The French food company Danone recently announced that it is seeking a buyer for its Russian business unit producing dairy and plant-based foods, with the sale potentially resulting in a loss of up to one billion euros. Its local operations and the largest dairy brand in the country, Prostokvashino, accounted for approximately five percent of Danone’s revenue in the first nine months of this year. The unit is, in fact, the largest dairy company in Russia, with as many as 12 production facilities and eight thousand employees, Reuters reported.
Danone suspended investments in Russia following the invasion of Ukraine in February, but has now decided to completely exit the country. While numerous Western multinational companies have withdrawn from Russia, food companies have retained some operations there, claiming a moral imperative to feed people.
Nestle continues to import products such as baby food into Russia, while British rival Unilever still owns factories in Russia and previously promised to continue selling essential products. Danone’s shares rose by as much as 1.9 percent in Paris amid a recovery in European stock markets.
Bad Business
It is worth noting that the French company entered the Russian market three decades ago and built its position by acquiring Unimilk in 2010. However, according to Bernstein analyst Bruno Monteyne, the business has not succeeded.
– Running the business has already been very complex, given all the restrictions. At the same time, trying to improve the business is completely impossible – he stated.
The potential sale could be complicated by the fact that Danone sells both domestic and international brands like Activia. We still do not have information on whether the new operator will sell Danone’s global offerings and under what conditions.
The deconsolidation of Danone’s Russian dairy business makes sense and should stimulate its mid-term organic sales growth and operational margin, given that consumers have never been willing to buy its offering of more expensive brands. However, what could attract criticism is the write-off of one billion euros compared to the initial investment of 120 million euros in Unimilk in 2010, which speaks volumes about the scale of capital that has been allocated without a decent return, Duncan Fox wrote for Bloomberg.
Too Big to Leave Russia
With the announcement of its exit from the country, Danone joined numerous Western companies such as Coca-Cola, McDonald’s, Renault, Amazon, and others. However, some companies operating in Russia claim they are too big to leave. This is, for example, the case with the French Mulliez group. Mulliez argues that the enormous Russian exposure of its retail chain Auchan, home improvement store Leroy Merlin, and sports equipment retailer Decathlon gives a unique responsibility to its Russian employees. In fact, Auchan alone employs 30 thousand people in Russia.
A similar stance is shared by the French energy giant TotalEnergies. In a statement on its website, the company explained why it has abandoned measures taken by competitors Shell and BP, who said they would exit the country and sell their assets there. The main factor in the decision to continue trading Russian liquefied natural gas is ‘helping to ensure energy supply for the European continent,’ the statement said.
