Danone's upcoming third-quarter sales report may look solid at first glance, but a new analysis from UBS suggests the growth is increasingly coming from higher prices rather than from selling more yogurt, water, and plant-based products. The investment bank expects the French food giant to post like-for-like sales growth of 3.8% for the quarter, slightly below both its previous forecast and the Visible Alpha analyst consensus.
Like-for-like sales growth is a key metric for consumer goods companies because it strips out the effects of currency fluctuations and acquisitions, giving a clearer picture of underlying business momentum. UBS's estimate breaks down into pricing growth of 3.0% and volume/mix growth of just 0.7%. In other words, most of the increase is coming from consumers paying more, not from buying more.
Why the slowdown?
UBS attributes the softer volume growth to a mix of temporary factors. Demand is normalizing after a stronger second quarter in the Middle East and Indonesia, where sales had been boosted by seasonal and promotional activity. Additionally, Argentina is no longer included in the group's results, which removes a source of high inflation-driven sales that had previously flattered the numbers.
This pattern is not unique to Danone. Across the packaged food and beverage industry, companies have been grappling with the challenge of passing on higher input costs to consumers without losing market share. In recent years, many firms have leaned on price increases to protect margins, but that strategy has limits as shoppers become more price-sensitive and switch to cheaper alternatives or private-label brands.
For Danone, the balance between price and volume is crucial. If price increases start to outpace volume growth too heavily, it could signal that the company is struggling to drive genuine demand. Conversely, a healthy mix of both is often seen as a sign of brand strength and pricing power.
What it means for investors
For everyday investors, the key takeaway is that Danone's growth story is becoming more reliant on pricing, which may not be sustainable in the long run. While higher prices can boost revenue in the short term, they can also weigh on consumer demand if competitors hold their prices steady or if economic conditions tighten.
UBS's forecast suggests that the market's expectations for Danone's third quarter are already fairly modest, and the slight miss versus consensus could put pressure on the stock when results are released. However, the bank's view is that the slowdown is largely temporary, which may offer some reassurance to investors who are worried about a more fundamental deterioration.
Investors will be watching Danone's upcoming earnings report closely for signs of whether the volume/mix trend is stabilizing or worsening. They will also be looking for any updates on the company's cost-saving program and its ability to maintain margins in an environment of elevated input costs.
In the broader context, Danone's situation mirrors challenges faced by other consumer staples companies. As seen with Volkswagen's delivery slide and China's car sales drop, global demand is uneven, and companies are having to adapt to shifting consumer behavior. Similarly, Valmont's utility pricing gains show that pricing power can be a double-edged sword when costs remain elevated.
For now, Danone's story is one of a company navigating a delicate balancing act. It needs to keep prices high enough to protect profitability, but not so high that it drives away customers. The third-quarter numbers will give investors a clearer read on whether that balance is being maintained.
As always, it's important to remember that analyst forecasts are just estimates, and actual results can differ. Investors should focus on the underlying trends and the company's long-term strategy rather than reacting to a single quarter's numbers.
