Companies Struggle with Economic and ‘Regulatory’ Inflation: Danone’s LatAm Head

Legislative changes coupled with inflation put pressure on costs across the region, says Silvia Dávila, Grupo Danone’s president in Latin America

A quarter of the company's global workforce is employed in Latin America.
January 27, 2022 | 12:45 PM

Bloomberg Línea Ideas — Silvia Dávila has spent half of her four years as Grupo Danone’s regional head for Latin America working from home, via her computer and Zoom, and things were no different for this interview.

Her responsibility in her post is significant, given that the region represents 9.9% of total sales for the French multinational food producer, and which employs 25,000 people, more than a quarter of its global workforce, across the region, and where her decisions have an impact on all its markets, the largest of which is Mexico, followed by Brazil and Central America.

But the region is not a simple package to manage given that, beyond the ongoing health crisis, many of the countries are also seeing a crisis due to a drop in consumption amid double-digit inflation.

President of Grupo Danone in Latin Americadfd

“I was previously also in charge of Argentina and Uruguay, but they passed those countries to someone else as of January 2021. Danone put our permanence in those markets under strategic review,” Dávila says.


With inflation last year closing at 50.9% in 2021, Argentina (and Uruguay) are now overseen by Juan Garibaldi, who is in charge of finding the best bidder for the three businesses in those markets: water (Villavicencio, Levité and Villa del Sur), dairy products (with the La Serenísima line of products, such as Yogurísimo, Ser, Activia, Cindor, Danonino and Casancrem) and milk formulas (Nutrilón). In total, these businesses employ 5,000 people and have annual turnover of $500 million.

In the case of Brazil, the company’s second-largest market, although sales did not decline in 2020, because the government made millions of reais in payments available, which facilitated consumer spending), sales did fall in 2021 when that government support ended and inflation was close to 20%. The high inflation increased prices to consumers, as the prices of ingredients such as sugar increased by 100% year on year.

“Added to this was the global inflation of plastic prices that affected all countries,” Dávila adds. Brazil generates some 600 million euros a year, with 4,500 employees in the country and four production plants.


Such is the importance of Latin America for Danone Group’s growth opportunities that Dávila is part of a global executive committee of 13, a task force that is in charge of deciding in which direction the company moves, reacting to changes and balancing the regions.

But one thing the pandemic did bring was greater cohesion between the different markets, and which were previously independent and reported their results independently, becoming a network of communicating entities in which, if one market falls, another adjusts its costs to accommodate the numbers, or if something goes wrong in one country, another country takes note so as not to suffer a decline too, Dávila explains.

The capacity for reaction, know-how and what is happening in each of the businesses in each region is monitored in real time and adjusted in real time, she says.

“The philosophy before was to work by segments, by types of products. Now it is not. The theme of proximity to each market is maintained, but the global organization has become a single one,” Dávila says.

This international business model (called ‘Local First’) was one of the first pillars on which the group’s new CEO, Antoine de Saint-Affrique, who took over in September last year, based his management style.

Mexico: Between Breakfast On-the-Go and ‘Flexitarian’

Mexico is the jewel in the region’s crown for the French company, with 16 brands circulating from across all product categories, and of which the biggest revenue generators are Bonafont, Danone, Danup, Activia, Danonino and Silk.

Mexico generates revenues of around 1 billion euros ($1.11 billion) per year, and sales increased by 2% in 2021.


Of that total, sales of bottled water alone generate more than 50% of income. The pandemic brought change to the water business, as the sale of demijohns for home consumption grew in a proportion that almost equaled the drop in consumption by offices and corporations, which were closed due to lockdown, Dávila says.

“They are two businesses, two completely separate operations: bottles and demijohns, both in production, storage and distribution, but we are finding many areas of opportunity and synergies,” she says. Today, demijohn sales contribute 56% of revenues, with 300,000 households served in Mexico every week, while individual bottles of water contribute 44% of revenue.

And what about dairy product consumption? “In Mexico we don’t think of yogurt as a standard of excellence for breakfast at home, for example. If we stay at home, as has happened the last few months, we like something hot better, because our yogurt was the ‘breakfast-on-the-go’ option,” she says. For example, a student will quickly drink a Danup on the way to school, or a Danonino is a mother’s emergency solution to put into her children’s lunchbox. Lockdown led to a change of formats, and the sale of individual options decreased by 20%, while sales of kilo-sized pots grew by 50%.

E-commerce also became a new phenomenon within the company’s distribution formula. While before 2020 it was more of a future project than a sales channel per se, that has changed: with platforms such as Rappi or Cornershop, today 3.5% of Danone’s sales are online, “almost equal to growth for the year”, Dávila says, adding that “this year we want online sales to increase to 6%”.


Another segment in which she is confident there will be growth is vegetable milks, such as almond or soy, a category that grew by 40% in the pandemic. Asked if we are becoming vegans, she says rather it is “a movement known as ‘flexitarian’; that is, those who occasionally consume something vegetarian, and this is the case of Mexico, because we Mexicans have a gene that makes us more intolerant than other nationalities to lactose”.

‘Double Inflation’ in 2022

The pandemic and inflation were compounded in 2021 by the new labeling of all products and beverages in Mexico, as part of new legislation, that warns consumers of high sugar or fat levels. In only six months, Danone’s laboratory had to review and reformulate 170 products to achieve a balance between a lower volume of sugar without losing flavor and attractiveness. And on top of that, during the pandemic it was not possible to carry out focus groups for testing, and alternatives had to be found, such as home delivery of samples.


This change implied costs of between $10-15 million for the company, which in 2021 reduced the volume of added sugar in its products by 53%. “We created the Danonino with the least sugar of the entire group - reducing sugar content from seven to two grams - and that allowed us to keep the mascot on the packaging,” Dávila says. “Today, Danone Mexico’s entire portfolio is the healthiest in the entire group”.

But there are more adjustments on the cards in 2022: in addition to economic inflation, it is already accounting for legislative inflation. On the one hand, a new yogurt formula, and on the other changes related to logistics. Each of the vehicles in the company’s fleet will have to have a waybill that indicates the complete route with a digital reader, for security reasons.

“Between economic and regulatory inflation, we are talking about double what is estimated, that is, almost 15%,” Dávila says.

Also Read: