WELLINGTON / PARIS (Reuters)
— French food group Danone
said it would sue wholesale dairy exporter Fonterra and stop buying
products from the New Zealand firm following a contamination scare
that sparked the recall of infant milk formula across Asia.
The world's largest yogurt maker did not say how
much money it was seeking, but it has previously said it wanted full
compensation for what it says were 350 million euros ($476 million)
in lost sales following the recall of the company's Dumex and
Karicare infant formula products.
Danone buys a range of dairy ingredients from Fonterra, but is one
of its biggest customers for milk powder, according to analysts who
cover the sector. Fonterra, which said it would contest the suit
"vigorously", declined to give details on its sales to the French
Danone has said that Fonterra supplied about 16 percent of the milk
ingredients for its baby food business, which accounts for 20
percent of its total revenue.
In August, Fonterra said it had found a potentially fatal ingredient
in a range of products sold by multinational companies. After
recalls were issued across nine countries including China, the scare
turned out to be a false alarm because the ingredient was found to
contain a less harmful bacteria.
In a statement, Danone said it was starting proceedings in the New
Zealand High Court against the world's largest dairy processor, as
well as arbitration proceedings in Singapore to bring all facts to
light and obtain compensation.
The company said it was also terminating its supply contract with
Fonterra and would make any further collaboration contingent on a
commitment by Fonterra to full transparency and compliance with
Danone's food safety procedures.
"This affair illustrates serious failings on Fonterra's part in
applying the quality standards required in the food industry,"
Danone told Reuters it would source products from other firms,
Other potential suppliers could include Glanbia, which is building a
new milk powder plant in Ireland, and Arla Foods, which recently
told Reuters it has "massively benefited" from a desire by milk
powder buyers to diversify supply after the food safety scare and a
drought last year highlighted the risk of over-reliance on one
Some dairy brands in China, for example, have started to look to
Glanbia and Fonterra's much smaller competitors in New Zealand would
not comment on whether they had seen more business from Danone as a
result of the dispute. Arla was not immediately available.
Danone's decision to halt purchases may be an effort to distance
itself from the source of the perceived problem.
"It's all about trying to rebuild their brand," said an analyst, who
added that Danone was unlikely to face any supply interruption.
"This isn't a panic decision today. They've been looking at
(diversifying) since the minute it happened."
Danone has a cushion, the analyst said, since the sudden, sharp drop
in consumer demand means there is a large amount of product that
still needs to be sold.
Fonterra, a farmer-owned co-operative, has denied any legal
liability to Danone regarding the recall.
"Fonterra has been in ongoing commercial discussions with Danone
and is disappointed that they have resulted in legal action," the
company said in a statement.
Shares in Fonterra's trading fund closed down 1.7 percent, while
Danone shares were down 0.7 percent at 1245 GMT.
SETTLED WITH SEVERAL CUSTOMERS
The two sides started negotiations in October, after Danone recalled
its Dumex formula products in China, where demand for foreign
branded infant formula is high due to a series of domestic food
quality issues. It is a key growth market at a time of sluggish
demand in Europe.
Eight companies issued product recalls in August. Danone is the
first to take legal action against Fonterra. In December, Fonterra
said it had reached agreements to compensate six firms and that it
was "very, very close" to an agreement with an affected nutritional
New Zealand's largest company controls roughly one-third of global
dairy exports and is a major wholesale supplier of milk powder used
in milk formula and other food products marketed by Danone, Nestle
and other multinationals.
A big court settlement in Danone's favor would hurt Fonterra's
bottom line given that it has already slashed its earnings and
dividend forecast on the back of rising production costs at a time
when it is struggling to keep up with soaring demand for milk
"A large fine of the magnitude that Danone ... has stated would have
a material impact. You'd have to either remove your dividend or
address your capital structure," said Rickey Ward, head of equities
at Tyndall Investment Management in Auckland.
Ward said that given strong global demand for dairy products,
particularly from China, Fonterra was unlikely to have problems
finding new buyers to replace cancelled orders.
"It's not nice to lose a big customer ... (But) there's large global
demand and short supply so Fonterra may be able to fill that void if
there is a big void," he said.
(Additional reporting by Martinne Geller
in London; editing by Dean Yates and Sophie Walker)