DANONE IN CHINA

How Danone as a Global Brand has developed its International Marketing Strategy

in the Chinese market

.

IB3880 International Marketing

Student Number: 0831099

Word count: 1646 Words

INTRODUCTION

In this essay we will study the Danone brand, which is primarily used for Fresh Dairy

Products and represents 60% of the group’s sales (Danone, 2012)1. We will assess the

strength of the Danone brand globally and discuss the entry into the Chinese market, where

the Danone logo is used for the bottled water, biscuit and fresh dairy segments. Finally we

will review the challenges it will face in coming years.

WHAT IS A GLOBAL BRAND?

While being international simply refers to the ownership of operations in a number of

countries (Mesdag, 1999) the term global generally describes a more elusive and idealistic

goal. A global brand is often described as a standardised product and advertising offering

across different countries (Mesdag, 1999) (Levitt, 1983) while on the other hand a more

modern outlook is to offer international products in a more region-specific way (Hollis,

2008) (Ohmae, 1989). While a totally global brand, as elusive as this concept may be, can

rely on its international appeal to attract and market to consumers irrespective of their

culture, rare are the examples that stand up to this definition in practice. Even global brands

such as Coca-Cola or Mcdonald’s2 have had to adapt their marketing decisions in terms of

advertising or product offering (container size, product pricing or restaurant design

:Appendix 1). It is fair to say that we live in a world of semi-globalisation as suggested by

Rugman and Verbeke (2004) where companies strive to simplify markets and find

similarities across countries to streamline the marketing strategies, all the while staying

attuned to the local environment to ensure product adoption and a strong market share.

This is however not to say that a global brand cannot be successfully used, as Cateora and

Ghauri (2000) point out, they can enhance efficiency and cost savings by using a global

approach.

1 2009 Figures

2 Both consistently ranked as top global brands on several reputable Brand value rankings (Interbrand ,2011),

(the global brand, 2011)

We must therefore consider the extent to which Danone can be considered a Global

Brand, considering the level of local recognition, the level of local adaptation and the

strength of the Brand across the globe.

According to the 2011 annual report Danone is clearly present in the extended triad though

it appears to be a largely home region oriented company with over 50% of its sales taking

place in Europe (Rugman and Verbeke, 2003, Danone annual report, 2011).

Table 1: Danone Geographical Sales (Danone Annual Report 2011)

Table 2: Danone Sales Growth 2010-2011 (Danone Annual Report 2011)

On the other hand when looking further at the

location of its plants and its employees the

picture changes somewhat, with Asia

representing a much larger proportion of its

activities (Figure 2 and 3). This suggests a strong investment in these locations in order to

take advantage of the strong growth in sales in the Asia-pacific region (Table 2).

Geographical location Growth

europe 14%

asia 20%

rest of world 9%

total 14%

57% 14%

29%

Danone Half year Sales 2011

Europe

Asia

Rest ofWorld

Geographical location 2010 Split 2010 2011 Split 2011

Europe 9449 56% 10809 56%

Asia 2386 14% 2862 15%

Rest of world 5175 30% 5647 29%

Total 17010 100% 19318 100%

Figure 1: Danone Half year sales 2011 (Danone Annual

Report 2011)

Figure 2 : Danone plant location (Annual Report 2010) Figure 3: Danone employee location (Annual Report 2010)

A large focus on geographical diversification and in particular on Asia was started upon the

arrival of Franck Riboud as CEO in 1996 (Bloomberg Businessweek, 2012). Sales have

gradually become less focussed on Europe, apart from the recent Russian acquisition of

Unimilk which can arguably be placed in Europe or Asia(Food and Drink Business, 2010). Not

only does it have a healthy split across regions in terms of sales (It is present in over 60

countries across 5 continents Figure 4), but its employee and production plant split shows

increased focus on the Asia-Pacific market, the only continent where it is not yet number

one in fresh dairy products.

Figure 4: Danone geographical activities (Danone 2012b)

43%

27%

30%

Danone Plants 2010

Europe

Asia

Rest ofWorld

35%

19%

46%

Danone Employees 2010

Europe

Asia

Rest ofWorld

Furthermore a global brand needs to promote its values and be recognised for these values

worldwide. Danone stands for improving health through food (Danone, 2012c) and is

market leader in many of the segments it operates in, including N°1 in Fresh Dairy in 4 of the

5 continents (Danone, 2009)

According to geographical presence in sales and production plants as well as its brand

recognition it is clear that Danone truly is a global brand.

DANONE’S INTERNATIONAL MARKETING STRATEGY

In order to enter China Danone had to assess the Macro and Microeconomic factors, as well

as the cultural and psychic distance to develop an appropriate management and marketing

strategy.

The difficulty of doing business in China was highlighted in the DoingBusiness report (2012)

where China is ranked 91 out of 183 economies. Additionally the psychic distance of a

French company entering a Chinese market is rated 90/100 according to Hakanson and

Ambos (2010), a particularly high rating implying care and research upon entry. A Pestle

analysis mainly points out the political and legal difficulties involved with investment in

China in terms of facilitating business, where companies struggle with local counterfeit

products, little government support in legal battles and particularly a thriving double

bookkeeping mentality if too little control is present. (Kan, 2008)

In terms of market entry motivation (according to Dunning’s eclectic theory,1988) Danone’s

internationalisation is a market seeking entreprise due to the largely perishable nature of

dairy products which requires on-site production thereby also allowing better adaptation to

local needs and wants. This was largely motivated by a low level of growth in Europe in the

90s, spawning interest in high potential developing countries, China included3.

3 China GDP growth reached 14.2% in the early 90s with a minimum growth rate of 7.6% in the late 90s (IMF,

2012]

According to Kogut and Singh (1988) the

method of Joint Ventures is one that is

favoured by companies with French

headquarters such as Danone, and supports an

Uppsala model (Figure 5) of partial knowledge

and commitment to the market.

Danone invested in Joint Ventures to take

advantage of local experience and know-how in

order to get product recognition and adoption

(Euromonitor, 2010), as well as provide local

regulatory knowledge (The Economist, 2007).

Arguably the Brand awareness in China can

largely be attributed to its joint-venture selection with the top 3 largest Yogurt brands in

China (Wahaha, Mengniu, and Bright Dairy and Food Co : 14, 12 and 11% Market Share

respectively Euromonitor, 2011).

We will now discuss the extent to which Danone developed a globally standardised or a

locally customised marketing strategy.

In terms of standardisation Danone has managed to keep its strong consistent marketing

brand and image (Keeping the same logo and colour attributes Figure 6 as

well as a similar product offerings) however it has focussed its strengths

on attributes that were specific to the country i.e. choosing adequate

flavours, advertising its health benefits, adapting ads and websites).

The Name Danone changed to DaNeng in China which means Developing

your abilities (Poiroux, 2006) leading to certain consumers associating it

to a Chinese brand.

The difference in yogurt consumption is a huge barrier for Danone with an average yearly

consumption of 7kg compared with 20kg in Western Europe (Danone, 2012c). However the

company has managed to take advantage of a recent study mentioning a deficiency in

calcium and vitamins (Wang et al. 2010) which spawned government initiatives to

Figure 5: Uppsala Model (Johanson and Vahlne 1977)

Figure 6: Danone Logo China

Versus Western Europe

encourage calcium consumption (KPMG, 2008). In terms of the customisation of ads, the

use of local celebrity Jet Li in the Maidong drink adverts (Jetliang, 2006) contributed to

making it the preferred drink among teenagers (Coyle, 2010).

With few expatriate employees present on the ground Danone has favoured a local

approach and customised product offering in China (Giorgini, 2009). The main issue

however has been that control was low and therefore opened up the danger of

mismanagement.

One of the main challenges which plagued Danone and other European entries in China is

competition from local firms offering similar products at lower prices (Poiroux, 2006). As a

result Danone has recently changed its pricing strategy from middle range to a luxury

product ranges (Le Figaro, 2011). This was supported by a study linking Danone “Bio” yogurt

with positive effects preventing constipation (Danone, 2009) which increased the luxury and

health product brand image. Danone has shown the ability to adapt its products to the local

culture by linking its products to health benefits, an important aspect of the Chinese culture.

This changed its pricing strategy from a Market penetration to a Market Skimming

marketing strategy. Grey Markets from competition remain a strong issue in China. To

respond to this threat Danone has either seeked collaboration with counterfeit product

sites, or had to resort to legal actions, though most government control generally had little

impact on this issue (Poiroux, 2006).

Danone has managed to retain a global communication strategy by using a similar logo,

similar name and encompassing the same values while focussing on the specificity of the

Chinese culture and consumer by offering new products locally and emphasizing small

entrepreneur-like geographical business units with a high proportion of local workforce. In

this respect Danone has managed to attribute a local feel to a global brand.

FUTURE CHALLENGES

The slow trend of an aging population (Coface, 2011) justifies a larger market opening up for

the sale of yogurt and health related products. Danone’s shift in positioning will be

beneficial in the long-term as it allows retained profits and a protection against rising wages,

which are bound to impact local producers. As a luxury product Danone can appeal to urban

consumers with urban disposable income growing (KPMG, 2008), a category which is

growing4 and could prove a successful strategy for Danone.

The situation in China seems to be a struggle and a source of concern for Danone.

While great growth prospects could yield great results and diversify a portfolio that is overly

reliant on Home country results, at the same time Danone has faced great difficulties in its

Joint Ventures. A relatively high power distance coupled with a high uncertainty avoidance

rate is culturally high in France (Hofstede, 1980) which justifies the use of high control entry

models. However in the case of the JV with the Wahaha group it actually offered little

control with “Danone officers having never participated in the day-to-day activities”

(Giorgini, 2009). In 2009 it ended its Joint Venture with the Wahaha group due to the

development of camouflaged parallel companies run by its business partner and JV CEO

Zong Qinghou (New York Times, 2009). This public scandal further harmed the group as

Danone was branded a ‘rascal’ and imperialist, which are negatively linked to the Country of

Origin effect (Schooler, 1965).

On the other hand due to recent food scares involving Mengniu in particular the negative

country of origin effect may be counteracted by association with higher safety standards, as

this would fit in well with the new higher quality price and positioning strategy.(Culliney,

2012)

A recent press release has clarified Danone’s aim in China is to remain present and build on

its baby food strengths to develop financial returns and be able to attack and growth in

china in the next 10-15 years.(Bouckley, 2012) This is a troubling thought as Danone appears

to be reducing its presence and production capabilities in mainland China. Such a move

4 Growing GDP per capita (7000$ in 2009 to 8400$ in 2011) CIA, 2012 And growing GNI per capita since 1962

(17% growth 2019-2010) Index Mundi, 2010

coupled with a recent increase in price and change in positioning as well as a stronghold of

local brands taking over the Chinese market make it perhaps more important than ever to

carefully manage brand awareness and presence. It retains a steady 16% market share in

shanghai with its BIO product which gives it a stable foothold in the Chinese market until it

decides to redevelop its activities there.

CONCLUSION

To conclude Danone has successfully developed its brand across the world with a high level

of standardisation in its company values and image. It has however developed independent

geographical units which enable it to partner with successful local brands and develop a

highly customised product offering and marketing strategy. While there are issues with its

model, particularly in terms of the amount of control that can reasonably be delegated, it

has managed to remain successful and profitable in the markets it chooses to operate in. A

careful assessment of future developments in the dairy industry will enable the highly

reactive company to continue to entice the Chinese population and jump into the market

when dairy consumption becomes part of the Chinese daily life.

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APPENDICES:

Appendix 1:

Coca cola logo in China

Mcdonald’s offering in Hong Kong