Wednesday
February 15
2012

Josh Cleveland

A Responsibility and a Market: Why Danone May Represent the Future of BoP Business

The “future of BOP business” is a sweeping, flashy claim. Yet Danone’s strategy appears to be different for all the right, non-flashy reasons.

A strict focus on unit economics, clear understanding of the business’ role in social impact, and most of all, direct links between base of the pyramid (BOP) market growth and core business goals set their approach apart.

Eric Soubeiran leads the company’s BOP business efforts as head of Danone’s newly launched BOP Business Unit based in Gurgaon, India. In our recent conversation, Soubeiran described in detail Danone’s trajectory related to BOP markets beginning with the launch of Fundooz, a yogurt product for kids in India. The two variations of Fundooz – Yum Creamy and Yum Chuski – are priced at Rs 10 and Rs 5 respectively.

Soubeiran has not yet proven that Danone’s model for providing nutritious food to C&D consumer segments can be replicated at scale. But our interview showed plenty of reasons – and good old fashioned business sense – to back up expectations that they will.

The Opportunity

Danone is the largest provider of fresh dairy products in the world. In 2010, almost half of their business was in emerging markets. The corporations over-arching goal is to bring health and nutrition to the maximum number of people. It doesn’t take long to see that you’ll need a BOP market strategy to get there and a strong business case to reach scale.

According to Danone, some 200 million Indians in C&D consumer segments live in urban and peri-urban areas with limited access to fresh, nutritious foods. As much of the Indian population adapts to city life, purchasing preferences are changing and fueling a growing market for packaged foods. As anyone familiar with the ubiquity of cookies and chips in India knows, although often affordable, nutrition is not the strong point of much packaged food. Nutritional deficiencies prominently affect Indian children some 70 percent of whom suffer from anemia (WHO) in these areas. Recent research also suggests an increase in rates of obesity amongst Indian children in A&B consumer segments. In Soubeiran’s words, these shifts create “both a responsibility for Danone as well as a market.”

The Product

Soubeiran is quick to note that at 5 Rs and 10 Rs, neither Fundooz product will ever likely be the cheapest in its category. But that’s not necessarily the team’s goal.

Cost is certainly one factor in the equation: C&D consumers are unlikely to pay for Danone’s more luxury yogurt brands such as Activa. Yet catering to lower-income markets requires not only the creation of a lower cost product but also a product capable of symbolizing aspiration and providing high value for money. “The challenge is not to have a product designed for the BOP consumer but rather to have a nutritious product that can be consumed by the maximum number of people,” Soubeiran said. This means developing a product with a high ratio of rupees to nutrition. Danone’s goal is to reach 60 percent of C&D consumer populations in urban and peri-urban areas of India.

Why Danone chose to develop and market Fundooz – a yogurt product – in urban and peri-urban areas is as important for its success as how they sell the product. Soubeiran’s team set themselves up for success by starting with a product they understood, in a geography where they had experience, and by targeting a population where they knew they could achieve social impact.

Arguing that Danone doesn’t understand yogurt would be tough: the company sold over $10bn in fresh dairy products in 2010. Its work in Bangladesh with Grameen initiated by danone.communities provides an adequate base for understanding the BOP, mostly in urban or near urban areas. Despite the buzz about the rural opportunity in India, Soubeiran again chose to begin with what the company knows best. Finally, his team kept this principle in mind when choosing to start with Fundooz, a product targeted towards kids given the clear opportunity for social impact.

The Trajectory

Even with a crystal-clear business case, solid product, and sound strategy, Danone’s work in India hits plenty of roadblocks. We’ve heard it before: few reliable supply chains, roads, distribution networks, and easy market entries exist at the BOP. Companies like Danone often create entire ecosystems to support the launch of a product. The creation of a product ecosystem including everything from manufacturing facilities to last-mile distribution is an approach often described by BOP business practitioners as a necessary component to market entrance and/or creation. Yet as soon as Danone buys all its own trucks, coolers, warehouses, etc., capital intensity goes sky high and soon the price exceeds the reach of the target market. How do you cultivate an ecosystem for producing and distributing yogurt without building everything yourself and driving costs through the roof?

Simply put, to reduce capital intensity the company must form partnerships and work within existing structures. Just how that can be done is part of the secret in Danone’s sauce. There’s no silver bullet to making partnerships happen (although any BOP business leader can tell you stories about times this strategy didn’t work) but it’s a component that Soubeiran thinks can set Danone apart.

The ‘ecosystem approach’ with a focus on reducing capital intensity conveys a deep understanding of a core tenet of BOP business: if the unit economics are not attractive, nothing else matters. “Businesses become obsessed with numeric expansion (to more shops and distributors). We want to expand in a controllable manner without going for volume until we are absolutely sure that the product will turnover and make money for sellers and Danone,” says Soubeiran.

Social Impact as a Business Outcome

One of the beauties of our interview was the lack of development speak. This was a conversation about business, almost strictly so. Yet this is a business that understands the social impact it can create.

The key performance indicators of Soubeiran’s team reflect the business’ need to produce return for shareholders. While Soubeiran measures social impact, capital expenditures are evaluated on the same corporate criteria as in other parts of the company. Social impact comes from doing work well and selling more products. Future investments in the business unit come from showing returns. CSR efforts are confined to several separate (albeit very valuable) departments and initiatives. Through one of those efforts, the Grameen-Danone partnership, Danone learned about the local markets for yogurt in Bangladesh. The company built on its core business strengths through an innovative CSR program that creates real impact. Danone achieved a first step towards successful BOP engagement by bringing quality products to C&D markets through this program. But CSR departments make lousy business units at the end of the day. Danone understands that ultimately the most social impact will come from business outcomes. With Fundooz, if Danone sells more yogurt, more people will be healthy, more will have jobs. It’s so simple, it’s beautiful.

While Danone continues its forward-thinking social enterprise work, the company’s launch of Fundooz creates more potential for social impact than any CSR initiative they could ever pursue.

Moving forward

No one can rightfully claim that any one company has BOP markets entirely figured out. But with Danone’s new strategy and launch of Fundooz, the company earns its place as one of the very small number of corporations that understand the space deeply enough to build what one may justifiably refer to as the future of BOP business.

Categories
Health Care
Tags
multinational corporation, nutrition, pricing