Danone takes a hit from US water business

The French group this week announced that it was taking a charge of around €600 million relating to its US and EU partnership with Japan's Suntory group, a result of increasing competition and an inevitable slow-down in growth.

The company, which also produces a wide range of dairy products and biscuits, said that it would take a one-off charge of €450 million in its 2004 consolidated accounts relating to its holding in DS Waters, the US joint venture that it formed with Suntory in late 2003.

This one-time charge relates to the writing-off of the goodwill of Danone's holding in DS Waters, as well as a provision for its commitment to buy out Suntory's share of the business by 2008 should the Japanese firm decide to sell - a move considered likely by the French group.

Danone, which has owned the Evian and Volvic bottled water brands (among others) for many years, is a relative newcomer to the HOD sector, making its first US acquisition (McKesson Water Products, the leading HOD player on the West Coast), in early 2000.

Since then, the French company has added a number of other HOD operators in both the US and Europe, and merged its US business with the Suntory Water Group in 2003, creating the US HOD market leader with leading positions in many of the top 25 cities in the United States.

But there are signs that the glory days for HOD operators - driven by the aggressive acquisitions of both Danone and Nestlé on the back of growing awareness of the health benefits of water consumption - may finally be nearing an end. Danone cited "slower volume growth patterns for the HOD industry, an increasingly aggressive pricing environment on HOD formats and faster-than-expected erosion of cooler rental revenues"​ as the principal reasons for the charge.

"These negative factors have thus far more than offset the cost synergies generated by the combination of Danone and Suntory's HOD businesses,"​ the French firm said.

DS Water Danone has sales of around $800 million, but a book value of less than $400 million following the write down.

Danone has set itself the deadline of "the end of the first half of 2005"​ to find a solution for the problems facing DS Waters, but restructuring has been underway there for some time, with a significant reduction in the number of production plants already underway.

Danone's problems are not limited to the US. West European HOD volumes increased 18 per cent in 2003 according to analysts Zenith International​, but Danone continues to struggle there as well, taking a charge of €150 million relating to Danone Springs of Eden, its joint venture with Britain's Eden Springs.

The problem in both the US and Europe is that increasing numbers of users are buying their water coolers outright, a much more cost-effective strategy for them but one which means that DS Waters and Danone Springs of Eden are losing out on significant rental revenues.

The market is also being impacted by growing sales of point-of-use coolers, which purify and then chill or heat simple tap water. Growth in this market has been more than 30 per cent a year since 1999 in Europe alone, according to Zenith, and now accounts for over 10 per cent of total cooler placements in Europe.

Tellingly, most of this growth has come at the expense of traditional coolers. "In 2003, some 52 per cent of new POU installations were converted from bottled cooler contracts,"​ said Zenith research director Gary Roethenbaugh, underling the cost-effectiveness of this system.

Growth in traditional cooler sales is not yet over, however. While Zenith predicts a slowdown in northern European markets, this is likely to be more than offset by strong sales in southern Europe, in particular Spain and Greece, and by moves to increase penetration of coolers in homes, where POU coolers are far less likely to steal away market share. "Zenith predicts the industry will reach 2.7 million units in 2008, with volume sales of 2,100 million litres,"​ said Roethenbaugh.