the underdeveloped home and office delivery market, and has streamlined its dairy business to focus on high margin products such as yoghurts and dairy desserts, while the biscuit business has remained largely untouched, notwithstanding some new product innovation from its French unit, LU, responding mainly to the health craze.

This has been partially reflected in the division's performance in recent months. The biscuits division posted a 3.1 per cent increase in like-for-like sales during the first half to €1.5 billion, and while this was an improvement on the mere 0.4 per cent improvement in the whole of 2003, it was still well below the growth rates of the water (9.4 per cent) and dairy (11.2 per cent) units.

And although the biscuit arm remains profitable (operating profits were 8.9 per cent higher at €135 million during the half) margins are far lower than the other units, at 8.8 per cent compared to 15.4 per cent for water and 13.8 per cent for dairy. If Danone were looking to focus on its best-performing units, then the biscuit one would be the least likely to feature.

For now, however, a wholesale withdrawal from the biscuit market does not appear to beon the cards, with the sale of Jacob's to Britain's United Biscuits group seen more as an opportunity to exit an increasingly non-core market at an attractive price.

The deal will also help UB, itself faced with the same challenges as Danone but without the same diversity of products to offset declines in the biscuit market. UB's sales grew by a meagre 1.8 per cent in 2003 to around £1.3 billion, but much of this was due to price increases entailed by higher costs. Operating profits, which were impacted by the ingredient price hike, dropped by 4.8 per cent.

So adding the £184 million in turnover from TUC, Jacob's Cream Crackers, Twiglets and Ice Gems to its own Penguin, McVities and Hula Hoops brands will certainly help provide growth in a market where opportunities are harder to come by.

Danone, at least, has found some growth for its biscuit business - in particular for LU, which is now a major international brand with a presence throughout the world - and this could ultimately save the unit's future. Prince, a key LU brand in the children's segment, is present in eight countries, while Tiger, powered by its success in India, Malaysia, and Indonesia is the number one biscuit brand in Asia, and while margins are likely to remain impacted by a focus on emerging markets, the long-term potential is clear.

Other options to revitalise biscuit sales could include joint ventures such as that recently signed with the Arcor Group in Argentina, which combines Danone's brand strengths with the local market knowledge and buying power of a major food producer.

But perhaps the strongest argument for holding onto the biscuit arm, despite all its problems, is the growing opportunity for cross-seeding. Danone's range of healthy dairy products, sold under the Taillefine/Vitalinea brand, has already been extended to the biscuit sector, capitalising on both the brand's strength and the low-fat trend.

Sales of these products in the biscuit sector have shown double-digit growth (14 per cent in 2001, the latest figures provided by the company), much more in line with the rates seen in the other business units.