Caroline MORAND 8 October 2010

International Trade Management
BUAd 401

Individual Class Assignment #1

DANONE’s entry in China

The article.
Danone's quick expansion in China
By Shangguan Zhoudong (chinadaily.com.cn)
2007-06-15
Brief introduction
Group Danone is one of the most famous food and beverage groups in the world with its headquarters in Paris and 90,000 staff members worldwide. Group Danone is a Global Fortune 500 company with a long history and large size. Danone develops its business across over 120 countries focusing on three core categories: fresh dairy products, biscuits (in which it ranks second worldwide) and beverages (in which it ranks first worldwide).
Founded in 1966, Danone has followed an active expansion strategy throughout the world since the 1990s. In less than 40 years, Danone has become a giant of the food industry, owning many famous international brands such as Danone, LU, Evian, and more.
Since the end of the 1980s, Danone began to develop the production and business in China extensively by investing in building factories. Now, the main business of Danone in China concerns yogurt, biscuits and beverages.
Danone has 70 factories in China, including Danone Biscuits (in Shanghai, Suzhou and Jiangmen), Robust (in Guangzhou), Wahaha (in Hang Zhou), and Health (in Shenzhen). The products are not only sold in China, but also exported to different countries.
Four brands under Danone
Danone: the leading brand worldwide for fresh dairy products; Danone represents almost 20 percent of the international market. Danone is present in 40 countries worldwide.
Evian: the best selling mineral water brand, with 1.5 billion bottles sold every year. Present in 125 countries across five continents.
Lu: the second brand worldwide, the first Biscuits brand of Groupe DANONE, which represents almost the half of the sales for the Biscuits and Cereal Products division. LU is mainly present in Western Europe.
Wahaha: the leading brand for refreshing still water (water, ready made tea, fruit juices). The brand is one of the most popular in China, with more than 1.5 billion liters of water sold each year. Its name means ¡°the child who laughs.¡±

Danone in China

1. In 1987, Guangzhou Danone Yoghourt Company was established
2. In 1994, Danone and Bright Dairy jointly launched two yoghourts in Shanghai; Danone has 45.2 percent of these projects.
3. In 1996, Danone acquired 54.2 percent of Wuhan Dongxihu Beer (Group) Co Ltd, and established five joint ventures with Wahaha Group; Danone holds 41 percent of these joint ventures. During the financial crisis in Asia, Danone acquired the shares of the Hong Kong-based company and became the biggest shareholder of those companies, holding 51 percent. In 1996, Danone also bought 54.2 percent of Shenzhen Health Food Co Ltd.
4. In 2000, Danone bought 92 percent of Guangdong Robust Group.
5. In 2001, Danone Asia Pte Ltd purchased a 5 percent stake in Bright Dairy.
6. In April 2006, Danone Asia Pte increased its stakes in Bright Dairy, and became the third-biggest shareholder of the company. By the end of April, 2006, Danone raise its ownership of Bright Dairy to 20.01 percent.
7. In July, 2006, Danone became the second-biggest shareholder of Huiyuan Group. In February this year, Danone increased its stakes in the company to 24.32 percent.
8. In December 2006, Danone formed joint ventures with China Mengniu Dairy Co, in which it holds a 49 percent stake.

Table of contents
Executive summary 1. Presentation of DANONE 1.1. History 1.2. Setting-up of Danone on the Chinese market 1.3. Principal Products and Brands 1.4. Products sell in China 2. Standardization VS Adaptation 3. Lead market 4. Entry mode 5.1. Joint-venture as an entry mode in China 5.2. Example of the joint-venture with Wahaha 5. Main factors of success: local adaptation for global expansion 6. High context and low context cultures 7. Bibliography

Executive summary
The manufacturers of foodstuffs are interested in Third World countries. Giants of the food-processing industry as Danone included that the number of potential consumers was not to ignore, and that they had to adapt themselves to these low-income populations by proposing them products at very low prices.
Sales in emerging countries jumped up with 20 % in 2007 in particular thanks to China (Asia), Brazil, when the total turnover progressed only of 4,1 %, in 3,55 billion euro.
Danone as other group has to to adapt its products with regard to consumer habits, as well as to adapt its prices to be able to be competitive on the local market and optimize a distribution network (4 P: Price, Product, Place, Publicity).
It is then necessary to study the countries where the setting-up is planned by being interested in the sociocultural differences which can exist between several countries, their economic situation, their business connections with the foreign countries, their geographical situation, and all the regulations (incoterms, customs politics…) applying to it.
In twenty years, the empire of the Middle became one of the biggest markets of the French giant of the food-processing industry, Danone, which realizes in China 55 % of its sales made on the Asian market, and 20 % of its business figure and its total profits. This development was relatively fast, because Danone began its setting-up in the 1980s. Danone succeeds even in selling yoghurts while the Chinese, for the greater part, "do not digest the lactose, and do not eat only with baguettes". Danone has owed to adapt its products to the Chinese culture.
So, we shall treat in this file of the setting-up of the Group Danone on the Asiatic continent, and more exactly in China. We will speak first about the history of Danone and the products which the company marketed into China, then, we will see in what degree is the primary product of Danone have “global product” marketing features, we will explain aspects of the product which require “market adaptation” rather than “market standardization” strategy, we will identify the factors encouraging globalization of the products and the factors presenting barriers to globalization.

1. Presentation of DANONE
With €14.982 billion in sales in 2009, Danone/Dannon is a French food-products multinational corporation based in the 9th arrondissement of Paris. It claims world leadership in fresh dairy products (including yogurt, cheese, and dairy desserts) and second-largest producer of biscuits (after Kraft's Nabisco) with Jacob's and LU cookies and crackers. Evian and other brands make it No.2 in bottled water (behind Nestlé). About 56% of its 2006 net sales derived from dairy, 28% from beverages, and 16% from biscuits and cereals.
The company develops its business across over 120 countries around the world and counts 90,000 employees. 2.1. History * The original company bearing the corporate name was founded in 1919 by Isaac Carasso in Barcelona (Spain) as a small factory producing yoghurt. The factory was named Danone, a Catalan diminutive of the name of his first son, Daniel Carasso. * Ten years later, the first French factory was built * 1932, inauguration of the first factory to Levallois Perret * 1942, creation of the Dannon Milk Products Incorporation in the United States * 1966, the fusion of the " Glaces de Boussois " and " Verreries de Souchon-Neuvesel " gives birth to BSN * 1970, acquisition of the breweries Kronenbourg, the European Company of Breweries and Evian * 1972, Gervais Danone's takeover * 1990, begin of its international expansion outside Europe because the European market is in the process of saturation * In 1994, the new company name of Group becomes Danone, the most global brand of the Group BSN, the one who represents best its will of globalization. 2.2. Setting-up of Danone on the Chinese market
Danone entered China in 1987. Although it had suffered setbacks as other multinational dairy corporations at the beginning, it has now obtained the top position in the Chinese market. In 1987, Guangzhou Danone Yoghourt Company was established. In 1996, Danone acquired 54.2 percent of Wuhan Dongxihu Beer (Group) Co Ltd, and established five joint ventures with Wahaha Group; Danone holds 41 percent of these joint ventures. 2.3. Principal Products and Brands
The Danone brand, primarily used for Fresh Dairy Products, represents 60% of the group’s sales.
Fresh dairy products:

Danone developed two lines of probiotic dairy products (known under the names Actimel and Activia*), a range of reduced-calorie products (under the brand names Taillefine, Vitalinea and Ser), a range of “fromage frais” for children (known by the brand names Danonino, Danimals or Petit Gervais), as well as a product leading the market for chilled cholesterol-lowering products (known under the name of Danacol).

*Activia / Bio (Japan) / Activia Laban (Saudi Arabia)/ Activia Kefir (Russia).
Bottled waters:
The group is the world’s second-largest producer of packaged waters, with two of the world’s five top-selling brands of bottled water (Evian and Volvic) and the world’s leading brand of packaged water (Aqua in Indonesia). Having sold some 18 billion litres of packaged water in 2009, the group has a global market share in the region of 8.5 %. Danone holds second place in Europe and is a major player in both Asia-Pacific and Latin America.
Evian (international), Volvic (international), Aqua (Indonesia), Badoît (France), La Salvetat (France), Mizone (China and Indonesia), Lanjarón (Spain), Font Vella (Spain), Fonter (Spain), Bonafont (Mexico), Hayat (Turkey), Villa del Sur (Argentina), Villavicencio (Argentina), Salus (Uruguay), Robust (China), Health (China), Zywiec Zdroj (Poland)
Baby nutrition:

Nutricia Nutrini
Milupa
Blédina (France)
Cow&Gate (United States and United Kingdom)
Bebiko
Aptamil (UK, Germany)
SGM (Asia-Pacific)
Dumex (Asia-Pacific)

Medical nutrition:

Nutricia
SHS
Fortisip (United Kingdom)
Neocate
Fortimel
Nutrison
Milupa
Respifor
FortiCare… 2.4. Products sell in China
Waters
* Subsidiaries: * Robust * Robust Drinking Water * Shenzhen Health Drinks * Aquarius * Danone Premium Brands * Partner: China HuiYuan Juice
Fresh Dairy Products * Subsidiary: Danone China * Partner: Weight Watchers Danone China Limited
Baby Nutrition * Subsidiary: Dumex Baby Food Co. Ltd.

Medical Nutrition * Subsidiary: Nutricia Pharmaceutical Company Wuxi 2. Standardization VS Adaptation
The food-processing industry is a completely particular sector in the industry. Indeed, it is the one which is the most subjected, and by far, to variations of the tastes of the consumers from a continent to the other one, from a culture to the other one. We can say, for example, that the cars which we find in Japan or in Italy are almost the same. Furthermore, with the distribution of the western consumption pattern, the clothing, and the consumer habits get closer more and more. The food tends to be more and more globalize but it is definitely a different sector.
Danone has suffers several setbacks and put about years to adapt itself and understand trends in consumption in China for example the sale of yoghurts. Chinese consume 7kg of dairy a person and a year on average, against 200 in Western country.
But we do not change the consumer, we adapt ourselves to it! And Danone thus adapted its products to the local requirements.
The most important for the Chinese consumers are the beneficial products for the health. A big part of the Chinese chooses their food according to their medicinal virtues. It is the main weapon of Danone, which never forgot to remind the virtues of its products. So, biscuits “Prince” are enriched in iron, and the Chinese are big consumers of products like Actimel, for example. Additional luck for Danone: the Chinese government published 2 years ago a showing study that the population suffered from a deficit of calcium and vitamins, and incited it to drink more milk.
Concerning the water, the problem was that the Chinese do not consume it during the meals. Even there, Danone was lucky again: pipes do not follow the galloping urbanization and the installations are often dilapidated. The Chinese consume so bottle water to make some tea or some soup.
The last and very good idea of Danone is called the Maidong «脉动», an energy drink which became in some month the trendy dink of the young people. It is presented as source of energy, and it has a particularly effective advertising campaign with as figurine the actor Jet Li.
The result: 270 million liters are consumed by the Chinese young people a year.
In this case, we can see that Danone needed a “market adaptation” to implant in China. Indeed, the number of the Chinese population incites to the globalization however consumers’ habits presented barriers to this one. 3. Lead market
A lead market is characterized by strong and demanding customers, by freedom from government regulation measures, by products and services which incorporate the latest technology, by strong companies at the high-end of the product line, by often the largest markets, but not necessarily, and it is able to compete with the companies with the largest market share. Danone is the leading brand worldwide for fresh dairy products. The stars brands are: Activia, Actimel, Danonino, Danacol. These four brands realized 4,6 billion euro of turnover (54 % of the turnover of the pole). These four products constitute the lead market in the Danone Company and in the market of dairy products. 4. Entry mode
"Is it Necessary to be afraid of China? I do not believe, even if there is a risk, we have no choice, it is the biggest country of the world and everything starts here." That is how Franck Riboud, CEO of Danone, justifies its setting-up on the Chinese market. His method to reach is of a redoubtable efficiency there.
Danone has adopted a strategy of growth through joint ventures, particularly in fast-growing emerging markets, because it lacked the management depth and size to grow quickly.
To penetrate into the Chinese market, nevertheless in full change, Danone had to become allied to Guangming, the local historic giant, who put today a lot on campaigns. Liquid yoghurts sold with straw, milky drinks perfumed in fruits, bricks of milk: the shelves of dairy products do not stop filling out. Created in Shanghai in 1956, Guangming, subsidiary of the public company Nonggongshang (NGS), is the main supplier of the city and the third company quibbles of the sector, after Yili and Mengniu. In its range, the products of a prestigious brand: Danone.
In China, year 2006 was marked by the creation of one joint-venture between Danone and chinese’s leader of dairy products, Mengniu Dairy Company Limited. With still a low consumption per capita, but a grown concern in anchored health, the chinese market of the fresh dairy products offers an important potential of growth that this new company, which has for vocation to develop, produce and distribute PLF at the national level, wish to run. With one billion euro of turnovers, Mengniu, which is young company on the Hong-Kong’s stock exchange, knew a growth from 25 to 30 % a year and possess 20 factories in 15 Chinese provinces. With this joint-venture, Danone is going to be able to lean on its industrials sites to build a system of distribution meshing all the Chinese territory. 5.5. Joint-venture as an entry mode in China.
The following graph shows the different choice of entry mode.

Danone choose the Joint-ventures as an entry mode and majority Joint-ventures when it is possible
The joint-venture can be advantageous for both foreign firms and the domestic government that hosts the venture. For the foreign firm, joint-ventures are a way of gaining localized knowledge and navigating the domestic legal and political environment. Host governments often mandate joint-ventures too as a way of acquiring technology transfer and business expertise that will help develop the economy internally. In both cases, the critical issue is shortening the time that would be required to accomplish these goals without the joint-venture format, and thereby gaining a competitive advantage.
One thing that influences the complexity of the macro-environment in China is the high level of control exercised by the government in opening markets to the capitalistic system. To control market mechanisms, China's government has preserved parts of the socialist system. That is why joint ventures are one of the most common manner in which foreign companies enter the China market and the preferred manner for cooperation where the Chinese government and Chinese businesses are concerned.
Regarding the background of Danone, joint-ventures were probably the better for it to entry in the Chinese market. Indeed, Danone needed to understand the Chinese market and to obtain the support of the Chinese government. But joint-venture sometimes doesn’t works as the example of the one with Wahaha. 5.6. Example of the joint-venture with Wahaha
The Wahaha Joint Venture was formed in February, 1996. Upon the formation of the joint-venture, Wahaha Group owned 49% of the shares of the joint-venture and Danone owned 51% of the shares of the joint-venture. Danone exercised legal control over the JV because of its right to elect the board of directors. Beginning in 2000, the Wahaha Group began to create a series of companies that competed directly with the joint-venture, selling the same products as the joint-venture and using the Wahaha trademark. The creation of the non-joint venture companies violated both the trademark license and the joint-venture agreement. Danone apparently learned of the creation of the non-joint venture companies in 2005. To remedy the violation of the existing contracts, Danone insisted it be given a 51% ownership interest in the non-joint venture companies. Danone agreed to purchase this ownership interest from the Group and from Mr. Zong, who by this time was one of the richest men in China. Ultimately, the Wahaha Group and Mr. Zong refused to make the transfer. The dispute therefore threatens to destroy what was until recently a very successful joint venture company in China.
Though joint ventures in China can be quite difficult, with proper planning and management, they can be successful. In the case of the Wahaha/Danone joint-venture, many basic rules of joint venture operations in China were violated. We can also learn of this conflict that it is critical in China to make the ownership and control of a joint venture explicit and clear from the very start, that the foreign party must actively supervise or participate in the day-today management of the joint venture and that a 51/49 joint ventures are generally a mistake in China. 5. Main factors of success: local adaptation for global expansion
One of the main factors of success of the entry of Danone in the Chinese market is the adaptation. Indeed, Danone adapted its products with the habits of the consumer, and its prices with the purchasing power of consumers. The danone’s products are often sale under the name of a Chinese brand.
With this politics of local adaptation, the Group can afford on one hand products " known locally ", and on the other hand the flagship products as the yoghurt Activia and the lactic ferments Actimel. For Danone, it is thus the opportunity to propose to the consumers their usual products (enjoying by definition a strong rate of development of customer loyalty) and that benefit from the technical expertise of a Food-processing group centered on the health, but also its flagship products in the hope that these conquer new regular customers.
The second factor of success is the cooperation with the local company. Indeed, Danone weaved a network of local partners having a greater knowledge of the market and the local specificities while bringing its expertise at the level of products and of marketing and by helping the producers to increase their profitability and the quality of their production (control and improvement of the animal food and veterinarian care).
Furthermore for logistic reasons and depends on the kind of the goods (water and fresh(cool) dairy products) the best way of guaranteeing the availability of products and their fresh is to produce them directly in or near the countries. This nearness with factories also allows Danone to guarantee competitive prices by eliminating a big part of the costs of logistic and reducing them has the supply of the local distribution networks. Thanks to this nearness of the center of production that Danone launched the “Affordability program” to allow in the most poor people to have access has their products. 6. High context and low context cultures
In order to communicate successfully you have to consider the cultural differences and the predominating communication process in individualistic and collectivistic cultures. When workers from high-context and low-context cultures have to work together often problems occur by the exchange of information.
High context refers to societies or groups where people have close connections over a long period of time. Many aspects of cultural behavior are not made explicit because most members know what to do and what to think from years of interaction with each other. Your family is probably an example of a high context environment.
Low context refers to societies where people tend to have many connections but of shorter duration or for some specific reason. In these societies, cultural behavior and beliefs may need to be spelled out explicitly so that those coming into the cultural environment know how to behave.
At differences in direction employees from high-context cultures like China and France adapt to their good friends, families and also to close colleagues (in-group members). They communicate with them intensively (quantity difference) and exchange specific/detailed information about many different topics. The result is that every in-group member is constantly up-to-date with the facts around the business.
In China communication tends to be very efficient because of their information-flow at work and in privacy. They discuss everything in advance and consider meetings as an official “ceremony” where the already commonly agreed decision will be announced. This is important in the way of “giving and keeping face”.
It is important to remember that every individual uses both high-context and low context communication; it is not simply a matter of choosing one over the other.

7. Bibliography

* http://danone-en-chine.wikeo.be/a.html * http://www.marketing-chine.com/entreprises-etrangeres/danone-chine * http://www.gotoread.com/mag/13136/sarticle_28868.html * http://www.chinadaily.com.cn/bizchina/2007-06/15/content_895462.htm * Danone v. Wahaha: Lessons for Joint Ventures in China, Steven M. Dickinson, Harris Moure PLLC * http://www.via-web.de/high-context-vs-low-context/ * http://www.clearlycultural.com/ * http://www.culture-at-work.com/highlow.html * Quelle est la stratégie d’internationalisation de Danone par rapport aux Produits Laitiers Frais ? Nadia KADRI, Saskia DE MOOR et Mr. BENAVENT, professeur de marketing