Danone counts cost of food scare in Asia, shares drop

PARIS - Shares in food and dairy group Danone fell by 3.85 per cent early on Wednesday after a profits warning over the cost of a health scare about baby food in China.

Danone said that a false alert by New Zealand milk product supplier Fonterra, which caused it to recall products in eight countries in the Asia-Pacific region, would cost 280 million euros (S$471 million) this year.

Danone said that the recall would hit sales and its operating margin. The group's shares fell by 3.60 per cent to 51.13 euros. The overall French market was down 0.57 per cent.

Fonterra has said that it is in talks with Danone over how to settle a claim for compensation for the recall.

Danone said that sales this year would now grow by 4.5-5.0 per cent instead of by at least 5.0 per cent as expected previously, and the margin would fall by 0.8 per cent instead of by 0.3-0.5 per cent.

Danone, publishing sales figures for the third quarter, said that sales of baby food had slumped by 13.0 per cent, or by 8.6 per cent on a comparable basis to 924 million euros.

This division of the business had remained a driving force within the group in the previous quarter, achieving a sales increase of more than 10.0 per cent.

Consequently overall group sales in the quarter were flat, or rose by 4.2 per cent on a comparable basis, amounting to 5.259 billion euros.

The head of corporate finance Pierre-Andre Terisse told journalists that overall "this affair is going to cost us slightly more than 1.5 points of growth this year" in terms of sales, equivalent to 350 million euros.

It would also cost 280 million euros in terms of the margin, or gross profit, of which 170 million euros represented the cost of withdrawing products from the distribution channels and actions to re-boost consumption.

The group's priorities were to rebuild stocks in Asia and to reassure consumers, Terisse said, and sales should pick up in 2014.

The problem arose at the end of August when Fonterra said that three lots of the dairy product used to make baby food and products for people doing sport contained bacteria which could cause botulism which in turn could cause paralysis or death.

However, tests showed that the bacterium concerned was inoffensive.

Danone had taken the precaution of withdrawing products in eight markets in the Asia-Pacific region: Cambodia, China, Hong Kong, Malaysia, New Zealand, Singapore, Thailand and Vietnam.