DANONE Mercador 1.

Background information on Mercador

Mercador is a south american country of 145,000 km2, its population stands at 17 million inhabitants, with quite strong demographic growth and a net growth rate of around 1% per annum. The population is divided into three zones: - 20% of Mercadorians live in the capital Mercador City where there is a high concentration of higher socioprofessional grades. However the suburbs also have one million underprivileged people living in shanty towns. - 30% live in the country's nine other medium-sized cities, including one called Montemar. - 50% live in rural areas, either on the northern plain or in the mountain regions in the centre of the country. A World Bank expert recently summarized Mercador's economic situation as follows: "A success story for an emerging country in what has now become a stable region. The national currency (the mercas) is stable and the external debt is at a reasonable level. Inflation will be limited to less than 5% in the next three years with annual growth also running at around 5% per annum. Mercador remains introverted, and still has to open up more to international exchanges. The country's wealth lies in its mineral resources and farming and it should be able to cover its imports with manufactured products. Its geographical features mean that the rail and road infrastructure is not very good and it takes over seven hours to get from the north to the south of the country (300 km). Admirable budgetary priorities for Education, Industry, Health (with special focus on children's vaccination and obesity prevention programmes) and Environment (from June 2007 a restrictive law on industrial waste treatment will allow to tax the most polluting industrial sites) have been stated and emphasized both by the Parliament (elected in 2000 and renewed in 2005) and by the current government." dollar. The country's currency is the mercas whose value is indexed on that of the American

2. General insight and background on your subsidiary in Mercador

The Groupe DANONE recently finalized its takeover of national company, LACTA, in March 2013. LACTA is a household name in Mercador, since the company sells all of its dairy products under this brand. In legal terms, the takeover led to the company to change its name to DANONE Mercador. LACTA produces milk cream, light cheese, yogurt and a traditional national product called "Yolact" (based on curdled milk). Unlike one of DANONE's major international competitors, that has been present in the country for the past four years, LACTA does not produce probiotic yogurts. It is worth to underline that the Groupe DANONE is a leader in this profitable segment in several countries. DANONE Mercador is the leader on its various markets (29% market share in 20012). It has two production sites: a plant with 350 people in Montemar in the north of the country and a second site with 280 people (including 52 people in headquarter) 15 km outside of Mercador City, capital of Mercador. All investments are financed with the cash flow generated by the business due to the high investment rate that makes not viable borrowing funds. Brief background and corporate culture DANONE Mercador is strongly marked by LACTA's past history. This family company has enjoyed remarkable success since its creation in 1948. Until now, all of its products have been sold under the LACTA brand with no reference to the DANONE brand. Initially, LACTA was formed by a cooperative grouping of dairy producers in the northern part of the country where dairy farming remains prevalent. LACTA's national competitor, a subsidiary of a national conglomerate (450 people), is also based in Montemar in the north of the country. In 1960, LACTA had one production site in Mercador City with around 60 people and, besides the dairy basics, its only one star product: Yolact. In 1983, as it grew to employ 200 people and become a source of national pride, LACTA took over its main competitor that was half its size. This competitor was located near Mercador City: this was where the company then set up its headquarters in premises next to the plant. From a management point of view, LACTA has been directed for many years by one of its founders. He is attached to rural values, to stimulating national pride, to the solidarity of employees, to loyalty and to commitment to the corporate growth project. At 69 years old, health problems have forced the founding director to retire and sell the business to Groupe DANONE. His spirited and difficult character meant that he could not find a successor neither in his family, nor in the company.

3. Your executive committee

The executive committee includes five members (men/women): DANONE Mercador Managing Director is a Spanish manager with considerable international experience in Group Danone. He champions Groupe DANONE values and has former experience in marketing. He has just arrived and takes over from the Group's stand-in manager who has run the company for the past six months (since the takeover in January 2005). The Quality Manager reports directly to the Managing Director. The Marketing and Sales Director is one of the Groupe's international managers with an impressive track record. He has very good knowledge of the retail trade through his experience as group leader at one of the Group's prestigious subsidiaries in France. Trained as an agronomic engineer, he also supervises the Product Development team. The Operations Director (Industrial, Supply Chain and Purchasing) is an international executive (career outside of Danone). He was hired in February 2005 to replace the previous industrial director who retired. The headhunter who found him highlighted his ambition and his ability to reason in terms of efficiency and productivity. Originally an engineer, with additional training in management, he really enjoys organizational aspects. In his previous company he had the chance to restructure two production sites, with great success. The Finance Director is a product of the country's university elite. He joined the company in 1997. The previous CEO thought that he might have been right to succeed him but he only wanted to use his talent for management control and finance. With an introverted character, organizational, people and managerial issues do not hold much appeal for him. The Human Resources Director is also a Mercadorian. He has been in the company for over twelve years and does not have any inter-cultural experience. He only speaks the national language and an English that must be improved. He is recognized nationally for his know-how in social relations: he is proud that there have never been any strikes at LACTA. He is strongly involved in the various labor relations networks in Mercador. He is also Vice-President of Mercador's National Association of Personnel Directors.

4. People management
The employee age pyramid is quite well balanced. The company has been careful to regularly hire as it has grown. The men (61%) are in a majority in maintenance and the women (39%) are strongly represented in manual packaging activities, with a lot of operations still being carried out manually. On average, in both plants, 60% of workers are directly involved in production, 20% in logistics, 16% in maintenance and 4% in local administrative tasks. In the headquarters (the same buildings as the Mercador City plant) the staff of 52 people carries out accounting, marketing, human resources and sales tasks. Based on data from the data room during the due diligence phase, we can highlight that: There is basically a paternalistic type management; There is a real disparity between the Mercador City site and the Montemar site that is less modern and whose employees behaviour is strongly out-of-line with that at DANONE: moving fast, being independent, responsive etc. Employees wages are 5% under the local average; There is virtually no staff turnover; There is an insufficient number of real managers in all sites; Careers development are based on years spent in the company instead of competences; Relations with Unions are becoming increasingly tensed due to the lack of dialogue with the top management and the worry of possible restructuring following the acquisition

5. Products and Markets

After particularly high investment in TV advertising and sports sponsorship in the late 90's, the LACTA brand has become very strong locally. It is now one of the top brands in terms of unaided awareness for all ages and socio-professional categories. DANONE Mercador is currently present on four segments:

DANONE Mercador is in the envious position of leader but two competitors immediately follow: a national competitor and an international one. In terms of sales, LACTA also has a host of local competitors who are becoming increasingly aggressive and offering a varied range of inexpensive products. For the first time in its history, DANONE Mercador will have to seriously look at carefully managing its costs. Recently both medical journals and magazines have published articles related to the benefits of probiotics. Market surveys show this can be a high potential segment in the coming years, even if important investment in marketing and industrial facilities are indispensable to launch such products. The Groupe Danone, a pioneer in this field, sells internationally a probiotic yogurts whose volumes increased by 30% in the last three years and margin is close to 28%. Another segment that offers interesting perspectives of growth and a high margin (close to 30%), is the ice cream.

6. Industrial facilities
The industrial performance has not been a priority in the last years when investments were mainly devoted to marketing campaigns. Due to the seasonal nature of the products, we have to admit that the company is working at 40% of its capacity for 3 months of the year. Indeed, since its creation, it has chosen to show its loyalty to employees. In 2010, the age of some equipment caused a minor food safety crisis which was quickly contained and which was not reported in the local press due to the director's excellent relations with journalists. Moreover the workplace accidents rate is increasing year by year in both plants so it is now urgent to address this problem. Two plants separated by 280 km: One is located in Montemar, a town located in the northern rural region, where employment rate is decreasing especially in manufacturing field. From these regional beginnings the previous dairy cooperative managed to develop its business and sell its products throughout Mercador. Less than six months ago, dairy producers expressed their strong misgivings concerning LACTA's takeover by DANONE. They did not want to see prices drop. They were also worried about the new quality requirements for the dairy chain. Some of them even threatened to switch to LACTA's competitor. The industrial facilities have not been modernized since 1988 so the performance is not satisfactory at all. It is also important to mention a small environmental risk related to the water treatment plant that is obsolete. In two years, two minor pollution alerts have occurred with the Rio River turning white for several hours. The other plant is more modern and has the advantage of being located 15 km from the capital Mercador City. Besides the territorial impact of switching Montemar's business to the second plant close to the capital, it was perhaps for emotional reasons that the previous director could not face the task of closing the rural plant in the north of the country.

DANONE WAY
I - DANONE WAY's origins The Groupe DANONE considers that the company's financial performance is closely related to its original culture that has been emphasized from the outset. 1. The cornerstone for this approach can be found in a speech given thirty years ago by Groupe DANONE's founder. It hinged around three main ideas: Asserting a dual commitment to business success and social responsibility in which "sustainable economic growth can only be achieved by developing people". The company's corporate responsibility with regards to its surrounding environment " A company's responsibility does not end at the office door or the factory gate, since its action affects the community as a whole. The jobs it provides are central to people's lives. Their future, and that of their children, depends on the scope for promotion that the business provides. The way it uses energy and resources changes the worldaround us. And in this industrial age the public is there to remind us of our responsibilities." Antoine Riboud, 1972. Groupe DANONE's focus on providing innovative solutions to social and economic change. This corporate concept is at the heart of DANONE's business plan and the Group is careful to recruit managers who are highly professional and who also share its values: "I want Danone to be an innovative business attuned to new conditions while remaining faithful to its values and culture" (Franck Riboud, Chairman and CEO, Groupe DANONE). 2. In 1997, the Group's values were formalized following a participative approach involving a large number of employees: Openness : Diversity is a source of wealth and change is a constant opportunity. Enthusiasm : There are no limits only obstacles to be overcome. Humanism : The attention paid to individuals, whether they be consumers, employees or citizens, is at the heart of all our decisions. Proximity : Know how to stay close to each person in the world: colleagues, consumers and clients, suppliers, stockholders and society, become a part of their everyday lives.