* French dairy firm seeks to shake off 2013 troubles
* Promotions, Mengniu investment to sway shoppers, investors
* Online chatter spikes, woes linger in consumers' minds
* Danone to overhaul China milk powder range in 2014
(Add Danone CEO comment, earnings, 2014 plans)
By Adam Jourdan
SHANGHAI, Feb 20 In Danone SA's China,
diamonds are free, milk powder is forever.
The French dairy giant is handing out the jewels as prizes
in promotions to win back consumers it lost last year in claims
of high prices, accusations of bribery and food safety scares.
On milk, it's spending big. With investors restless over its
inability to grow in China, this month Danone paid $665 million
to lift its small stake in the country's number two milk maker,
China Mengniu Dairy Co Ltd.
Sealed at a hefty premium, the Mengniu deal and Danone's
aggressive online campaign to promote its Dumex milk powder
brand show the world's largest yoghurt maker is determined to
convince shoppers and investors alike it can make large profits
in China after a string of failed tieups there.
A breakthrough remains some way off: Danone has a 0.5
percent share of China's dairy market, according to Euromonitor,
and for some customers, its brand remains tarnished. The
Paris-based company is just one of a string of foreign firms
facing tighter scrutiny as China patrols pricing and product
safety more closely, saying it needs to protect consumers in the
world's second-biggest economy.
"I don't really trust Dumex," said Pei Qianqian, 29, an
office worker in Shanghai with a 17-month-old daughter to feed.
"If it's just one problem then perhaps it's just the
side-effect of industry competition, but if there's two and then
three in a row, I think this milk powder really has problems."
The home of brands like Evian mineral water and Activia
yoghurt reported earnings on Thursday, saying growth will
accelerate this year after weakness in Europe and Asia woes
weighed on its performance in 2013.
With much of its business rooted in lower-growth Europe,
Danone has long targeted emerging markets like China as future
growth streams. According to business consulting firm Frost &
Sullivan, China's dairy market will nearly double to about $89
billion in 2017 from 2012.
Danone's China sales of early life nutrition products such
as infant milk formula were virtually "zero" in December, the
firm's leadership said in an investor call on Thursday. Danone
said the firm would overhaul its offering for China in 2014,
including launching a revamped Dumex product and making more use
of other brands like Aptamil and Cow & Gate.
"Don't think we are going to rebuild the same animal, we are
going to build a new one, a better one, especially in terms of
margins," said Danone CEO Franck Riboud on an investor call.
Riboud said Danone could not go it alone in China, but that he
expected Mengniu to become the leader among China milk
RECORD ONLINE NOISE
The shadow of a crisis in China can loom large over
international firms, especially in more sensitive sectors such
as nutrition and health. Amid fervent condemnation from the
country's growing online community, KFC-parent Yum Brands Inc
has struggled to win back consumers over a year after a
food scare at a local chicken supplier.
Chatter around Danone's "1000 Day Plan" promotion drives on
China's popular social network Sina Weibo has risen to record
levels. Yet Internet watchers warn that a campaign designed to
highlight Dumex milk powder safety after health scares across
the industry in China last year may instead have the effect of
keeping Dumex's problems in people's minds.
Mother Tang Jiahui, 27, said she was not swayed by Dumex's
online campaigns and free give-aways. "All I'm looking at when I
choose which brand of milk powder is quality; an online prize
draw won't change my mind," the Shanghai resident said.
Still, in January alone, users re-posted its Weibo campaign
messages over four million times, in the hope of being chosen in
a draw for prizes including diamond-studded brooches or iPad
tablet computers, according to a Reuters analysis.
At the same time, messages about Dumex that were not
campaign-related tripled to 2.6 million in January compared to
November, while those mentioning other international brands that
were affected by health scares last year dropped back to
Non-campaign posts often referred to issues Dumex faced last
year, including an unfounded botulism scare and a state
television report on corruption in the milk powder sector.
It's an effect that echoes that experienced by KFC-parent
Yum Brands last year, with some Chinese diners being put off by
its "Operation Thunder" and "I Commit" campaign to allay food
"It's really hard to hide or delete the social buzz on the
internet nowadays," said Linda Du, managing director of APCO
Worldwide's Shanghai office. APCO has worked previously with
Dumex in China on crisis management and social media strategy.
Danone's Dumex competes with international rivals Mead
Johnson Nutrition Co, Nestle SA, Abbott
Laboratories, as well as local competitors in the
Chinese infant milk formula market.
A number of international dairies were hit last year in
China. New Zealand's giant Fonterra Co-operative Group Ltd
sparked product recalls in August after a false alarm
over potentially fatal bacteria, while several firms were fined
for price fixing. In September state TV accused some milk powder
firms of bribing doctors to promote their products.
"Rivals have moved on faster than Danone because it wasn't
just hit by one issue, but several altogether. Going forward,
it's going to be tough for Danone to find a way to market itself
for China," said Cherry Du, Shanghai-based project manager for
marketing consulting firm SmithStreetSolutions.
Danone's troubles in China have concerned investors, keen to
understand why the firm is struggling more than rivals to turn
things around in its fourth-largest market, accounting for
around 7 percent of its global revenue. The company first
invested in China in 1987.
In October Danone cut its 2013 financial targets after its
woes in China dragged on third-quarter figures, with sales in
markets affected by the Fonterra recall seeing growth down 40
percent compared to pre-crisis levels. Dumex accounts for around
half of Danone's China sales, according to analysts.
Danone shares are down around 3 percent since mid-October,
while the Paris market benchmark CAC 40 index is up 2.6 percent.
Shaun Rein, Shanghai-based managing director of China Market
Research Group, said his company has been contracted by a hedge
fund that is invested in Danone to provide analysis of Dumex's
performance in China. Rein, whose agency has conducted research
for a range of corporate customers including Danone rival
Nestle, declined to name the fund.
While the price tag in Danone's move to double its stake in
Mengniu to 9.9 percent caught the eye - the deal came with a 15
percent premium to Mengniu's share price at the time - analysts
broadly welcomed the deal, even if the French firm has a track
record for falling out with Chinese partners.
In the highest-profile case, Danone and China's Wahaha food
and drink group in 2009 settled a long-running dispute over a
joint venture that had descended into litigation.
Mengniu has an 18.8 percent share of China's dairy market,
according to Euromonitor. The closer tie-up with Mengniu, whose
largest shareholder is China's state-owned COFCO, gives Danone
better access to a large, nationwide distribution channel - and
places it closer to the ear of China's watchful regulators.
"Danone doesn't have strong sales channels coverage and is
not good at marketing in China. In those segments Mengniu can
help Danone to do a better job after this deal," said Du at
($1 = 0.7317 euros)
(Reporting by Adam Jourdan; Editing by Kenneth Maxwell)