Labour, sugar and milk likely to keep pressure on inflation and prices, CEO Antoine de Saint-Affrique said.

Danone plans to become more selective on pricing, which will start to “normalise” as inflation eases through the rest of the financial year.

The French dairy giant raised prices by 8.7% in its fiscal second quarter, compared to a 10.3% increase in the opening three months. Volumes, however, fell 2.3%, with a more protracted 3.3% decline in Danone’s essential dairy and plant-based products (EDP) business.

Price rises averaged out to 9.4% across the first half, with volumes down 1.1%, the Activia and Alpro brand owner reported today (26 July).

“Inflation was still high in the first semester. It will be decreasing as we go through the next quarter but there will be still inflation,” CEO Antoine de Saint-Affrique told analysts on a follow-up call after simultaneously announcing a €700m ($774.3m) impairment charge on Danone’s EDP assets in Russia.

Input-cost inflation will still be driven by labour costs, some agricultural ingredients like sugar, and also by milk, especially in Europe, he said.

The Danone CEO was asked during today’s Q&A whether a point had been reached when prices might come down in the context of private-label gaining share in the current cost-of-living environment.

Danone’s pricing strategy was now moving beyond “broad-based pricing discussions” to individual SKUs, de Saint-Affrique suggested.

“Some SKUs are driving our premiumisation, so you start being much more sophisticated in the way you play…using promotion rather than our pricing,” he added. “Inflation is still there. It’s lower, not on everything by the way, but it’s still there.”

Danone finance chief Juergen Esser explained further: “The pricing trend is sequentially coming down. We have price effect to a lesser extent in the next two quarters in front of us, but pricing will stay positive while pricing will normalise.

“When it comes to the impact it will have on our top-line and our bottom-line, it is very important that we have created the conditions over the last quarter, and you can say almost over the last two years, for reinvestment and there will be investments that will help us to restore volume growth.”

Danone’s net sales rose 6.4% in the second quarter in like-for-like (LFL) terms and were up 8.4% over the first six months to reach €14.2bn. Reported sales climbed 2.4% and 6.3%, respectively.

Second-quarter LFL sales in Europe, Danone’s largest market, increased 6.5% to €2.4bn. They rose 5% in North America to €1.7bn and were up 9.6% in the China, North Asia and Oceania reporting region at €954m.

Latin America accounted for €779m and the rest of the world €1.4bn, respective increases of 10.8% and 3.8%.

Danone’s portfolio “sharpening”

“Over the last quarters, we are focused on getting back to category leadership fundamentals,” de Saint-Affrique said. “We have prioritised, metabolically, the key demand spaces we want to play in focusing on health, underpinned by strong functionality, indulgence, kids and everyday nutrition.

“We started sharpening our portfolios again, those four spaces, with less overlaps between brands, rationalised and more focused portfolios. Having clear swim lanes, and a more focused portfolio, enables us to now start reinvesting more assertively in A&P, while making sure all of this is also visible to the consumer through superior shelf execution.”

The CEO added: “We have strengthened the core of the offering, adapting formats and price points to recover volumes and obviously operating leverage, but also, and this is important, to drive brand penetration at a time where some shoppers may start feeling the squeeze from inflation.”

Danone’s recurring operating profit margin in Europe fell 290 basis points in the first half to 10.6% in LFL terms. China, North Asia and Oceania also saw a drop, 107 points, but elsewhere margins rose – 229 points in North America, 291 points in Latam and 127 points for the rest of the world.

European volumes also fell, dropping 4.6% and outpacing the group decline of 1.1%. EDP volumes decreased too for Danone as a whole, down 3.3% in the first six months, while specialised nutrition volumes were up 1.7%.

From a European perspective, Esser said Danone was “progressing with the transformation of our EDP portfolio”, which has “temporarily” weighed on margins.

He added: “With the volume dynamic sequentially improving moving forward, we should have reached now an inflection point for the profit margin of Europe. The overall dynamics of the last weeks and months make us confident that you will see our volumes sequentially improving further, supported by an increased level of investment.”