Reference no: EM132166422

Look Before You Leap

Groupe Danone SA, the Paris-based marketer of yogurt, nonalcoholic beverages, and baby foods, has long been a savvy international competitor. Employing 102,000 persons, its sales in 2012 totaled €20.9 billion, 90 percent of which are outside of France, its home country. It is the world’s largest seller of fresh dairy products, and the second-largest vendor of bottled water and infant nutrition products. Like many other MNCs, Danone believes emerging markets—which currently produce one-third of its sales—offer it significant opportunities for growth. Danone has adopted a strategy of allying with local companies to penetrate promising emerging markets. Danone contributes its financial clout, manufacturing expertise, and sophisticated marketing skills to these JVs, and the local partner contributes its knowledge of the host country’s legal system, political process, distribution channels, and the consumption habits of local consumers.

In Bangladesh, for example, Danone created a joint venture with the Grameen Group (see page 564 for a fuller discussion of Grameen). Danone viewed Bangladesh’s 164 million people as an untapped market. Grameen had two different, but complementary goals. It wished to improve nutrition in that country through the provision of healthier foods. It also wanted to reduce poverty by creating new markets for Bangladeshi farmers. To accommodate Grameen’s goals, Danone had to make some changes in its normal business practices. For example, its local factory uses as little automation as possible to maximize job creation, and Danone scientists tinkered with product formulas to eliminate the need for sugar, which would have had to have been imported. Grameen Danone’s first product is low-priced Shoktidoi yogurt (Bengali for “yogurt that makes you strong”), which is fortified with vitamins to overcome nutritional deficiencies in the diet of rural children. Shoktidoi yogurt is made using milk provided by local farmers and is sweetened with molasses made from locally produced dates.

Danone adopted a similar strategy in entering the Chinese and Indian markets. In the former market, Danone established a partnership with Zong Qinghou, the entrepreneur who in the 1980s founded the Hangzhou Wahaha group, a drink manufacturer and owner of one of China’s most famous brand names, Wahaha. Starting in 1996, Danone and the Wahaha group formed a series of JVs—a total of 38 in all—to produce soft drinks, sport drinks, tea, and bottled water. In most of these JVs, Danone had a 51-percent ownership share and Wahaha a 49-percent share.

On paper, these JVs were quite successful; most enjoyed large market shares with significant growth prospects. For example, Wahaha is the largest bottled-water marketer in China, with a 39-percent market share. Danone’s JV with Hangzhou Wahaha and another small partner made Danone the country’s largest soft drink seller, with an 18-percent market share. Its soft drink sales enjoyed annual growth rates between 10 and 15 percent in the past several years.

Despite the market successes of these companies, the relationship between Danone and Hangzhou fell apart. Danone argued that Zong Qinghou, the founder of Hangzhou Wahaha, set up without its permission 20 parallel soft-drink businesses, with cumulative sales of $1.46 billion, which operated outside of the Danone-Hangzhou agreement. Zong did not deny his creation of these parallel companies. Rather, he responded he was forced to do so to protect his rights to the Wahaha brand name and because Danone was not aggressive enough in building and investing in their JV operations. Zong also argued that Danone has been unfaithful as well, investing in other Chinese companies—such as the Mengui dairies and the Hui Yuan company, a manufacturer of fruit juices—that competed with their JVs.

Besides depriving it of its share of the profits, the parallel operations, in Danone’s view, made it impossible to determine if the products sold to consumers were legitimate. Accordingly, Danone sued Zong and Hangzhou Wahaha in Chinese, Swedish, and U.S. courts, alleging they had violated the JV agreement. Danone did not fare well in Chinese courts. Danone claimed its JVs had the right to the Wahaha name. However, when Hangzhou Wahaha first submitted its request to transfer the Wahaha brand name to the JVs as was required by their contract, Chinese regulatory authorities failed to approve it. No reapplication of the request was ever made. Thus, in December 2007, the Hangzhou Arbitration Commission ruled that Danone had waited too long to demand that Wahaha transfer ownership of the Wahaha brand name to their JVs. Subsequent to this ruling, Danone suspended its lawsuits, hoping that the Chinese government would recognize the importance of protecting foreign companies’ legal rights and that the Chinese and French governments would intervene to help settle the disputes. Its hopes for a political solution came to naught. Accordingly, in 2009, Danone chose to surrender: It sold its 51-percent share of the JV to Wahaha for €300 million, ending their dispute.

Danone had the opposite problem in India. Danone and the Wadia family each owned about one-quarter of their JV in India, Britannia Industries Ltd., with the remainder publicly held. Danone preferred to be more aggressive in introducing new products in India. Unfortunately, as part of its agreement with the Wadia family to market foodstuffs there, its 1995 contract stated it could only introduce new foodstuffs in the Indian market with the consent of the Wadia family, which was unwilling to do so. As was the case with its Wahaha JVs in China, in 2009 Danone sold its stake in Britannia Industries to the Wadia family for $170 million.

Case Questions:

1. Grameen Danone is a JV among two companies—the nonprofit Grameen Group and the for-profit Groupe Danone SA. What are the benefits of this JV to each of these companies?

2. Why did each choose to participate in the JV?

3. From the perspective of each of the partners, are there any potential pitfalls to joining this JV?

4. Now consider Danone’s JV in China. What were the benefits of this JV to each of these companies? Why did each choose to participate in the JV?

5. What could Danone have done to avoid the problems it encountered in China and India?