Thursday, 25 October 2012

Can big business sell nutritious food to poor people? The case of Grameen Danone Foods in Bangladesh

By Ewan Robinson

Groupe Danone, the largest global producer of fresh dairy products, has done something unusual for a massive, global food business: it has experimented with selling nutritious foods to very poor people. This move is part of a growing interest in nutrition by big businesses.

If you live in North America or Europe, you’ve probably come across Danone’s products, most likely its yogurts. And the company is increasingly present in developing countries. In 2011, 51 per cent of Danone’s sales came from emerging countries.

In 2007, Danone and Grameen Bank invested a total of $1 million to create a small social enterprise venture in Bangladesh, known as Grameen Danone Foods. Grameen Danone produces a yogurt known as Shokti (Bengali for strength), which is fortified to meet 30 per cent of children’s daily requirements of vitamin A, iron, zinc and iodine. The goal is to increase consumption of these yogurts by children in poor, rural areas of Bangladesh.

Grameen Danone’s business model: It is innovative, but is it successful?
Grameen Danone was designed as a social business: it needed to be profitable, but all profits would be invested back into the business, rather than paying dividends to shareholders. The venture operates a single small factory in the city of Bogra, which was designed to use simple production techniques and minimise costs.

Grameen Danone’s distribution model was unique; it worked through saleswomen known as ‘Grameen Ladies’ to sell yogurts in remote areas where there were few shops or refrigerators to store yogurt. The saleswomen received training on how to promote the nutritional benefits of Shokti yogurt, and earned a commission fee for each yogurt they sold.

Yet despite its innovative features, Grameen Danone struggled both to earn a profit and to deliver nutrition to those who needed it. On the one hand, the venture was unable to secure a reliable supply of cheap milk. When fresh milk prices doubled in Bangladesh in 2008, Grameen Danone was forced to raise the price of Shokti, and sales plummeted. At the same time, sales by Grameen Ladies were low, and the venture operated at a loss.

Grameen Danone responded to low sales by beginning to sell yogurts to wealthier urban consumers, alongside those in rural areas. It used conventional marketing techniques, including TV commercials, to promote the yogurt’s health benefits and the fact that it was a social business.

Urban sales grew quickly, and by April 2010, they made up 80 per cent of Grameen Danone sales. While re-orienting sales had kept the company afloat, it had diverted it from its original purpose of providing nutrition to the rural poor.

Can social enterprise be big enough for nutrition?
Grameen Danone is trying to revitalise rural sales and promote new products for rural consumers. It hopes to double sales to urban shops and triple the number of Grameen Ladies, while using promotional events in villages to increase awareness and demand among the rural poor. The company has introduced a new product, a yogurt-cereal blend with a low price and a 30-day shelf life, to cope with the lack of refrigeration in rural areas.

Ultimately, Danone hopes to attract investment in the social business model to replicate it across Bangladesh.

However, it’s unclear whether the rural portion of the business can be made profitable and large scale. Grameen Danone may contribute to Danone’s efforts to expand its brand presence in South Asia, but how much will it contribute to reducing undernutrition for the poorest people?

The challenge is getting the people who really need nutritious foods to pay for them
The case of Grameen Danone also shows the challenge of convincing people to pay for nutritious foods. It has been pointed out that the rural poor in Bangladesh don’t normally buy yogurt products. Still, yogurt is already a well-established product across Bangladesh, produced by several national firms. If it is difficult to grow sales of a familiar product, introducing entirely new foods may prove even trickier.

3 comments :

Anonymous said...

Muhammad Yunus, the founder of the Greeman Bank, had a great idea in mind; creating profit while simultaneously maximising the wellbeing of those who need it the most. This approach is linked to the idea of the bottom of the pyramid approach developed by Prahalad suggesting that the poverty can be alleviated when companies incorporate the poor into their business models. Both Yunus and Prahalad believe businesses can make profits through sales to the poor. When I first read about these propositions, I did not understand how such business models could function. I mean, the poor live on around $2 a day. How are companies to make profits from products sold to people who have very little disposable incomes? However, once I got to reading a few examples I saw it is somewhat possible. There is this example of Shokti or Hindustan Unilever’s Salt containing iodine. Both products are smart and simple innovations. Therefore, it was interesting to read that Shokti actually didn’t do so well when introduced on the market. What was striking is that it was actually those who were better off that kept up the sales rather than those who perhaps need the product the most. The question of how much this product would help in reducing undernutrition for the poorest people was raised. I think it could have a large impact since the poorest people cannot afford a wide variety of products. Thus if they receive a relatively large amount of nutrients in one small pot, it could increase their nutrition levels significantly. My critique is more related to the business behind the sales. You mentioned that Danone “hopes to attract investment in the social business model to replicate it across Bangladesh”, how are they planning to attract invest if the project didn’t sell well in the first place and their main objective of providing to the poorest basically failed? It cost $1 million to launch the product yet they struggled to earn profits, how is this attractive to businesses? This is precisely my problem with the bottom of the poor proposition; it doesn’t look appealing in terms of profit generation. So how is social enterprise supposed become a widespread attractive model? I do hope Grameen Danone will become profitable and improve the wellbeing of the poorest. Perhaps the products need to be subsidised in the short run to make profits in the long run once the customers learn to like it. Maybe subsidising via price discrimination could work? Those living in wealthier areas would pay more for the product and in turn it will be sold for less in remote, poorer areas. Or maybe the marketing in the poorest areas should improve because it really appears to be a great product.

Ewan said...

Thank you for your useful comment. You capture the key question well: Can businesses make a profit selling to the bottom of the pyramid in the case of nutrition? As you point out, there is a chance Grameen Danone becomes financially sustainable. But will it achieve its social objective of improving nutrition for the very poor?

Your questions about the business model are interesting. Yunus wrote an article about this with some academics from the HEC School of Management, Paris. The article mentions the unique model Danone used to invest in Grameen Danone: "Danone developed another innovation by disconnecting the funding of Grameen Danone from the stock market. The company created a publicly-traded mutual fund with a special mission to give investors social benefits rather than financial benefits and gave Danone’s shareholders the option of joining if they wished." (http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCgQFjAA&url=http%3A%2F%2Fwww.hec.edu%2Fcontent%2Fdownload%2F52956%2F470943%2Ffile%2FArticle%2520LRP%2520Yunus%2520Moingeon%2520Lehmann-Ortega%2520d%25C3%25A9finitif.pdf&ei=6g-hUN38PO6o0AWzyoHgCg&usg=AFQjCNFC4fWEOaUwjYq3eCzTo92GJJVdbA&sig2=rklwOog2OkXbPMCO8aWO2g)

So you are right: Grameen Danone was not attractive to conventional investors. It's unclear where they will find capital to expand the operation.

Your suggestion of a hybrid business model, where the conventional sales subsidize 'bottom of the pyramid sales' is interesting. I can't comment on how feasible this will be for Grameen Danone. You also raise a key question: How can Grameen Danone convince its poorest customers to like its products? And if they do, how can the company distinguish itself from other would-be competitors?

Grameen Danone is a fascinating case. Thanks again for your input.

Young Entrepreneur Association for SMEs (YEAS) said...

From a consumer point of view I would like to note that in Bangladesh this sort of product was not available at all. Amid the low quality and toxic items in the market we welcomed it as some thing nutritious for our kids. Instead of rural it has been popular in urban markets. And price is not affordable for middle class here. Over the last three years it has increased its price more than 300 times! Initially it was offered at BDT8.00 now it has been increased to BDT 25.00. But we love it and think good source of nutrition for our kids.