Danone's transformation strategy is likely to deliver 'significant' cost savings and boost sales, however it also carries a high execution risk, Moody's has said.
According to the ratings firm, the three-year strategy, which was announced last November, will require structural and cultural change, with high restructuring costs of €1.4 billion likely to curb cash flow generation.
Danone is targeting €1 billion of cost savings by 2023, with two-thirds of these savings set to be made by the end of 2022. It will seek to obtain €300 million in logistics efficiencies and €700 million in general and administrative costs, reducing its headcount in both local and global offices by between 1,500 and 2,000.
'Implementing the transformation plan carries high execution risks because the shift to a more decentralised structure is a significant operational change and implies a cultural transformation,' Moody's said in a note, Danone – Execution of transformation and financial policy under new management are key for credit quality improvement.
'The job cuts are also substantial, totalling up to 25% of global and local headquarter roles. This could lead to difficult negotiations with union and the risk of strikes.
'Total one-off costs to carry out the transformation will total around €1.4 billion in 2021-23. Most of these costs will fall in the first year or so, offsetting most of the initial cost savings. Coupled with a still difficult trading environment, FCF generation will be weak in 2021.'
The strategy will, of course, be implemented without longtime chief executive Emmanuel Faber, who departed his position in recent weeks following shareholder pressure.
Gilles Schnepp was recently appointed as Danone's new chairperson, with a search for a new CEO ongoing, according to the group.
“Danone’s transformation strategy will increase its agility, while also generating significant cost savings of €1 billion by 2023 and boosting sales," commented Lorenzo Re, Senior VP Analyst at Moody’s.
"High restructuring costs will curb cash flow generation, however. We expect credit quality to recover by 2022 if the execution is successful. A more aggressive financial policy under the new CEO would add to risk of credit quality erosion if transformation is unsuccessful."
As Moody's noted, Danone's sales declined more than peers such as Nestlé or Unilever during the pandemic, largely due to a 17% decline in sales in its bottled water business, which relies heavily on restaurant and café sales.
The bottled water business, which accounts for 18% of Danone's sales, is likely to remain a drag on profits, said Moody's, with the division having 'proved slow to adapt to shifting consumer behaviour', it said.
At the same time, plans to cut around 20% of its SKUs, particularly products that account for between 1% and 2% of sales, or less, will enable the business to 'free up some capital to reinvest in supporting other brands and commercial activities and to simplify its supply chain', said Moody's. It also recently announced plans to sell its share in Japan's Yakult.
Plant-based products are also likely to continue to take share away from traditional dairy, and Danone is targeting €5 billion a year in revenue from its plant-based category by 2025, recently announcing the acquisition of Follow Your Heart, a plant-based cheese and mayonnaise producer.
'However, plant-based product growth will only partly offset the decline in traditional milk-based products,' said Moody's. [Pic:©Moovstock/123RF.COM]
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