DANONE 2003 THE YEAR IN REVIEW

CHINA, HOD, … new frontiers

Interview with : ”T he fastest moving food company”

The world we live in Social responsibility DANONE2003

Contents

Interview with 2 Zigzag

Franck Riboud 4 Interview

10 In focus 4 Corporate governance at

16 Features 16 18 China 20 HOD Groupe Danone— 22 North Africa and the Middle East new frontiers 24 Probiotics

26 Business lines 28 Overview 30 Fresh Products 36 Beverages Our operations 42 Biscuits and Cereal Products in Asia-Pacifi c 48 Asia-Pacifi c 54 The big picture 56 DANONE and social responsibility 58 DANONE and water 48 60 DANONE and health 62 DANONE and globalization

64 Management The world 69 Key fi gures we live in 70 Groupe DANONE worldwide 72 Groupe DANONE performance 54 76 Groupe DANONE and shareholders

THE YEAR IN REVIEW • 1 12 KEY EVENTS IN 2003 12 KEY EVENTS IN 2003

BSN-Gervais Third DANONE Tapping new DANONE merger International potential 30 years on Nutrition Prize in Egypt DECEMBER 2003 The 1973 merger NOVEMBER 2003 The DANONE OCTOBER 2003 Alongside local of BSN and Gervais DANONE, Withdrawal International Prize for Nutrition partner Rachid, DANONE opens initiated under the leadership of from glass is awarded to Dr. Ricardo its first biscuit factory in Egypt. Antoine Riboud (right) and Daniel Brassani from Guatemala’s Located at Borg El Arab, the

Carasso, was built on shared values, completed Universidad del Valle in new site aims to make the JUNE 2003 DANONE sells its 44% interest complementary know-how and recognition of over 40 years’ most of the Egyptian market’s in BSN Glasspack, the company resulting common goals. At the time, the two research into malnutrition in his promise with an initial offering from the merger of the glass container businesses were mainly domestic, country. Malnutrition is a burning of five products adapted to operations of DANONE and Gerresheimer. but the synergies generated by Home and issue for the international local demand sold under the DANONE no longer has any interest the tie-up have demonstrated their community, and currently affects LU Tiger and Prince brands. Office Deliveries in glass, its original business. value over the past 30 years. And expansion in over 800 million people. The BSN—renamed DANONE in 1994—is DANONE Prize, one of the most now present in 120 countries. Europe… prestigious in the field of JULY 2003 DANONE and Eden nutrition sciences, includes an Springs announce plans to award of €120,000 to support set up a joint venture bringing winners’ research. together all their Home and Office Delivery (HOD) business in Europe to create a new market DANONE , DANONE leader. Boasting top positions in number-one Children’s Day 11 countries with special promise, shareholder of DECEMBER 2003 As in 2002, the new business was launched Yakult in Japan DANONE employees in over in September and already holds APRIL 2003 DANONE raises its 30 countries take the initiative around 20% of the total European interest in Japan’s Yakult to 20%. Bolstering to help children suffering from market. In less than ten years, Yakult has played a pioneering role Groupe presence poverty, illness, disabilities or DANONE has moved up to the in the development of probiotics, in Turkey… mistreatment. The priority is number-one place worldwide in a field where it is now number one DECEMBER 2003 DANONE acquires Nestlé’s to provide lasting support for this high growth segment. worldwide. With this unopposed dairy business in Turkey, doubling its sales projects selected by employees move, DANONE becomes the on a market where dairy products are themselves. … the new leader largest shareholder of a leader in very much in demand. At the same time, for HOD in the US dairy products for the Asia-Pacific DANONE buys out the interests of Turkish region. Present in over group Sabanci in the Danone SA joint Children SEPTEMBER 2003 DANONE and 20 countries, Yakult reported venture to take full control of … and the of the world Suntory Limited agree to set up sales of around €1.8 bn in 2003. operations. SEPTEMBER 2003 South Africa a joint venture bringing together US, too comes out on top in the fourth their home and office delivery DECEMBER 2003 DANONE raises its interest annual DANONE Nations Cup, businesses, and by the same in Stonyfield Farm, the US leader for natural a soccer tournament for young token consolidating geographical and organic dairy products, to 80%. DANONE players aged 10 to 11. This coverage. first took an interest of 40% in the company international competition is In November this agreement leads New corporate in 2001, and the new acquisition reflects a showcase for fundamental to the creation of DS Waters LP. headquarters the success of cooperation between DANONE values that include Sales of $800 million place the new OCTOBER 2003 DANONE the businesses. openness, enthusiasm and company first in the US for home management moves into proximity. Two and a half million and office deliveries. modern new premises featuring children from 32 countries took spacious open areas that favor part, sharing their passion for the contacts among staff. The building is located in the heart game. Presided over by the Cup’s of Paris, close to the Opera and sponsor, soccer great Zinedine major department stores. Zidane, the final in Paris drew a crowd of 25,000 including 120 journalists.

THE YEAR IN REVIEW • 3 INTERVIEW INTERVIEW

Franck Riboud, 48, has been Chairman and CEO of Groupe DANONE since May 1996.

Franck Riboud : “Our three businesses hold enormous potential”

With sales reaching new records, D For a start, how would you sum up business in 2003? gains in market share, a steady stream FRANCK RIBOUD: It was a very good year for DANONE, of new products and partnerships and with organic growth reaching 7.2%—our highest in ten years. With that, we posted the strongest growth in our profit margins on the rise, 2003 was sector for the fifth year in a row, which I think shows the effectiveness of our business model over time. Since 1997, right on track. And 2004 is set to bring organic growth has consistently come in it at between more of the same. 5 and 7%, and we have raised operating margin by 40 to 50 basis points on average each year(1). And over the INTERVIEW WITH FRANCK RIBOUD past three years, we have nearly doubled operating PHOTO GRÉGOIRE KORGANOW – MÉTIS/IMAGES cash flow. That is definitely no accident. It rewards the

(1) or 0.4 to 0.5 point (100 basis points: 1 percentage point).

DANONE 2003 • 4 THE YEAR IN REVIEW • 5 INTERVIEW INTERVIEW

strategy we adopted back In this, we can count on two key strengths. First, DANONE’s product innovation. Examples include our energy drink D Over the past year, you made new investments in Home Executive Committee in 1996, which means three proven and unrivalled capacity to bring out a steady flow Mizone, an enormous success in China where it is sold and Office Deliveries the safe of water in jugs. What is Franck Riboud things: of attractive new products. And, second, our ability to as Maidong, and flavored waters in general, which are your approach to this market? Chairman and Chief Executive deploy and adapt winning concepts in the 40 countries benefiting from their position as healthy alternative to n a focus on three businesses— Officer we now operate in. Today, our top performance in dairy sodas and showing very firm growth. Levite, a range of F R: The market for home and office deliveries is the water, fresh dairy products Bernard Hours (1) products is founded on nine basic product concepts, all flavored waters that is contributing to strong growth in fastest-growing segment of the packaged water market. and biscuits—benefiting from Executive Vice-President of them launched or totally revamped over the past ten Mexico, is an excellent example. We have already won world leadership in the field where Fresh Dairy Products an association with nutrition our presence was negligible just five years ago. In keeping years. These already account for 50% of the business Franck Mougin (2) and health to show some of with our usual strategy, we have built strong positions line’s sales, and they are continuing to show sales growth D What about the US? Executive Vice-President the strongest growth in the both on today’s big markets and on those that will drive Human Resources averaging over 15% a year. Fresh dairy products also have food industry. F R: Our water operations there were not big enough growth in the future. So we naturally operate in the US Georges Casala (3) a special advantage that is not often mentioned—since and we had no control over distribution. So we have n a more balanced geographical presence, with greater and Mexico, the world’s two largest markets, and in Executive Vice-President they only keep for a period of 28 days at the most, there teamed up with Coca-Cola on its home turf to continue Biscuits and Cereal Products involvement than our competitors in high-growth emerging Europe, where the sector is expanding rapidly. are no inventories. Which means that they represent one the development of our brands. The price war now raging markets, particularly in China and other parts of Asia. Jean-René Buisson (4) of the only major segments of the food industry with a and rapid rises in sales of Dannon water prove we were But we have also staked out positions in China and General Secretary Indonesia, where big populations and rapidly increasing n local leadership on nearly all the national markets structurally negative working capital requirement. And right, although it is true that sales of have still to Jacques Vincent (5) where we operate, so that in each case we have the that is not just a technical advantage —every extra euro get back onto an upward track. favor for HOD make for very promising potential. Vice-Chairman and Chief Operating Officer resources we need to build for the future. of sales revenue adds rather than demands cash. In Europe and the US, I think we have made the right D Big soft drink makers are now moving onto the water Pierre Cohade (6) Beverages also did very well, with organic growth at choices for expansion in this area. Instead of new acquisi- Leading positions D And Fresh dairy products are still driving growth. How D Executive Vice-President market in Europe. Does that change your way of looking tions, we have opted for joint ventures—with Eden Springs worldwide do you explain this? 9.9%. How far is that attributable to the heatwave in Beverages at things? in Europe and Suntory Water Group in the US. That has Europe? (7) No. 1 in Fresh Dairy F R:Performances from this line of business have been enabled us to rapidly achieve critical mass with practi- Executive Vice-President Products F R: That is a development we had been expecting for a impressive—a real driver. Our worldwide position has F R:Beverages were the other main contributor to growth, cally no cash outlays. And we will also be freer to make Finance, Strategy and long time. And we can certainly be satisfied about the No. 1 in Bottled Water improved steadily from year to year, and our share of with sales up nearly 10% and operating margin signifi- decisions further down the road. Information Systems (by volume) way things have gone so far in Spain—despite the new the market is now higher than the total for our three cantly better. The heatwave obviously gave business in Simon Israel (8) No. 2 in Biscuits competition from the two US soft-drink majors, our Biscuit sales, in contrast, did not grow in 2003. closest competitors. But while our share has risen by Europe a lift, but the weather worked the other way in the D Executive Vice-President and Cereal Products water sales there have remained on the rise and we have How do you see prospects for that business? Asia-Pacific around one percentage point each year, it is still only US and Japan. And the SARS outbreak hit water sales in consolidated our market share. around 18%—which leaves plenty of room for continued Asia for several months. Overall, the structure of growth F R: It is true that business was nearly flat overall, with expansion. And the potential is all the greater since the in water sales thus involved much more than the heat- So we feel reasonably confident and take a fairly serene organic growth limited to 0.4%. But trends were very segment is growing at an annual rate of 4% worldwide, wave. Markets are generally expanding, which naturally view of the future. More specifically, we have no plans to different from one market to the next. In Asia, growth 1 2 3 4 5 6 one of the strongest rises in the food industry. helps, but our growth owes even more to the quality of cut our growth and earnings targets for 2004. is in double digits and performances have been good 7 8

“ We posted the strongest growth in our sector for the 5th year in a row ”.

The 9-member Executive Committee is in charge of operational management at Groupe DANONE.

DANONE 2003 • 6 THE YEAR IN REVIEW • 7 INTERVIEW INTERVIEW

in Russia, Northern Europe, D What about the possible threat of a takeover bid that and health, enabling us to benefit from the continuing where performances have been excellent; China, where the Benelux countries, Greece you sometimes read about in the papers? shift in consumer preferences to this type of product we now have nearly 23,000 employees and growth has and Spain. Things were more on mature markets. been in a range of 10 to 15% in recent years; and, finally, F R: DANONE has been placed among the top five poten- complicated for a variety of regions around the Mediterranean, where we now have tial targets for the past 20 years, so we take rumors And of course we have opened up our businesses to new reasons in Brazil and , leading positions in all countries. with a grain of salt. More fundamentally, my answer is horizons in terms of both products and geography. The the latter our largest single the same as always: our business project has nothing to fresh growth potential that results is already beginning D Do you plan to move ahead with acquisitions and market for biscuits. Generally gain from a tie-up with any other business. Our aim is to to yield benefits. To take geographical expansion alone, alliances? speaking, biscuit markets are Operating confirm the place of DANONE as a leader for growth from in the space of just a few years we have developed a very local, and that means we margin one year to the next, building on the businesses we have significant presence in three new regions, each of which F R: Over the past five years we have been involved in have to take a differentiated approach, with solutions over 50 transactions for a total of more than €7 billion. 12.2% today. We have all the human and financial resources we now contributes around €1 billion to consolidated sales. adapted to local conditions. 11.7% need to do that unaided. On top of that, our business has These are Central and Eastern Europe including Russia, Often narrowly targeted and sometimes very small, 11.1% We will be reporting to our shareholders on that in the everything to do with our form of organization and a these were made to round out our product offerings second half of 2004, when we will be able to give more very special corporate culture. That culture means quick and geographical reach. details of plans to revive growth and earnings. We have responses, flexibility, distrust of unwieldy structures In our core businesses, 70% of contenders are inde- made it clear that we need time. We want our people and no doubt even a bit of anti-conformism. It is very “ Our culture is based pendent, very often family-owned operations. It is only to put all they have into making sure there is a return strong, but could also prove fragile. I do not believe it natural for us to be the prime mover for consolidation to growth—but we also want them to go about their job can be taken over. on quick response in these sectors. 2001 2002 2003 calmly. In this, we can also count on a special strength. We know D You often talk about speedy responses, about staying That is what has been happening for the past few months how to work with local partners, and we feel comfortable on the move. Why do you think that is a special feature under the leadership of the new head of the business line. and agility—we’re with them. We do not necessarily want to take a majority of DANONE and why do you believe it is so important? The aim is to put new life into the market, in particular interest from the start. In our businesses, that gives us a by developing new occasions for consumption, and to F R: We are the world leader in each of our three businesses, quick on our feet.” real edge on competitors, as shown by our rapid success rebuild our lead on competitors. Biscuits clearly have but we are still only a third or a quarter the size of less in North Africa and Middle East, where partnerships have Organic growth their place in DANONE’s business strategy. We must focused competitors operating across been our main form of business in sales, not forget that they are a major driver for growth in a wider range. We cannot go about expansion. Not many companies like for like Asia and offer overall potential for improvement in our things in the same way as they do. know how to operate in this way. +7.2% operating margins. Instead, we look for another type of And, finally, what are your goals +6.0% competitive advantage rooted in our D for 2004? +5.1% D A few years ago you explained how the Thémis project culture. And that is speed—something

for the worldwide deployment of an integrated informa- our competitors find much more F R: It will be another year of tion system based on SAP solutions would help raise difficult to copy. It concerns the pace profitable growth for our model. margins. How far along is that now? of growth in our business, and the way Admittedly, growth in biscuits is we implement strategy and operate likely to remain slack, with a big F R: Thémis is helping us streamline our operating 2001 2002 2003 on a day-to-day basis. And it is part gap between the first and second procedures. As such, it is crucial to the competitiveness of my day-to-day job to clear away half. But that is not going to stop of the Groupe and we expect margin to benefit from potential obstacles and ensure that us from achieving our targets. 2004 on. The first stage in the project was completed we remain agile and on the move. Organic growth should be between rapidly and three-quarters of our fresh dairy product 5 and 7% for the sixth year in a sales are now administered within the system. We are D What do you think about growth row, placing us at the front of the on course to meet our target completion date. prospects for the years ahead? field once again and perhaps leading the industry as a

F R: The potential of our three businesses is enormous. whole. And I am confident that the annual rise in margin D DANONE shares didn’t rise much in 2003. Levels of consumption vary widely from one market should be at the upper end of our target range, which is

F R: I generally don’t comment on share prices. Although to the next, which means there is plenty of room for from 20 to 40 basis points. Earnings per share should be I would point out that DANONE shares have continued them to rise in many countries, including the developed close to double the figure for last year (thus up around to show a healthy premium on the sector ever since we world. To take an example, per capita consumption 10%), provided the dollar does not go on sliding too far adopted our current strategy seven years ago. And I of fresh dairy products is only 5 kg a year in the US below current levels. Finally, we expect cash flow from believe it has never been better deserved, since DANONE compared with 30 kg in France. Which explains how operations to continue to rise. So the adventure that really stands out in terms of potential for profitable we are making rapid gains in the former. We have also started with the launch of the new DANONE seven years growth. chosen to focus on categories associated with nutrition ago goes on. Or, better said, is only just beginning.

DANONE 2003 • 8 THE YEAR IN REVIEW • 9 IN FOCUS Corporate governance at Danone

In 2003 DANONE continued efforts to enhance standards of corporate governance with moves including reinforcement of Board involvement and 10 11 new internal audit procedures.

PHOTOS GRÉGOIRE KORGANOW - MÉTIS/IMAGES 7

8 9

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1 3 6 4

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1 Michel David-Weill • 2 Benoît Potier • 3 Richard Goblet d’Alviella • 4 Jérôme Seydoux • 5 Jacques Vincent • 6 Emmanuel Faber • 7 Jacques Nahmias • 8 Christian Laubie • 9 Jean Gandois • 10 • 11 Umberto Agnelli • (not featured in photos: Hakan Mogren)

DANONE 2003 • 10 THE YEAR IN REVIEW • 11 IN FOCUS

Questions to DANONE Director “The quality of Jean Gandois Audit Committee corporate governance Jean Gandois* PHOTO GRÉGOIRE KORGANOW - MÉTIS/IMAGES Chairman Richard Goblet d’Alviella* D Are you satisfied with the proce- Jean Gandois, head of the Audit Committee, was formerly depends on the Christian Laubie dures now applied at DANONE? Chairman and CEO of Rhône- Compensation Committee Poulenc and Péchiney, and JEAN GANDOIS: I would say they President of the National Council willingness Michel David-Weill are generally very good, and in of French Employers from 1994- Chairman some cases excellent. DANONE is 1997. He is currently the Vice- Jean Gandois* a very fast-moving business. Our Chairman of the Supervisory of supervisory bodies Jérôme Seydoux* Board of Suez. strategy involves a large number Appointments Advisory of partnerships and joint ventures, to think of ways Committee and we have had to adapt proce- Michel David-Weill Chairman dures to the new situation this to contribute.” Benoît Potier* entails. Today these procedures Jérôme Seydoux* are among the most effective I * Independent director know of.

To back up internal control, which is an ongoing process, we major concern of the Committee is n corporate governance, the main developments of 2003 concerned Board activities in 2003 for the examination of 2003 financial statements and related fees, have reinforced internal audit the valuation of intangible assets. the reinforcement of Board involvement following the Board’s The Board held five meetings in 2003, with attendance averaging at the same time approving audit-related fees and non-audit fees. resources, considered that the We have to make regular, in-depth self-assessment at the end of 2002. Directors were asked to 85%. Concerning the reappointment of the Statutory Auditors, whose term examinations of the goodwill on respond to a questionnaire designed not only to assess formal of office expires in 2004, the Committee decided to request proposals team was no longer big enough to I The Board approved annual and half-year financial statements and our balance sheet to see whether procedures but also to identify ways to ensure the genuine involvement from four firms, with those selected to be presented to the Board on deal with a larger, more complex conducted regular reviews of the Group’s financial position, treasury the amounts are justified and of all Directors. There were six main headings: information supplied February 10, 2004. business. and commitments. Meetings featured detailed presentations of major ensure that they are written down to Directors, Board procedures, compliance with regulatory require- So last year we signed an outsourcing acquisitions and divestments, among them the joint venture with Eden Compensation Committee where necessary. ments, relationships between the Board and management, the subjects agreement with KPMG to send joint Springs for home and office delivery of water in jugs (HOD) in Europe, The Compensation Committee has three members, including two discussed, and implementation of related decisions. teams to work in the field. We are And thirdly, there are off balance the joint venture with Suntory Limited in the same business line in the independent Directors. At its annual meeting in February 2003, the also moving ahead with Thémis, an sheet items and their possible Reinforcement of the Board’s mission US, negotiations with Wimm Bill Dann in Russia, acquisition of Nestlé’s Committee approved guidelines for the compensation of DANONE SAP project to ensure consistency impact on our financial state- business in Turkey, strategic transactions in Asia, and the sale of management, in particular concerning criteria for the allocation Board decisions in response to survey findings were implemented during of data throughout the group. This ments. DANONE’s interest in BSN Glasspack. The Board also considered issues of bonuses and stock options. It also defined compensation to be 2003, in particular through amendments to its internal charter dated should be completed by 2006. including Board regulations, variable Directors’ fees, the move to new paid to the Chairman & CEO and the Vice-Chairman on the basis of D How do you think the Audit February 13. The overall effect was to reinforce the powers of the Board headquarters and the Vigeo audit report. Finally, it examined the main results and objectives, and contributed the definition of compensation D What points are particularly Committee could best move and the resources available to it, including: risks to the business and crisis management procedures (1). for the Executive Vice President, Finance, Strategy and Information important for the Audit Committee forward? n Prior consultation of the Board on all major transactions including Systems, who is also a Board member. “Simplicity and transparency are at present? acquisitions, divestments, investments in existing operations and Audit Committee J G:That is a matter of will. The fundamental to a good compensation system,” notes Michel David-Weill, internal reorganization, as set out in the appendix to the Board’s J G: Risk management is definitely Audit Committee must not be The Audit Committee has three members including two independent the Committee’s Chairman. a top item on the agenda. In addi- satisfied to simply listen to what charter. Directors. Its Chairman, Jean Gandois, considers that it has a threefold Appointments Committee tion to the risk facing all major it is told; it has to take a proactive n Five Board meetings to be held each year instead of four previously. mission “to ensure that DANONE’s financial statements reflect underlying Following the arrival of three new Directors in 2002, the Committee, international companies, DANONE approach. I am convinced that the n Earlier and more comprehensive information to be supplied to realities fully and accurately, to assess risks, and to verify the adequacy made up of three members including two independent Directors, met has to deal with the special kinds quality of corporate governance Directors in preparation for meetings. In addition, Directors will be able and proper implementation of internal control procedures.” once in 2003. of risk associated with our busi- depends in large measure on the to obtain information directly from management, in particular through The Committee met four times in 2003, with members all in attendance. nesses, starting with consumer willingness of supervisory bodies Its mission is to put proposals to the Board for the appointment of new an annual meeting with the Executive Committee. In September 2003, At these meetings, it examined proposed consolidated annual and health and food safety. Another to think of ways to contribute. Directors. As regards managers not on the Board, whose appointment is Directors were for the first time invited to the Evian Executive Meeting, half-year financial statements before their presentation to the Board. a matter for the Chairman and Chief Executive Officer, the Committee’s an annual event bringing together 160 top managers from the Group and One meeting was entirely devoted to the organization of the internal tasks is to verify that decisions are properly based and fair in light of its subsidiaries. Finally, an induction program has been set up to assist audit function and proposed outsourcing of certain activities to the criteria applied, and that promotions are not unduly delayed as a new Directors, who are invited to attend Board meetings at subsidiaries KPMG teams. It also discussed plans to ensure compliance with new result of internal constraints. as a means of better understanding Group businesses. French legislation (the so-called Loi de sécurité financière or Financial n A portion of Directors’ fees made dependent on actual attendance Security Act) and procedures for the adoption of International Financial The Committee was charged with the assessment of Board operation at meetings of the Board and Committees. Reporting Standards (2). It reviewed the Statutory Auditors’ audit plan conducted at the end of 2002.

DANONE 2003 • 12 THE YEAR IN REVIEW • 13 IN FOCUS IN FOCUS

Michel David-Weill is Chairman of Lazard-LLC, “ The Board of Chairman and CEO Statutory Auditors 500 members of subsidiaries’ management committees as regards of Lazard Frères Bank and Chairman of the DANONE financial statements are audited jointly by compensation, including the relative weighting of variable and fixed Directors fulfils its Supervisory Board PricewaterhouseCoopers Audit and Mazars & Guérard. In 2003, fees portions and a common policy for allocation of stock options. For of Eurazeo. He is also for the audit of financial statements and due diligence procedures for Executive Committee members, the variable portion may range from on the boards of the acquisitions and divestments accounted for 87% of the total amount; role in directing 40 to 60% of total cash compensation (3). New York Metropolitan Museum of Art and of the paid to these two firms while the remaining 13% related mainly to tax. Compensation policies are designed to meet the demands of business Institut de France The statutory auditors’ services are closely supervised by the Audit (Académie des Beaux-Arts). and supervising the efficiency and match standards for major companies in each market. In Committee. * this, comparative studies of systems used by businesses of similar size Vigeo Audit business (Vigeo ).” and with similar market capitalization in France, other parts of Europe In 2003, the Board charged rating agency Vigeo with an audit, which and in the US provide useful guidance. involved some 50 interviews within the Group and 20 outside to assess and contributes alongside others to the promotion of social and Compensation paid to the nine members of the Executive Committee standards in key areas of corporate governance. These included powers environmental responsibility within its sector and at national, regional is subject to review by the Board’s Compensation Committee (see of the Board and of shareholders and the way they are exercised; and/or international level.” interview with committee chairman Michel David-Weill this page) and the efficiency of supervision through Board Committees, internal Questions to DANONE Director in the case of the Executive Directors is subject to Board approval. In control procedures, relationships with outside stakeholders, and Management compensation policies 2003 payments to the three Executive Directors who are also members Michel David-Weill relationships with supervisory and regulatory authorities. Vigeo rated Management compensation was a hotly debated issue in a number of the Board of Directors were as follows: DANONE 3 or 4 on these points, level 3 meaning that “the business of countries in 2003. The general principles DANONE applies in this PHOTO GRÉGOIRE KORGANOW - MÉTIS/IMAGES assumes its obligations to the full, takes recommendations into due area are simple and consistent. The same set of rules applies to the Franck Riboud, Chairman and Chief Executive Officer: €2,493,960, D Management compensation is D How would you say manage- account and has a firm grasp of the issues”, while level 4 means that nine members of the Executive Committee, the 160 Vice Presidents showing a rise of 3.9% from the previous year. Of this, €990,920 attracting a lot of attention in France ment compensation policies at “the business is actively committed, anticipating challenges ahead, in charge of subsidiaries and major corporate departments, and the represented the fixed portion, which has been unchanged since 2001, and other countries. What do you DANONE compare with those in and the remaining €1,503,040 the variable amount for the year. This think of this debate? other countries? bonus is based on performance relative to objectives defined at the

beginning of the year and relating to key indicators for financial markets MICHEL DAVID-WEILL: I think it is fairly Board of Directors For more information, see the DANONE 2003 Reference Document. M D-W: I consider management such as organic growth, operating margin and earnings per share. normal, especially last year when compensation at DANONE reason- Directors are appointed for Emmanuel Faber Michel David-Weill Hakan Mogren we were living out the aftermath able, and the system applied is three-year renewable terms of Jacques Vincent, Vice Chairman: €1,560,280, showing a rise of 4% n�Born in 1964 n�Born 1932 n�Born 1944 of the Internet bubble. At the simpler and more transparent office. Their average age is 58. from the previous years. This included a fixed amount of €760,000 Three directors are from outside nDirector n�Director n�Independent director beginning of the current decade, than elsewhere. There are three France and eight are independent nShares held: 3 000 n�Shares held: 40,468 n�Shares held: 1,000 and a variable amount of €800,280 for the year. as defined by the Bouton Report, nMember of Supervisory Board, n�Vice Chairman, General Partner, Chairman, Affibody AB businesses found themselves in components: salary, bonus and whose recommendations are being Legris Industries Maison Mazard SAS n�Vice Chairman and Chief Operating Emmanuel Faber, Executive Vice President, Finance, Strategy and competition with others offering stock options. In some companies applied by stages to board members Chairman and CEO, Blédina SA Chairman, Lazard LLC Officer, Astra Zeneca plc n n� Information Systems: €752,800, showing a rise of 5.2% from the in office for more than 12 years. Director, Ryanair Holdings Plc President of Supervisory Board, abnormally high rewards. To I have dealt with, in particular in n n� Jacques-Alexandre Nahmias nTotal compensation in 2003: Eurazeo previous year. This includes a fixed amount of €400,000 and a variable recruit and retain management the US, things are so complicated €752,800 n�Member of Supervisory Board, n�Born 1947 Franck Riboud amount of €352,800 for the years. talent, they were forced to make nStock options granted in 2003: Publicis Groupe n�Independent director that even a financial professional n�Born 1955 30,000 (exercise price €118.15) n�Shares held: 1,384 higher and higher bids themselves. can find it difficult to understand n�Chairman and CEO, Groupe DANONE Jean Gandois DANONE has for several years had a stock-option plan to motivate nOptions exercised in 2003: n�Chairman and CEO, Pétrofrance n�Shares held: 40,372 With the result that compensation how they work. 14,000 (exercise price €77.98) n�Born 1930 Chimie SA selected managers contributing to business development. Options are n�Member of Supervisory Board, n�Independent director n�Director, DANONE SA in general tended to get out of Accor, Eurazeo allocated annually without a discount on the market price. In 2003, the Umberto Agnelli n�Shares held: 2,328 D What is most important for a n�Director, SA, L’Oréal SA, Benoît Potier hand—all the more as everybody n�Vice Chairman, Suez Board allocated options for the purchase of a total 952,425 shares to Quiksilver nBorn 1934 good compensation system? n�Member of Supervisory Board, n�Born 1957 wanted to be at the top in their nIndependent director 1,094 staff members. Full details are set out in the annual report (Form n�Total compensation in 2003: Eurazeo n�Independent director nShares held: 1,000 category. And, of course, there is M D-W: The rules should be clear and €2,493,960 Director, Institut Curie, Vigeo SAS n�Shares held: 1,020 20F) accessible on the DANONE website. nMember of Supervisory Board, n� n�Stock options granted in 2003: n�Chairman of Management Board, Legris Industries question of stock options, which widely known, so that everyone can 50,000 (exercise price €118.15) Richard Goblet d’Alviella Air Liquide SA nChairman, Giovanni Agnelli e are exercised long after they are refer to them. And of course a good n�Options exercised in 2003: 20,000 n�Member of Supervisory Board, C. Sapaz, IFI S.p.A. n�Born 1948 (1) Main risks identified by the Group are described in the Document de Référence filed with the (exercise price €77.98) n�Independent director Michelin French market supervisor COB. allocated, at a time when the system must take performance nMember of Supervisory Board, Worms & Cie n�Shares held: 1,000 Jérôme Seydoux (2) Under the EU regulation referred to as “IFRS 2005”, companies listed in the financial condition of the company into account—which is why there is Jacques Vincent n�Member of Supervisory Board and will be required to use International Financial Reporting Standards for consolidated financial n�Born 1934 may no longer be what it was. All a variable component. It must also n�Born 1946 Bruno Bonnell Statutory Committee, Eurazeo statements from 2005 on. n�Independent director n�Vice Chairman and Chief Operating nBorn 1958 n�Director and member of Audit of that adds up to good reasons be internationally competitive to n�Shares held: 1,016 (3) Fixed and variable remuneration Officer, Groupe DANONE nIndependent director Committee, Suez-Tractebel n�Chairman, Pathé Distribution SAS, * Vigeo is an agency that rates and assesses corporate practices. for debate. recruit and retain the best talent. n�Shares held: 8,000 nShares held: 1,000 n�Executive Director, Sofina SA Pathé Renn Production SAS, Pathé SAS n�Chairman, DANONE Vitapole SAS nChairman of the Board n�Executive Deputy Chairman, n�Director, DANONE SA of Directors, Infogrammes Christian Laubie Chargeurs SA n�Total compensation in 2003: Entertainment SA n�Born 1938 n�Member of Supervisory Board, €1,560,280 nChairman of the Board Director n� Accor SA n�Stock options granted in 2003: and Chief Executive Officer, n�Shares held: 53,692 30,000 (exercise price €118.15) Atari Inc n�Chairman and CEO, Alfabanque n�Options exercised in 2003: 30,000 nMember of Supervisory Board, n�Member, Haut Conseil du Honorary directors: (exercise price €77.98) Eurazeo, Pathé Commissariat aux comptes Daniel Carasso, Honorary Chairman; Yves Boël, Jean-Claude Haas.

THE YEAR IN REVIEW • 15 FEATURES

HOD PAGE 20

PROBIOTICS PAGE 24

CHINA PAGE 18

DANONE’s new frontiers are not only geographic. While markets in NORTH AFRICA AND China, North Africa and the Middle THE MIDDLE EAST PAGE 22 East hold promise for future growth, probiotics and HOD offer scope for expansion worldwide.

PHOTO GETTY-IMAGES

DANONE 2003 • 16 THE YEAR IN REVIEW • 17 FEATURES FEATURES

Maidong is active, urban Beverage of consumers. Bottle the Year in China size was reduced from In April 2003, Robust 800ml to 600ml for launched a new energy drink people on the move, and it Franck Riboud, adviser under the name Maidong in was made slightly sweeter, in to the Mayor of Shanghai 13 Chinese cities. With 100 tune with Chinese tastes. In November 2003, DANONE million liters sold in just eight Another factor in Maidong’s Chairman and CEO Franck Riboud was named months, Maidong can lay a claim success is its distribution through Vice-Chairman of IBLAC*, an China to being the country’s Beverage Robust’s fi rmly established network advisory committee assisting of the Year. Success was due to in China’s main cities.cities. ToTo the Mayor of Shanghai. Set up in DANONE’s ability to tailor a reachach yyoung,oung, ttrend-rend- DANONE set out 1989, IBLAC’s brief is to favor product that began as a New conscious consumers,sumers, the economic and cultural to conquer the Zealand sports drink to the the drink isis alsoalso soldsold development of this city of Chinese market, starting in universitiesies aandnd 13 million people. Committee Chinese market with positioning. In China, backed byby locallocal members are CEOs of major over 15 years ago. Maidong’s vitamin andand nationalnational international companies with content makes it a advertising substantial operations in China, d r i n k fo r campaigns. and the chairman for 2004 is A look back. CEO of General Motors. PHOTOS STÉPHANIE TÊTU, GRÉGOIRE KORGANOW - Franck Riboud’s appointment MÉTIS/IMAGES, DANONE IMAGE BANK as Vice-Chairman illustrates DANONE’s clout in China: the group is clearly one of the leading Western companies in China.

* IBLAC: International Business Leaders’ Advisory Council.

A photo taken in 1983 Soda crackers, addressing the lack stores, these modern retail outlets make up only 20% shows group founder of calcium in local diets, enjoyed of China’s total retail network. Only in major cities in the Antoine Riboud on the rapid success. Another example was east do they account for over half the market, and there Great Wall of China, offering Maidong, a vitamin-enriched energy are a staggering 4 million small outlets nationwide. a slightly bewildered Chinese youngster a spoonful of But our 1991 acquisition of Amoy, a major Hong Kong drink that became a must-have product among young DANONE thus made extension of its distribution networks —a scene many thought incongruous. Yet twenty years on, producer of sauces and heat-and-serve dishes, helped us urban Chinese in just a few months. a priority in 2003. After an initial focus on eastern China, nearly 23,000 of DANONE’s 89,000 staff are Chinese and better understand the habits and preferences of Chinese 2003 key fi gures Inside knowledge distribution of DANONE-brand biscuits was extended to China is DANONE’s third-largest market, with sales of over consumers. And this information shaped our fi rst major DANONE’s expansion in China is underpinned by in-depth the north, the country’s second-largest region in terms ¤ 1,057 bn €1 billion. Proof that vision and determination pay. forays into the market. We focused on high-potential Peng Qin, Chairman, DANONE China: knowledge of this very special market, which combines of cereal-product consumption. The same strategy “ Almost all of our production in China in sales water and biscuit markets through majority stakes and strong national features with stark contrasts: consumers was applied to Robust brand products, now sold in all is for local consumption, not export.” outright acquisitions in beverages (Wahaha, Health 22,572 in some regions have three times the purchasing power major cities—not just in the east—and employees ANONE’s operations in China began in the late and Robust), and two joint ventures in biscuits—one in of those in others. produced by around 30 plants across 1980s with a small and largely symbolic move Shanghai and the other in Jiangmen, near Guangzhou. China The gap is particularly wide between eastern and coastal the country. This approach rounds out is DANONE’s 3rd largest into Guangzhou, one of the few cities open Today DANONE has leading brands in the Chinese water, China, where Beijing, Shanghai, Tianjin, Hangzhou, that used for popular Wahaha, a water national market in sales, to foreign companies at the time. This came and 1st in terms of D dairy drink and biscuit markets, positions built up gradu- Guangzhou and other main cities are located, and brand originating in Zhejiang province through a partnership with a regional dairy—a beachhead number of employees. ally through patient and unrelenting efforts. We spent the rural west. China as a whole, with a population of and now sold in over 2 million outlets set up to observe local conditions and serve as base for several years learning the ropes, then in 1998 opted 1.3 billion, is nonetheless the world’s largest food market through 10,000 distributors. expansion if opportunities arose. to concentrate on a limited number of segments with in volume terms. Wahaha sales have continued to grow The results convinced management that China was not particularly promising potential. Initially, this meant Given the size of the market and the country, we quickly in medium-sized cities and rural areas, yet ready for DANONE’s fresh dairy products. Supplies of focusing on some 30 cities, together accounting for realized that a fi rm grip on distribution was needed to take giving DANONE in-depth market pene- fresh milk and packaging were lacking, as was refrigera- 15% of China’s population and 30% of its wealth. We development to the next level—expanding into medium- tration across the country. The strategy tion for reliable production, transport and storage. Most also streamlined our brand and product portfolio, and sized cities and the rest of the country. While almost has paid off, generating a sharp rise in important of all, consumers were simply not accustomed launched products tailored specifi cally to the needs of 80% of DANONE sales in the western world are made DANONE sales in China, up over 10% full to drinking milk, much less eating yogurt. Chinese consumers, particularly as regards nutrition. through hypermarkets, supermarkets and convenience year despite the SARS epidemic.

DANONE 2003 • 18 THE YEAR IN REVIEW • 19 FEATURES FEATURES

In Europe, 98% of all Mexico—the 19-liter standard DANONE fi rst entered the market in 2001 through water fountains are With a population of 100 million and per-capita a partnership with Pureza Aga, a company in offi ces, with home markets still untapped. consumption reaching 130 liters a year, Mexico present in 16 cities, later moving on to consolidate offers extraordinary promise for bottled water. positions through acquisitions in main centers The market has been growing at an annual rate including Monterrey, Puebla and Tijuana. In 2003, of 6% since the end of the 1990s, with demand business moved up a gear with the launch of driven by a general distrust of tap water. Highly containers under the Bonafont brand—already fragmented, the sector counts around 3,000 local used for DANONE’s sales in small bottles and producers in addition to all major international particularly well placed in Mexico City, Monterrey contenders. and Toluca. With annual sales close to 2 billion A good 90% of sales are in 19-liter garrafones with liters, our group now ranks second on the Mexican a refundable deposit. Three distribution networks home and offi ce delivery market. co-exist, with home deliveries accounting for 52% of sales, offi ce deliveries for 10% and resale for 38%.

marketing, logistics, sales and fi nances are very different. This is in keeping with a growth strategy founded on Thus in China, where the group has eleven factories and World market Convinced of the potential, DANONE went on to local partnerships in HOD. In Indonesia, we remained a three brands—Aquarius in the Shanghai area, Robust in for HOD consolidate its position in the sector, which remained minority shareholder of Aqua for several years before Guangzhou and other main cities, and Health in the south 15% fragmented and dominated by small, independent fi rms. taking control, and business has developed in similar of the country—deliveries from franchised local stores are of annual growth Among our fi rst moves was the acquisition of McKesson ways in Mexico, Europe and the US. By opting for joint made by bicycle rickshaw. Ideally suited to sprawling towns HOD 32% another side Water, an American company with top positions on the US ventures, DANONE has been able to reach critical mass with heavy traffi c, this method is naturally in contrast of total bottled water sales west coast, followed by operations in Mexico—the world’s while at the same time limiting cash outlays and leaving with those applied in California, where hundreds of trucks worldwide and 50% in to bottled water largest water market by volume—and in Argentina. alternatives open for the future. ply the road, with on-board computers calculating and developing countries adjusting delivery schedules on the basis of orders placed 2% PHOTOS GRÉGOIRE KORGANOW - MÉTIS/IMAGES, DANONE IMAGE BANK These were associated with acquisitions in Asia that Now present worldwide, DANONE is well aware that through a call center. In other countries, deliveries as of coolers are installed included Robust and other leading brands in China as home and office delivery is a far such hardly exist, since many customers come to pick in homes in Europe, well as Indonesia’s Aqua, the world’s biggest water from homogeneous market. compared with 50% in the US up water jugs themselves. Previously confi ned to only a few countries, home and business by volume with sales reaching three billion Business models and DANONE is No.1 offi ce delivery (HOD) of water in 15 to 20-liter jugs is liters a year. logistics in Beijing Growth potential also varies signifi cantly from one country in the US, Indonesia, now becoming a global business. In the space of a few are not at all the Europe came later with the acquisition of France’s to the next. The US, for example, is a mature market Turkey, Argentina, Canada years, DANONE has taken the number-one position same as in San and China Château d’eau, followed by a joint venture with Eden Springs expanding at a moderate rate of 3 to 5% a year, although on this worldwide market, expanding a presence that Francisco. of Eden placing DANONE in second place Europe-wide. margins are healthy, whereas in other parts of the world DANONE is No.2 already reaches from Buenos Aires to Jakarta and sales are rising at a swift pace. This is in particular true of in Europe and, from Montreal to Stockholm. We are now ready to take The new entity, named DANONE Springs of Eden, is present since this year, in Mexico Europe, where growth is expected to be in double digits in advantage of new opportunities. in 18 countries and enjoys the top place on eleven high- many markets over the period from 2001 to 2006. growth markets including France, Spain, Switzerland, ANONE’s fi rst steps in home and offi ce deliveries Finland, Norway and Sweden, as well as strong positions Following a period of acquisitions and expansion, DANONE date back to 1994 when we acquired Canada’s on others including Germany, the UK, Italy, and Poland. now aims to make the most of its new size, at the same Aquaterra. Our aim was to test the concept The latest development to date came at the end of time learning from the many different situations in the and better identify the structure of a business 2003 when DANONE joined forces with the Suntory Storage, business and identifying the practices most worth general D transport and very different from the production and sale of water in Water Group in the US to set up a joint venture posting application. In this, our group will be working towards its delivery—logistics small bottles. While there are clearly similarities—the the highest sales revenues of any HOD business in the hold the key to central aim, which is to realize the full potential for growth object in both cases is to bottle and sell quality water—the world. successful HOD. and earnings in home and offi ce deliveries.

DANONE 2003 • 20 THE YEAR IN REVIEW • 21 FEATURES FEATURES

Algeria build up a database of nearly 13,000 retailers. DANONE Djurdjura, set A merchandising department was also set up and sales up jointly with ’s managers hired to reinforce ties to this all-important North Africa and Djurdjura, put in a robust client base. “But wholesalers are also important,” notes performance in 2003, capturing Nader Bassit, head of sales and marketing at DANONE 40% of the market with sales Djurdjura. “And in 2003 we launched HI FI, Algeria’s volumes up over 50%. This first customer-loyalty program, offering discounts to rewarded its fresh approach to our best customers.” the Middle East distribution. To raise its profile with consumers, the company has Traditional outlets—including 50,000 small shops offered to paint wholesalers’ trucks in DANONE colors equipped with refrigerated cases and 900 for free. Initiatives have clearly the rewards wholesalers—account for 98% of DANONE sales in paid off: already 560 out of 900 Algeria. Which explains why understanding these wholesalers work with DANONE of partnership clients’ needs and consolidating loyalty were priorities Djurdjura. in 2003. DANONE Djurdjura opted for direct PHOTOS DALIA BENAÏS, Nader Bassit, communications, launching a quarterly newsletter and GRÉGOIRE KORGANOW - MÉTIS/IMAGES head of sales & marketing sweepstakes drawings based on reply coupons to at DANONE Djurdjura

Strauss in Israel, and Delta and Papadopoulos in Greece. Some are developed especially for one country, as was large stores are the exception and the ability to make As a majority owner or simply the leading shareholder, the case for Moufid budget in Morocco. Others several deliveries a week to the small traditional shops DANONE considers such partnerships the most effective are variations on international offerings such as that are the rule represents a decisive competitive way to win a place for its brands on these markets, bifidus yogurts or Danao, a blend of milk and fruit juices. advantage. Serving thousands and thousands of kiosks, since local operators enjoy unrivaled familiarity Danao was introduced on the Saudi Arabian market stalls and small grocery stores to ensure the visibility of with national markets and business conditions, high unchanged. But the concept was completely overhauled products and proper storage, employees of DANONE and credibility and distribution networks already in place. to match local conditions for its launch in Morocco, its partners have developed a special kind of merchan- In addition, top managers are wholly committed, in where the redesigned product, named Assiri, is sold in dising expertise that has clearly demonstrated its worth. many cases because they themselves are shareholders. single-serve pouches instead of cartons and has quickly Today, sales in the region top €1 billion and are growing For its part, DANONE contributes high-profile brands, become a market favorite. To stay attuned to local habits at double-digit rates, with DANONE brands firmly in production and marketing expertise, and the support and adapt to different tastes, DANONE also develops place and leaders on their markets in most cases. Which of its international network. Getting the full benefit of variations on existing products and even entirely new adds up to an ideal start to make the most of surging

In Algeria as in most this potentially ideal combination nonetheless calls for recipes, such as pistachio-flavored Danette dessert consumer demand driven by population growth and of the region, the bulk a special kind of know-how. cream available only in Tunisia. steady rises in income. of sales are made Markets from Morocco to Turkey, and from Saudi As Flemming Morgan, head of Fresh Dairy Products for Production is always local to allow affordable prices, with through traditional Arabia to Greece and Israel make North Africa and family shops. the region explains, “Many international businesses factories nonetheless meeting our Group’s international the Middle East a promising base for a new stage in prefer to start from scratch, or take complete control standards. This naturally entails large capital outlays, DANONE’s growth. In this region, business develop- of the businesses they buy into so they have free hand. the case for two major projects in 2003. One was the ment is almost entirely through partnerships with But at DANONE we feel perfectly comfortable with construction of a new factory in Saudi Arabia, the largest local businesses. our partners. We know that success hinges on mutual of its kind in the Groupe, with annual capacity for the respect and willingness to listen. That demands personal production of yogurt, milk and leben reaching 250,000 ANONE has steadily built up a network of commitment and flexibility, but it also helps us to act tonnes. The other was the startup of a biscuit factory in partnerships with leading local businesses, quickly and effectively.” Egypt, also to supply local markets (more on page 46). many of them family-owned, around the A key to success is Mediterranean and beyond. They include ONA Fitting in Serving sales outlets by the hundreds of thousands mastering local distribution, D says Flemming Morgan, in Morocco, the Djurdjura dairy in Algeria, Stial and Sotubi The success of DANONE and it partners on these markets Efficient links to distribution networks also make a critical head of Fresh Dairy in Tunisia, Al Faisaliah in Saudi Arabia, Rachid in Egypt, is based on products perfectly suited to local needs. contribution to DANONE’s success in the region, where Products for the region.

DANONE 2003 • 22 THE YEAR IN REVIEW • 23 FEATURES FEATURES Probiotics, the food of the future at DANONE Probiotics will be an important part of health and nutri- PHOTOS STÉPHANIE TÊTU - MÉTIS/IMAGES, DANONE IMAGE BANK V i t a p o l e , tion in the years ahead, all the more as they are perfectly explains: “To attuned to the tastes of increasingly well-informed Some 25 centuries ago, Hippocrates made diet the Yogurt—where probiotics began qualify for the consumers who want food that not only tastes good Probiotics are living micro- organisms, strains often first pillar of health—a view very much in tune with The term probiotics refers to yeast and other living label, but also offers nutritional quality, helping them to live mixed in cultures, that can our cultures have longer, healthier and fitter lives. For Sven Thormahlen, today’s concerns. And new interest in so-called func- micro-organisms that benefit health when eaten in suffi- benefit human health. Today tional foods and nutriceuticals that combine natu- cient quantities. They do this in particular by reinforcing to preserve their DANONE’s head of research, “We are only just begin- some 100 scientists and engi- neers are hard at work at ral compounds with foods for added health benefits intestinal flora, easing digestion and favoring healthy properties unchanged ning to understand probiotics. Work now in progress the Groupe research center, throughout the life of the provides evidence of beneficial effects on some types of have favored the rediscovery of probiotics, a key functioning of the digestive tract. Millions of people over DANONE Vitapole, expanding part of many traditional diets. This is a main focus many centuries have unknowingly been taking probiotics product. And DANONE only selects infection and points to an enormous range of potential our knowledge of how they of research at DANONE, the world leader for probio- every time they eat yogurt. Containing two species of cultures that meet the strictest criteria in terms of applications.” can best be harnessed. tic dairy products. healthy lactic bacteria, Streptococcus thermophilus and safety, stability and health benefits, associated with an Lactobacillus bulgaricus, yogurt is both the oldest form ability to survive in the digestive tract. The vitality of of probiotic food and the most widely favored ahead of the strains throughout product life is fundamental to n many countries, lactic cultures have long kefir, which combines lactic bacteria and yeasts. quality in probiotics.” been considered a source of significant health benefits. But it was not until 1907 that Elie The commercial development of yogurt has since led to Working in close partnership with the scientific commu- Metchnikoff, a Russian scientist working at the the identification of many other cultures with probiotic nity and leading institutions such as INSERM, INRA and I the Pasteur Institute in France, as well as the University Pasteur Institute and later a Nobel-prize winner, effects. This is an essential component of the know-how was able to demonstrate these benefits scientifi- of DANONE Vitapole, the Groupe’s research center based of California, Harvard Medical School, the Beijing Center cally. This led to the development of the concept of outside Paris. The center houses a team of nearly a for Disease Control, and Munich University in other probiotics, or “substances favoring life”. Neglected hundred scientists and research engineers dedicated countries, DANONE research teams put their collection for a time, Metchnikoff’s discoveries have in recent to the identification of bacteria and related health of cultures to good use in clinical studies and observa- years been backed up with a large volume of research benefits—without neglecting the questions of taste and tions conducted over periods as long as five or ten years. to identify and assess the effects of lactic cultures. texture essential to consumer appeal. These help to identify new probiotics with potential for product development. Research expertise at To take one important example, Lactobacillus casei ted his products could help with With his newly acquired DANONE DN-114 001, used in the production of , was the intestinal disorders then so scientific knowledge, he went Over the past 85 years, DANONE selected not only for its taste properties but—even frequent among local children. on to found the Paris-based has built up an unrivaled more—for its capacity to interact with the intestinal DANONE yogurts, distributed DANONE yogurt company collection of more than three tract and reinforce its all-important role as the body’s through pharmacies with the in 1929. DANONE rapidly thousand strains. These repre- first line of defense. No fewer than 15 scientific studies support of the Spanish medical formed close ties to the sent not only an extraordinary now corroborate benefits that include balanced intes- profession, rapidly became a medical profession, interested scientific resource, but also a tinal flora, the vitality of mucous tissues and efficient standard setter. by its focus on bacteriology key competitive advantage. operation of the immune system. Another example is After completing his studies at and medical benefits. Yet in To preserve this unique heritage, the Bifidobacterium animalis DN-173 010 strain used in Isaac and Daniel Carasso the Marseilles Higher School contrast to his father Isaac, storage is naturally subject to the DANONE Bio range—sold under the Activia name in Pioneers in probiotics of Business Studies, Isaac’s who had promoted yogurt as stringent rules. As Jean-Michel some countries. This offers special benefits in terms of Isaac Carasso, founder of the son Daniel Carasso did an a health product sold through Antoine, a probiotics specialist intestinal transit, borne out by eight scientific studies. DANONE brand, began making internship in bacteriology pharmacies, Daniel Carasso yogurts in Barcelona in 1919. He at the Pasteur Institute, took a new tack. He highlighted took his cue from the work of following it up with another taste appeal in advertisements Nobel-prize winning biologist at an Austrian laboratory labeling yogurt “the dessert Elie Metchnikoff, which sugges- specialized in lactic cultures. for trouble-free digestion.”

DANONE 2003 • 24 THE YEAR IN REVIEW • 25 BUSINESS LINES FRESHDA RY PRODUCTS BE ERAGES BISCU TS & With sales up nearly 10%, and operating margin of 13.7% and 15.1%, respectively, the Fresh Dairy Products and Beverages CEREAL PR divisions drove growth in 2003. In contrast, it was a mixed year for C the Biscuits division. Asia-Pacifi c proved our fastest-growing and most profi table region.

DANONE PHOTO-TECH DUCTS ASIPACIFI A

DANONE 2003 • 26 THE YEAR IN REVIEW • 27 BUSINESS LINES OVERVIEW BUSINESS LINES OVERVIEW

Financial indicators— Earnings per share up 5.6%* EPS growth Net profit totaled €839 million, down from €1.283 billion in 2002, reflecting a net exceptional gain of €455 million in the 2002 + 13.2% figure. Stripping out exceptionals, net profit was up 1.3% in 2003. all signs are + 10.9% Earnings per share* stood at €6.45, an increase of 5.6%. EPS: earnings + 10.2% per share, + 8.3% The adverse impact of currency translation was partially offset good fully diluted, by share buybacks representing 3.2 million shares at a cost of + 5.6% excluding €368 million in 2003. exceptional * excluding exceptional items one-time items.

1999 2000 2001 2002 2003

Organic growth averaging 6.2% over the Organic past five years

Organic sales growth of 7.2% growth in sales Consolidated sales came to €13.131 billion in 2003, down 3.1% on €13.555 billion in (at comparable 2002. Changes in the scope of consolidation—principally the disposal of US domestic Capital bottled waters business and Galbani—alone cut revenues by 3.6%. Exchange rate scope) Sound financial position movements also had an adverse impact, with falls in the US dollar, Chinese yuan, investment Net debt rose from €2.269 billion at December 31, 2002 to Mexican peso, Brazilian real and UK pound accounting for another 6.7%. + 7.0% + 7.2% €2.692 billion a year later for a net debt/equity ratio of 49%, € millions 5.6% + 5.7% + 6.0% 5.1% down from 72% at year-end 2001. Capital expenditure amounted to At constant structure and exchange rates, sales rose by 7.2%, the strongest growth as% of Group + 5.1% 4.5% €543 million, equal to 4.1% of sales versus 4.5% in 2002 and 5.1% in DANONE has experienced in the last ten years. Sales growth was particularly robust sales 4.1% 2001. DANONE’s aim is to achieve a structural reduction in the ratio in Fresh Dairy Products (+9.6%*) and Beverages (+9.9%*), while Biscuit sales of capital expenditure to sales, and the fall in 2003 resulted from a were flat (+0.4%*). In geographical terms, growth remained moderate in Europe tight grip on investment projects. (+5.4%*), but was vigorous in Asia (+10.4%*) and the rest of the world (+10.9%*).

* at constant structure and exchange rates 798 737 603 543 1999 2000 2001 2002 2003 2000 2001 2002 2003

Steady growth in operating margin Further improvement in free cash flow Operating Rise in free Free cash flow continued to rise in 2003, reaching €1.149 billion Further rise in operating margin to 12.2% * or 13% more than in 2002. This was due to a reduction in both Operating profit reached €1.604 billion, up from €1.590 billion in 2002. It thus margin cash flow working capital requirement and capital expenditure. Free cash increased for the ninth consecutive year, rising by 48 basis points to 12.2%. 12.2% flow is a key performance indicator for both DANONE and its Changes in the scope of consolidation—mainly the sale of Galbani and bottled 11.7% € millions + 13% subsidiaries, and efforts to enhance it have been rewarded with + 24% waters business in the US—accounted for 21 basis points of this increase. The 11.1% * excluding impact of a near-doubling (+84%) in the last three years. 10.8% + 31% remaining 27 were due to operational improvements. Operating margin rose in 10.5% securitization all regions, from 13.5% to 14.0% in Europe, from 13.3% to 14.3% in Asia and from Continued rise in return on invested capital 6.6% to 8.5% in the rest of the world. Return on invested capital, or ROIC, maintained its steady progress to stand at 12.7% in 2003 versus 11.8% in 2002 and

624 818 1,017 1,149 9.3% in 2001. 1999 2000 2001 2002 2003 2000 2001 2002 2003

DANONE 2003 • 28 THE YEAR IN REVIEW • 29 BUSINESS LINES FRESH DAIRY PRODUCTS BUSINESS LINES FRESH DAIRY PRODUCTS

Sales growth* Operating margin € millions 1999 2000 2001 2002 2003 Sales 5,981 6,530 6,928 6,276 6,185 Growth (like for like)* +5.4% +6.7% +6.8% +9.4% +9.6% + 6.8% + 9.4% + 9.6% 11.4% 12.8% 13.7% Operating income 655 712 790 802 845 Operating margin 11.0% 10.9% 11.4% 12.8% 13.7% Cash fl ow from operations 615 667 742 746 756 Depreciation & amortization 233 259 293 233 193 % of sales 3.9% 4.0% 4.2% 3.7% 3.1% 2001 2002 2003 2001 2002 2003 Capital expenditure 312 308 286 200 195 *like for like % of sales 5.2% 4.7% 4.1% 3.2% 3.1% Employees 22,023 23,692 24,129 20,126 21,266 *at constant structure and exchange rates Fresh Dairy Products:

Fresh Dairy Products reported strong n 2003, business remained buoyant in Fresh Dairy Products, with sales up 9.6% or 10.1% excluding growth once again in 2003. The division infant foods. Since the global market grew by continued its drive to dominate the world Iaround 4%, DANONE’s market share increased as well. The business line accounted for a full 47% of market through strong brands, universal group sales, confi rming the strength of our business model by maintaining growth regardless of geographical association with healthy eating, international region, economic environment and competition.

roll-out skills and local strategy. Both mature and emerging markets buoyant WORLDWIDE CONCEPTS, LOCAL PRODUCTS In Europe, Fresh Dairy Products achieved organic sales DANONE IMAGE BANK PHOTOS YURI ABRAMOCHKIN/GAMMA, DANONE IMAGE BANK growth of 8% full year. Growth was driven equally by

DANONE 2003 • 30 THE YEAR IN REVIEW • 31 BUSINESS LINES FRESH DAIRY PRODUCTS BUSINESS LINES FRESH DAIRY PRODUCTS

Deployed in Annual per capita 18 countries, the Activia 2003 Highlights Sales by region Sales by segment consumption in kg concept is based on (1 kg=2.2 lbs) fermented milk with Display cases active bifi dus culture. raise profi le 22.8 in Western Europe In 2003, sales rose by To increase the visibility of 26 74 92 around 30%. drinkable yogurt, especially 8.8 in Eastern Europe Actimel, DANONE expanded 5.1 in North America its network of refrigerated 8 display cases at point of sale 3.8 in Latin America to 30,000 worldwide. Europe 74 % Yogurts and related 92 % 1.3 in Asia-Pacifi c Rest of World 26 % Infant foods 8 % New markets 4.7 in Africa/Middle East for Activia 4.2 worldwide Sales of Activia (sold as Bio in France) soared to around ¤500 million in 2003. It is now present in 18 countries.

DANONE–Stoneyfi eld Farm: a winning strong start in Saudi Arabia, where the general concept DANONE uses “acceleration units” to identify best combination of bifi dus dairy products was adapted to local tastes with practice, formulate it clearly and distribute it globally. DANONE raised its stake in success. Recipes were altered to include the region’s These teams play a major role in the rapid and successful Stoneyfi eld Farm—a partner traditional fermented milk and the media campaign roll-out of leading products in local markets. Each of choice and number one in the US natural and organic adjusted to refl ect the country’s cultural values. Activia unit is responsible for promoting and developing a market—to 80%. was also launched successfully in Mexico—again tailored particular concept, an approach that ensures concepts to the local market—and in the Netherlands, now one of the world’s most mature markets for fresh dairy mature Western European markets and emerging products. The same strategy paid off handsomely in Petit Gervais aux Fruits markets in Central and Eastern Europe. The business line We achieved drinkable yogurts, launched in Belgium, Saudi Arabia, Petit Gervais aux Fruits (PGF)—a fromage frais product Velouté Fruix—a new maintained and extended its lead in traditional markets, Germany, Argentina and Central Europe in versions aimed at children—has been on the market for over yogurt product with mixed fruit that has been with market share steadying at its record high in France, profi table growth tailored to local conditions. In each case, products made 30 years in fi ve major countries and is now our most adopted enthusiastically by 8% sales growth in Spain and double-digit growth in a substantial contribution to sales growth. international range. Sold in 35 countries, it generates families with youngsters in Germany, Portugal, Italy, Belgium, the UK and Ireland. on all markets, sales of over €750 million through a strategy based on nine countries. The Spanish launch of Danao is another example of In Central Europe, growth accelerated in the second half. tailoring products to regional habits and markets. This successful localization. Made of milk and fruit juice, the Key contributing factors were recovery in Poland on the approach has already enabled DANONE to move into with operating product line was expanded with the introduction of new back of product revamps and new advertising campaigns, infant food markets throughout Eastern Europe and packages designed especially for the Spanish market. It and a very solid performance in Russia, where growth North Africa. In countries where PGF has recently been margin reaching was also positioned as a breakfast product and aimed exceeded 20%. launched—Argentina, the USA, Russia and Turkey, for at children. example—growth has been spectacular. In each case, Momentum in North America remained strong, driven by 13.7%. a strategy of constant innovation and full localization very rapid growth in Canada and a fi rm performance in has proven its worth. And while PGF products carry the USA where, despite a market slowdown in the second different names in many markets—Danonino, Danimals, half, we confi rmed our position as joint leader. The trend Petit Gervais, etc.—they share the same positioning was similar in Latin America. DANONE performed very Adapting global concepts to local markets (fromage frais-style products that well in Mexico and also Argentina, where the group’s Strong growth in the Fresh Dairy Products business line help children grow). All are local Serenissima brand generated rapid volume growth. has a lot to do with our ability to roll out and adapt global promoted by the same cartoon Africa and the Middle East also did well, with fi rm growth concepts very rapidly across a large number of countries. Probiotic Actimel character, a mischievous little in South Africa and spectacular gains in North Africa Concepts playing a major role as growth drivers are has driven growth in all countries dinosaur. and the Middle East. Although DANONE does not yet low-fat products under the Taillefine, Vitalinea and where it is sold, consolidate sales from the latter two regions, they are Ser brands; bifi dus-based products under the Bio and with sales up an increasingly important outlet and source of growth Activia brands; Actimel products; and fromage frais— around 30% in for the DANONE brand. style products for children (Petits Gervais aux Fruits 2003. and Danonino). Last but not least, in all geographical regions, rising sales were accompanied by higher profi tability. Operating In 2003, this strategy’s potential was borne out by margin came in at 13.7%, up 1 point relative to 2002. successful product launches. Activia got off to a very

DANONE 2003 • 32 THE YEAR IN REVIEW • 33 BUSINESS LINES FRESH DAIRY PRODUCTS

Special edition: yogurt sold in traditional stoneware jars celebrates the 1919 birth of DANONE yogurt in Barcelona.

are rolled out rapidly and consistently. It also gives local business line. “It may seem obvious, but this is a real subsidiaries considerable operational autonomy, challenge for products that must be kept refrigerated in Danao, a mixture of milk and recognizing that teams operating at grass-roots level transit and storage, and monitored extremely closely.” fruit juice, achieved sales must have the freedom to adjust concepts to their growth of over 20%. Developing a policy for distributing products to small own market. Given wide variations in taste, a precise Success refl ects the success- retailers was one of the business line’s main priorities ful launch of a smaller carton understanding of each country’s special features is in 2003. This included introducing new systems for in Spain, and the consolida- needed when launching a new product. tion of market positions in optimizing delivery routes and installing compact France and Saudi Arabia. Local focus spurs growth refrigerated display cases in thousands of shops. Which “We want the DANONE brand to be present everywhere, gave the business another resource in its drive to cash in all sales outlets and situations,” explains Bernard in on huge growth potential in fresh dairy products—still Hours, Executive Vice-President of the Fresh Dairy Products underdeveloped in many regions of the world.

Potential in Russia and better understanding of Russian Present in Russia for 10 years, the consumers.” Brands like Activia and DANONE brand is now well-known to Actimel, for example, have been local consumers. A population of 150 successfully tailored to the local No.1 in North Africa market. As a result, says Dwyer, million with increasing purchasing and the Middle East power make this a promising market “sales of both brands have doubled in No.1 in Argentina in which DANONE is making rapid the past 18 months, and are likely to No.1 in the Benelux gains. For Jim Dwyer, Executive double again in the next two years.” Vice-President of DANONE Russia, In 2003, sales volumes rose by 25%. No.1 in Canada “The double-digit growth seen in the No.1 in Spain and the Canary Islands last few years is the result of three factors: a focus on value-added No.1 in Eastern Europe brands, ambitious training programs, No.1 in France No.1 in Italy In 1992 DANONE entered the No.1 in Mexico Russian market by opening a in Turkey shop near Red Square. Today the No.1 company, managed by Jim Dwyer, No.2 in the US has made the DANONE brand Based on volumes sold (yogurts familiar to Russian consumers. and assimilated products)

DANONE 2003 • 34 BUSINESS LINES BEVERAGES BUSINESS LINES BEVERAGES

€ millions 1999 2000 2001 2002 2003

Sales 3,565 4,141 3,796 3,691 3,557 Sales growth* Operating margin Growth (like for like)* +9.4% +8.4% +7.1% +4.3% +9.9% Operating income 440 513 432 464 537 + 9.9% 15.1% Operating margin 12.3% 12.4% 11.4% 12.6% 15.1% 12.6% Cash fl ow from operations 533 537 519 556 583 11.4% + 7.1% Depreciation & amortization 302 302 276 269 234 % of sales 85% 7.3% 7.3% 7.3% 6.6% Capital expenditure 247 395 321 236 208 + 4.3% % of sales 6.9% 9.5% 8.5% 6.4% 5.8% Employees 23,031 31,042 42,556 40,124 39,126 * at constant structure and exchange rates

2001 2002 2003 2001 2002 2003 *like for like ON THE BEAT: HOW DO YOU QUENCH YOUR THIRST? PHOTOS STÉPHANIE TÉTU - MÉTIS/IMAGES

“ I like to eat and drink, but I don’t go overboard. I’m a bit of a fashion victim and

very careful about my fi gure, so I try to stick to basic good habits. My personal formula? A good night’s sleep and lots of water. I’ve always have a bottle of water with me—at the studio or on location—and I drink a big

glass of water every morning when I wake PHOTOGRAPHER, ITALY PHOTOGRAPHER, SANDRINE, 34, SANDRINE, up. It lets me indulge in my mom’s tiramisu every now and then.”

Organic growth was buoyant at nearly 10% n 2003, beverages accounted for 27% of group revenues and generated very strong growth, with sales up 9.9% in 2003, driven by very strong regional at constant structure and exchange rates. Gains were positions (No.1 in Asia, No.1 in Latin America Iall the more striking in that growth was relatively even across all regions and continents, with the summer and No.2 in Western Europe). Equally important heatwave in Western Europe a contributing factor but “ After school, I never know not decisive. True, exceptionally hot weather gave sales where I’ll end up. I like sports, were powerful brands—DANONE now owns a lift in main European markets—in France, Spain, the but I also spend a lot of time three of the world’s top fi ve in bottled water— UK and Germany, this amounted to several tens of just hanging out with my and expansion into new consumer markets. millions of liters over the summer months. But this had friends. In the old days, vending no major impact on full-year performance, not least machines were stocked mainly

PHOTOS DALIA BENAÏS, GRÉGOIRE KORGANOW - MÉTIS/IMAGES, because other events had the opposite effect. These , with soft drinks. But now you DANONE IMAGE BANK included a cool summer in the USA and Japan and—most can get water—and French water at that. Very classy!”

HIROYUKI, 19 HIGH SCHOOL STUDENT, JAPAN

DANONE 2003 • 36 THE YEAR IN REVIEW • 37 BUSINESS LINES BEVERAGES BUSINESS LINES BEVERAGES

Sales by region Sales by segment “ My job keeps me busy, but now that I’m in my forties I’ve learned

38 9,5 to prioritize. And in some respects, 52 9,5 I take better care of myself than 19 43 when I was 20. I’m very aware that

29 I need to stay in shape, if only to keep on beating my oldest son at

Still water 52% 60, Europe 43% tennis!” Asia-Pacifi c 38% Sparkling water 9.5%

OIS, Rest of World 19% Water in jugs 9.5% Ç Other 29% DWhat impact did last service and sales teams. This

RETIRED, FRANCE RETIRED, summer’s European is particularly important when FRAN “ Faced with heatwave have on things get tough, and we held sales? daily meetings to monitor a heat Sales growth developments throughout DOMINIQUE LEVACHER: “ Until just a few years ago, I wasn’t the heatwave. And it paid off: In the four months wave, we was accompanied very careful about food. But times we maintained market share, from June to have changed—expectations, despite the fact that many September 2003, we reacted by However, the most spectacular too—and I’ve become quite fussy consumers traditionally switch by a marked sold several tens of gains came in Latin America, about the quality of what we eat to budget water brands in the millions of liters more adapting where sales jumped 40%. The and drink at home. And I’m the one summer. than in the same rise in our rise was driven by the second- who does the shopping, now that period of 2002. Which Flexibility is also essential... our half recovery in Argentina and, I’m retired.” D may sound like great profi t margin. above all, DANONE’s success D L: Yes, you have to be news, but that kind practices.” in Mexico, where it owns the prepared to review your importantly—the SARS epidemic in Asia, which cut sharply of sudden surge in demand is leading Bonafont brand.

procedures. For example, into bottled water sales in China for several months. , 43, actually very hard to manage. Mexican sales soared nearly 2003 Highlights Inventories became an issue as we stepped up direct deliveries pre-emptive action in the supply HY Robust pace in Europe, Asia and Latin America 40%, due in particular to the early as June, but we still kept to selected hypermarkets over chain, building up buffer stocks

KAT DANONE shakes up Regions where DANONE has traditionally been strong success of Levite, a fl avored ARCHITECT, UK service quality higher than our the summer. We also postponed for customers and securing the Japanese water some projects to prioritize supplies of raw materials and all contributed to growth. Sales in Europe rose 11%, water launched only a market rivals. packaging to cope with higher driven by the key French, Spanish and UK markets, each few months ago that has At the end of 2002, DANONE issues arising from the entered into a joint venture with heatwave. Finally, we took production levels. reporting double-digit gains. DANONE’s share of the already captured some 40% of its DQuite a feat—how did you the Mitsubishi Group and its manage? water market continued to increase in Spain and the UK, market segment. In both Mexico and subsidiary Kirin, the No.3 soft and held steady in France even as main rivals were losing Argentina, DANONE water brands drink in Japan, yet barely present PASCAL RIGAUD: In such excep- Interview ground. Italian subsidiary Italaquae and Zywiec Zdroj in increased market share and strengthened leading in the water market. One year tional circumstances, data later, Kirin’s bottling factory Poland both managed a slight increase in sales despite domestic positions. The only region where sales growth on customer inventory levels Dominique Levacher was completely modernised and continued fi erce competition, while growth in Germany has not yet recovered is North America, where the local water brand Alkali Ion was and tight order management and Pascal Rigaud was hit by new PET deposit bottles. price war in bottled water continued to weigh on Evian. successfully re-launched. As for are crucial. With some big , Japan’s No.1 imported However Dannon packaged water achieved a signifi cant customers, joint procurement Despite the SARS outbreak, sales were vigorous in brand, sales are raising fast. increase in volumes and market penetration, meeting management systems gave us Asia (1), with organic growth of over 10%. This was due Flavored water the main target set by DANONE in 2002 when it handed No.1 in Argentina the information we needed. in particular to a steep 13% rise in sales in China, together represented 6% of division sales Organization was another plus, the management and distribution of this brand over to No.1 in China in 2003. with a strong showing by Frucor, market leader in New since we maintain permanent a joint venture with Coca-Cola. No.1 in HOD in the US Winning innovations Zealand for energy drinks and fruit juice. Growth in Japan contact between customer No.1 in Spain 2003 saw new products including was hampered by the lackluster summer, although the Nor did growth in sales volumes come at the expense of Ser Lime Limon, now the No.2 joint venture set up with Kirin Beverage Corporation in margins. Higher sales were accompanied by a substantial No.1 in Indonesia lime soft drink in Argentina, and 2002 is already starting to pay off. Volvic, Japan’s leading increase in operating margin, up 12.6% to 15.1%. This No.1 in Mexico (1) Evian’s new Renaissance bottle, created in 9 months and a big hit imported water, was relaunched through Kirin’s network rise, achieved despite higher PET prices, refl ects volume No.2 in Germany (2) with distributors. Dominique Levacher, of local retailers and distributors, and saw market share growth, ongoing productivity efforts, the success of No.2 in France Operations Director and rise from 13% to around 20%. And Alkali Ion, a local value-added product innovation and the removal from Pascal Rigaud, Sales Director, No.3 in Italy brand featuring innovative packaging, reported very the scope of consolidation of DANONE Waters of North DANONE Eaux France (1) bottled water strong volume growth. America. (2) still water Rankings based on sales volume

DANONE 2003 • 38 THE YEAR IN REVIEW • 39 BUSINESS LINES BEVERAGES

Focus on Spain and raise market share from 22.5% Annual per capita Several months ago the world’s to 23%.” The unit adopted an consumption top two contenders in soft drinks aggressive promotional policy in (liters) arrived in force on the Spanish the away-from-home market and 101 in Western Europe water market, backed by huge traditional outlets, which account 22 in Eastern Europe promotional campaigns. Aguas for a quarter of the Spanish mar- 69 in North America DANONE España responded ket. The campaign paid off: by the 52 in Latin America through its top-selling local brands end of the year, Aguas DANONE Fontvella and Lanjaron, building España sales volumes were up 9 in Asia-Pacifi c on ties to 700 distributors with 12% on 2002. 10 in North Africa and the Middle East which it had built up long-term Filip Kegels, relationships. “We focused on General Manager 22 Worldwide of Aguas DANONE category management,” explains España, in the Filip Kegels, General Manager of mineral water aisle Aguas DANONE España. “This of a supermarket. enabled us to increase our store presence in the summer of 2003,

Product adaptation and innovation pay off With its Volvic, Salvetat and Taillefi ne brands, DANONE Innovation is a genuine growth driver in beverages, with is a pioneer in this fi eld. several water products introduced in 2002 achieving In France, DANONE Eaux France now controls more very high volumes as of 2003. An example is Ser, than 60% of the fl avored water market, and our other launched in Argentina in 2002. By beverage subsidiaries have copied and adapted its October 2003, the Ser range, which successful business model on their own turf. Examples initially comprised a calcium-enriched include Argentina, Mexico and Uruguay with the Salus still water and a low-sugar, lemon- brand. Thirst-quenching low-sugar water-based drinks and-lime flavored sparkling water, are clearly a promising market. Such beverages—and was already number two in its market. fl avored waters in particular—are set to account for a In Mexico, Levite, a flavored water very large share of beverage sales growth in 2004. launched in 2002, accounted for 20% “These drinks are defi nitely a major source of growth,” of Bonafont’s sales during the year. And says Pierre Cohade, Executive Vice-President of the in France, sales volumes of Taillefi ne business line. “And rising demand bears out our strategy fl avored waters, also launched in 2002, of pushing beyond our original market of bottled mineral more than tripled in 2003. water into new areas such as HOD (2) and flavored DANONE started developing fl avored drinks.” waters in France around 15 years ago, (1) Beverage activities in Asia are described in the Asia-Pacifi c section; see also page 50. and they have gradually emerged as a

KAREN, 40, REAL ESTATE AGENT, USA (2) For a description of the market for water sold in jugs, see HOD article beverage category in their own right. on page 20.

”Appearance counts in my line of work, and I want to look healthy and dynamic. So I work out regularly and watch what I eat—and also what I drink. For me, it’s a lifestyle thing.”

THE YEAR IN REVIEW • 41 BUSINESS LINES BISCUITS AND CEREAL PRODUCTS BUSINESS LINES BISCUITS AND CEREAL PRODUCTS

Sales growth* Operating margin

9.8% € millions 1999 2000 2001 2002 2003 + 2.4% 9.1% Sales 2,822 3,255 3,371 3,232 3,071 9.4% Growth (like for like)* +3.4% +6.4% +0.4% +2.4% +0.4% Operating income 222 282 316 317 280 Operating margin 7.9% 8.7% 9.4% 9.8% 9.1% Cash fl ow from operations 263 315 308 295 232 + 0.4% + 0.4% Depreciation & amortization 154 172 183 155 145 % of sales 5.5% 5.3% 5.4% 4.8% 4.7% Capital expenditure 88 83 93 118 110 % of sales 3.1% 2.5% 2.8% 3.7% 3.6% 2001 2002 2003 2001 2002 2003 Employees 27,849 28,835 30,553 27,361 23,996 *like for like * at constant structure and exchange rates

2003 was a year of transition for n a fairly lackluster overall market, our biscuits busi- ness generated very little growth in 2003, with sales DANONE’s biscuits division. While sales up only 0.4% at constant structure and exchange Irates after a 2.4% increase in 2002. Full-year sales marked time overall, we are now the totaled €3.071 billion, equal to 23% of the group total, BISCUIT CREATION world’s No.2 player in a business which while operating margin eased from 9.8% to 9.1%, hit by lower volumes. Yet these aggregate fi gures mask wide AT DANONE VITAPOLE, still has major potential, as shown by good differences from one country and market to the next. For DANIEL CARASSO biscuits are a market shaped by local preferences—more results in several countries and regions. so, perhaps, than any other segment of the food industry. RESEARCH CENTRE PHOTOS JEAN-CLAUDE AUNOS/GAMMA, And consumer habits vary widely, with tastes heavily PHOTOS STÉPHANIE TÊTU - MÉTIS/IMAGES DANONE IMAGE BANK infl uenced by cultural tradition. Thus the French market,

DANONE 2003 • 42 THE YEAR IN REVIEW • 43 BUSINESS LINES BISCUITS AND CEREAL PRODUCTS BUSINESS LINES BISCUITS AND CEREAL PRODUCTS

Annual per capita consumption (1 kg = 2.2 Ibs) 7 in Western Europe 2.2 in Eastern Europe The division’s 7 in North America where cookies are a tasty snack, has little in common S ale s b y r egion S ale s b y s egmen t increased, all Asia-Pacific countries generated double- 4.7 in Latin America with India, where biscuits are often seen as a staple objective is to digit growth. Sales rose 11% in India, more than 20% 0.9 in Asia-Pacific food. Closer to home, France has little in common with in China and over 30% in Indonesia, where a strategy 10 2 in North Africa Italy, where most cookies are eaten at breakfast, dunked revive growth based on developing nutritious yet inexpensive products and the Middle East 76 16 is particularly well-suited to consumer expectations in milk. 6 2.5 19 2.2 Worldwide and increase and needs. Wide variations 11.5 5 DANONE is well aware of the market’s potential in certain This variety explains some of the variations in perform- profitability. areas, and is continuing to invest to make the most of it. ance from one country to the next. Some markets were on E ur ope 76 % S w ee t bis c uit s 6 2.5 % In Egypt, for example, we have just launched products a firm growth trend—the case for Belgium and Spain, and S a v ory bis c uit s and pr oduct s 10% No.1 in Belgium Asia-P acific 19% under the Tiger and Prince labels, made locally in a above all Greece and Finland, with DANONE increasing R e s t o f W orld 5 % Crispbr e ads and cr ack er s 16 % No.1 in China (1) back in the UK, which accounts for 8% of DANONE’s total brand-new plant that opened in October (see opposite). market share in the latter. Eastern Europe as a whole P ack aged c ak e s 11.5 % No.1 in Eastern Europe biscuit revenues. They also declined across the board In Russia, DANONE negotiated the acquisition of Chupa made a stronger showing than in 2002. In the Czech in France, which accounts for almost 40% of total No.1 in France Chups’ rolled-cakes business in late 2003, signing the Republic, conditions remained difficult for market leader business line sales, although LU maintained its number-one No.1 in India agreement in early 2004. Bolshevik previously had position with a 34% market share. Opavia, and the market was also tough in Poland, although little exposure to the soft cakes segment—one of the No.1 in New Zealand LU did better than in 2002. The main driver was Russia, Strong growth potential fastest-growing areas of the Russian market—and this No.1 in the UK and Ireland where DANONE’s Bolshevik brand reported growth of Yet the biscuit business continues to show strong poten- acquisition should underpin its rapid growth. No.2 in Argentina almost 20% with very promising prospects. Operations tial, with demand in some regions outstripping growth in The challenge facing the business line is to return to No.2 in Brazil in Argentina were also encouraging, as sales volumes got other segments of the food industry by a wide margin. growth. And rising to this challenge is naturally very No.2 in Italy back on a steeply rising track in the second half. Thus in the Asia-Pacific region (1) as a whole, division sales were up no less than 10.5%. With the exceptions important in France, DANONE’s largest market. As a (1) DANONE is the No.1 brand Stepping back, slack overall growth in 2003 was due result, Georges Casala, who became the business line’s new in the country of Malaysia, where we started to streamline our brand Rankings based on sales volume above all to slowed pace in a few key markets. Sales fell portfolio, and New Zealand, where competitive pressure executive vice-president in the autumn of 2003, has also

D ANONE i n E g y p t b i scui t i n d u str y i s f rag m e nted , cam e o n strea m i n O c tob e r I n O c tob e r 2003, D ANONE with no single national leader, 2003, a l rea d y h a s a p rod u c t i o n ent er ed the E gyptian bis cuit rat h e r a h ost of s m a l l capa c i ty of 1 0,00 0 m et r i c ton s m a r ket, o p e n i n g a p l a nt a t Borg com pa n i es m a k i n g often l ow- a n d e m p l oys over 200 p e o p l e E l -A rab n ea r q u a l i ty p rod u c ts. tr ained at L U’ s Mor oc c an plant s A l exan d r i a . To e n s u re t h e s u ccess of i ts a n d o n s i te by D ANONE e xpert s . E gypt is a y outh ful m ove i nto t h i s n ew m a r ket, i n “D ANONE i s n ow set to d e p l oy c ountry with 7 0 2 00 2 D ANONE signed a i ts strateg y i n Egy pt, l a u n c h i n g m i l l i o n i n h a b i tants a n d pa r t n e rsh i p a g ree m e nt w i t h pr oduct s that ha v e pr o v en l ow b i scui t p e r cap i ta Egy pt i a n com pa ny Rac h i d , t h e m sel ves i n ot h e r e m e rgi n g c onsumption—jus t setti n g u p a j o i nt ventu re cal l e d m a r kets—I n d o n esi a a n d I n d i a , 1.2k g a y e ar c omp ar ed D ANONE- M a s h req . A n d to for exam p l e. We w i l l b e ba c k i n g A t D ANONE V it apole , our w i t h a n averag e g u a rantee o u t p u t m e et i n g t h e m w i t h h eavy a d ver t i s i n g ,” c orpor at e r e s e ar ch c en tr e , t e ams ar e de v eloping 2 kg for t h e reg i o n . D ANONE’ s high s t andar ds , w e not e s Chafiq Hammadi, plant ne w bis c uit s and t e s ting And mark e t pot ential o pted to b u i l d a n ew p l a nt n ea r m a n a g e r of D ANONE-Mashr eq lar ge-s c ale pr oduction— with i s con s i d e rab l e : t h e A l exan d r i a . Thi s fac i l i ty, w h i c h (phot o oppo sit e ). no lo s s o f nutritional v alue and t as t e—on a pilo t line .

DANONE 2003 • 44 THE YEAR IN REVIEW • 45 BUSINESS LINES BISCUITS AND CEREAL PRODUCTS

been directly in charge of LU France for several months. will lead to greater focus, and forms part of a revival plan The company’s industrial reorganization is now complete, that includes a firm grip on costs, stepped-up marketing and 71% of employees affected have already been trans- and a major quality drive. “Today, our line’s aim is to achieve ferred. As a result, staff can once again focus on growth renewed growth,” says Georges Casala, “and to start raising targets. To achieve these, DANONE has introduced a new profitability again as of the second half of 2004. organization based on three business units, each a profit (1) Biscuit activities in Asia are also described in the section on our Asia-Pacific 2003 Highlights center dedicated exclusively to one market segment. This business line. Europe Industrial reorganization aimed at reducing surplus production capacity in Europe was well on its way to completion at the end of 2003. 86% of employees affected had already been redeployed, and redevelopment options were Breakfast: the perfect specifically for In the last few years, either identified, in the course time for biscuits breakfast time, we have also made of being introduced, or already Long neglected in many based on the inroads in Eastern Europe, up and running, for all sites countries, breakfast has concept of long- starting with Hungary, concerned. In Calais, the Groupe has created 500 jobs. regained its status as a vitally lasting energy Russia, Poland and the Indonesia important meal in the last few (LLE) products. Czech Republic. In the Launched in 2002, Susu (milk years, underpinned by These comply with Czech Republic—Europe’s in Indonesian) is the first milk nutritionists’ campaigns. strict nutritional third-largest biscuit biscuit that makes up for calcium Cereal-based products are a guidelines to market per capita— deficiencies. It helped the Biskuat brand achieve record growth in particularly healthy way to get ensure consistent DANONE subsidiary Opavia 2003. the day off to a good start, content, give owns the market-leading Bebe Finland making biscuits the perfect consumers a gradual and long- Dobre Ranno brand. Bebe Dobre LU Finland is reaping the benefits breakfast food. In some lasting release of energy Ranno holds 90% of the market of restructuring, introduced in countries—Italy, for example— throughout the morning. LLE segment, and has just launched 2003. With a rise in advertising and promotional expenditure, breakfast already accounts for products have been launched new flavors (including muesli and sales of Domino, LU Finland’s most sweet biscuits sold. successfully in France, and are four-grain) that have further largest brand, have taken off Catering to this segment, also being developed in strengthened its positioning as and consumer recognition of the DANONE has developed a brand has been strengthened. Belgium, the Netherlands, Italy a supplier of products for health- category of products intended and Spain. conscious consumers.

DANONE 2003 • 46 BUSINESS LINES ASIA-PACIFIC BUSINESS LINES ASIA-PACIFIC

Sales growth* Operating margin

+ 6.5% + 10.2% + 10.4% 11.9% 13.3% 14.3%

2001 2002 2003 2001 2002 2003 *like for like PACIFIC BEHIND THE SCENES PHOTOS STÉPHANIE TÉTU - MÉTIS/IMAGES STÉPHANIE PHOTOS A SUCCESS STORY—

€ millions 2001 2002 2003 In 2003 sales in the Asia-Pacific sia-Pacific, which accounts for 15% of Groupe sales, is a special market for DANONE, forming Sales 1,934 2,080 1,957 region once again posted organic a distinct business unit with its own manage- Growth (like for like)* +6.5% +10.2% +10.4% ment team. This decision was made a decade Operating income 231 277 279 growth of over 10%. Growth that was A ago to take into account the region’s highly specific local Operating margin 11.9% 13.3% 14.3% also highly profitable, with operating characteristics and gain a tighter local grip on opera- Cash flow from operations 261 293 299 tions. And it has proven its worth, becoming one of the Capital expenditure 128 152 126 margin in the region exceeding the reasons why DANONE is so successful in Asia-Pacific. In % of sales 6.6% 7.3% 6.4% Groupe average for the second time. response to development and continuing growth poten- Employees 44,218 41,961 40,960 tial, DANONE bolstered the local management team in * at constant structure and exchanges rates PHOTOS GETTY-IMAGES, AFP, DANONE IMAGE BANK 2003 by appointing three new executive vice-presidents,

DANONE 2003 • 48 THE YEAR IN REVIEW • 49 BUSINESS LINES ASIA-PACIFIC BUSINESS LINES ASIA-PACIFIC

Sales by country as % of regional sales Two of these measures anti-virus mask and group momentum from July,

13 —a daily temperature exercise sessions on their particularly in beverages. check on arrival at work premises. They remain “The SARS epidemic 14 and anti-virus protective prepared to reintroduce seriously disrupted our 59 one for each of our three product categories. 2003 Growth driven by China 14 clothing—remained strict measures if needed. activities in China,” says marked a new advance in DANONE’s drive in Asia. Another welcome development has been consistently compulsory until June. At And when three isolated Simon Israel. “We had to Not only were sales strong—up 10.4% organically—but strong performance throughout the region and across the peak of the crisis, cases of SARS were cope with an economy operating margin (14.3%) was higher than the group all product categories. All countries contributed to China 59% DANONE even banned diagnosed in China in that was paralyzed for Malaysia-Indonesia 14% average (12.2%) for the second year running. This is growth, particularly China, India and Indonesia, which China: Combating employees from travelling January 2004, all several weeks. But during India 14% especially good news given that, until recently, many are DANONE’s main priorities. And although the SARS SARS within China and abroad, employees were again this period, we did a lot of Australia-New Zealand 13% observers regarded Asia-Pacifi c as a major source of epidemic weighed on sales for several months and led In 2003, like all companies and suspended supplier required to check their thinking about how to Excludes Evian-Volvic exports to Japan growth, but one that would be slow to deliver profi ts. to mixed results in the second quarter, it was offset by a operating in China, visits. Some staff were temperature before optimize our organization, sharp rebound in Chinese business in the third and fourth DANONE had to deal with allowed to work from coming to work. Today, and this allowed us to quarters. Sales in China totaled more than €1 billion the SARS* epidemic. Our home part-time, to avoid seven months after the streamline our cost base in 2003, and the country continues to drive growth. fi rst concern was to travelling on public offi cial end of the and production capacity. Performance was boosted by product innovation and protect staff and their transport. We also epidemic, none of So we were able to take successful launches including Maidong energy drink families. When the launched a campaign to DANONE’s 23,000 full advantage of the inform staff about the Chinese employees have upturn in activity in (see page 19), confi rming the emergence of new local epidemic began in January 2003, DANONE disease and provide been infected, and staff the third and fourth consumer trends. For the Chinese market is changing immediately introduced personal hygiene advice. commitment has never quarters, as our fi gures rapidly, leading to increasing segmentation of the product strict measures to protect Our local companies also wavered. As a result, demonstrate.” range. Consumers are now looking for different, more those working for its raised morale by holding DANONE was able to sophisticated products, and are increasingly prepared subsidiaries. competitions for the best resume its strong growth * Severe Acute Respiratory Syndrome to pay a premium for products that offer a genuine benefi t. Local brand Wahaha maintained its lead in China, and found a new source of growth in the tea drinks and fruit-juice segment, complementing lactic acid beverages (LAB), which are popular milk and water drinks. China, India, DANONE also leads the Chinese bottled water market. Alongside beverages, biscuits are the other main source of and Indonesia— India, Indonesia and New Zealand No.1 in bottled water DANONE’s Chinese growth. Biscuit sales grew by around China Biscuits sales also showed a vigorous rise in India all priority No.1 in energy drinks and Indonesia. Volumes continued to grow at a rapid New Zealand pace in India, where Britannia is the leading brand, but countries No.1 in bottled water surged by over 30% in Indonesia. DANONE’s strategy in Indonesia Indonesia is based on offering affordable biscuits with No.1 in biscuits in the region clear health and nutritional benefi ts. Biskuat—meaning India Sales by segment as % of regional sales “strong biscuit” in the local language—is distributed No.1 in biscuits contributed through more than 600,000 outlets and extended its Malaysia lead in this segment. No.1 in sweet biscuits New Zealand 28 to growth. DANONE also owns Aqua, Indonesia’s leading pack- No.1 in biscuits 68 aged water brand in volume terms. Bottled water sales China 20% in 2003, and here too, growth was driven by product 4 continued to rise in Indonesia despite slower sales of innovation and a focus on new areas of demand among water in large jugs. the middle classes. DANONE is working hard to meet Water (1) 68% increasing demand for products with high nutritional In New Zealand, stiff competition prevented Griffi n’s—the Biscuits and cereal products 28% value, a fundamental consumer trend in the region. country’s leading biscuit maker—from raising sales. Heat-and-serve The “healthy enjoyment” positioning of DANONE’s However, Frucor, which leads the market for energy dishes/sauces 4% range is ideally suited to this trend, giving us a major drinks and fruit juices, achieved sales growth of around (1) including non-alcoholic beverages competitive edge. 15%. This strong showing was driven mainly by product

China, where growth in household consumption is increasingly rapid, represents 59% of the region’s sales.

DANONE 2003 • 50 RAPPORTTHE YEAR D’ACTIVITÉIN REVIEW • 51 BUSINESS LINES ASIA-PACIFIC

innovation and new brands like h2go, a fl avored water for women sports enthusiasts that is distributed in a novel way—on the street, as close as possible to the consumer. Frucor also strengthened its position in Australia, where the water market was boosted by the launch of a sugar-free version of V.

“Our results were very good in 2003, but bear in mind that the SARS epidemic could have taken a heavy toll,” notes Simon Israel, Executive Vice-President, Asia- Pacific. “Our success in dealing with this extremely serious crisis shows how solid our foundations are. Which means that we are all set to take full advantage of Asia-Pacifi c’s growth potential.”

From China to India, Asia is DANONE’s fastest- growing market, offering impressive scope for future growth.

New Zealand: Frucor is an extraordinarily requires major logistics skills, DANONE on top down innovative business and leads it gives both a strategic edge in under the energy drink and fruit-juice markets dominated by indepen- market with sales of dent retailers, allowing them to Groupe DANONE has operated €150 million. New Zealand has build the close relationships that in New Zealand for several years 4 million inhabitants, and ensure loyalty. through Griffi n’s (biscuits) and penetration rates for both bever- Frucor (beverages), each leader ages and biscuits are high— in its market in 2003. a full 96% of New Zealanders With sales of €130 million, eat biscuits, for example. Griffi n’s ranks number one in Both Griffi n’s and Frucor owe biscuits and number two in much of their success to their crackers. The company has distribution and customer a high profi le, built up over relationship management 100 years via 25 brands that strategy. Whereas rivals sell to are fi rmly established in all wholesalers, Griffi n’s and Frucor Anthony Nowell, General Manager, and Vicky Taylor, Vice-President high-potential segments, one have adopted the direct store Marketing of Griffi n’s, the sweet example being chocolate biscuits. delivery approach. Although this biscuit leader in New Zealand.

THE YEAR IN REVIEW • 53 THE BIG PICTURE THE BIG PICTURE

In recent years, DANONE has adopted structures and procedures to strengthen our links to the world around us. In this section, we set The world out our positions on three key issues facing society—water, health, and globalization. we live in

ILLUSTRATION ÉRIC GIRIAT/VIRGINIE.

DANONE 2003 • 54 THE YEAR IN REVIEW • 55 THE BIG PICTURE THE BIG PICTURE

Franck Riboud: “DANONE Way comes as a response to A broader view a clear need. This is to preserve seven fundamental principles. These concern ters. To meet the challenges this entails, we DANONE’s culture, issues such as the minimum working age, have rounded out the initiatives taken—and in Danone’s commitment working hours, forced labor and wage stan- some cases supervised at Groupe level—with founded on a dards. DANONE not only insists on compliance DANONE Way, a unique program designed to ” Growth must never be an end itself. It is a tool that with these principles by its own subsidiaries, ensure that all subsidiaries share this respon- dual commitment but also considers them minimum standards to sibility and play their part in implementing should never diminish quality of life, but instead be met by suppliers and sub-contractors. The Groupe values concerning food safety, human- to business success enhance it.“ same principles are also now a pre-condition in resource policies, environmental standards, acquisition and joint-venture negotiations. relationships with customers and suppliers, and social progress— ILLUSTRATIONS ÉRIC GIRIAT/VIRGINIE and other areas of corporate responsibility. Turning to the environment, in 1995 we and pass it on initiated a drive to reduce use of water and In practical terms, DANONE Way calls on several years drawn on the support of a his statement, made by Groupe energy, with progress in this area making a all Groupe subsidiaries around the world to specialized Sustainable Development depart- to others.” DANONE founder Antoine Riboud significant contribution to general compliance assess their own performances in terms of ment to structure and guide corporate respon- over 30 years ago—when sustainable with ISO 14001 standards. Today, 64 of our some 100 clearly defined practices. These sibility policy and its implementation. Five Tdevelopment was in no way the issue factories have already been certified, while the self-assessments are designed to ensure the key themes central to our concerns include it is today—remains an apt summary of the certification process is under way at some 30 practical involvement of teams at local level labor relations and the environment, but principles guiding our Groupe and underpin- and is to begin at a later stage at 15. and foster a sense of emulation in the areas also relationships with suppliers, customers ning our commitment to corporate respon- addressed. As Bernard Giraud, Sustainable and consumers, and initiatives in favor of Other examples of corporate responsibility sibility. Development Director explains, “DANONE local communities. And each has important include support for the Ramsar Convention DANONE has for many years Way is more than a method of assessment. implications for the business as a whole. protecting wetlands under the aegis of Unesco, been committed to simple yet It is a shared endeavor encouraging each DANONE now enjoys worldwide recognition for encouragement for environment-friendly essential principles structuring subsidiary to review, at its own level, sustain- commitment to sustainable development, as farming with reduced reliance on pesticides, our responsibility to employees, ability issues and adopt relevant action plans.” illustrated by our inclusion in almost all inter- and the many initiatives taken by subsidiaries to the community at large and the Groupe DANONE has also commissioned audits national sustainability indices, among them help children at local level, in particular as part environment. We believe that from PricewaterhouseCoopers and Mazars to the Dow Jones Sustainability Index, Ethibel of DANONE’s annual international Children’s people are at the center of every assess practical commitment to these prin- Sustainability and Aspi Eurozone indexes. Day. These initiatives and other aspects of ciples, including deployment of DANONE Way business, that checks and balances DANONE corporate responsibility policies are at subsidiaries. Over the past three years, are essential inside and outside the Many of these indexes also rate the quality and described in more detail in our annual Social 14 have been audited. business, that businesses must transparency of information. At DANONE, we and Environmental Responsibility report, which be attentive to the needs of make a special effort by publishing, alongside also includes the various indicators adopted to DANONE Way started up with local communities, and our annual report, a social responsibility report track progress in this area objectively. a pilot phase at a dozen that each and every busi- that reviews in detail Groupe initiatives in this subsidiaries in 2001, and ness is directly responsible area and the indicators used to track progress. DANONE Way—a management tool for by the end of 2003 a full for environmental quality. Widely distributed in print form, this report can translating responsibility into practice 74% of all Groupe compa- also be downloaded from our internet site. Widely known and shared throughout As DANONE Chairman and CEO Franck Riboud nies were involved. Which DANONE and its subsidiaries, these principles Several examples illustrate our commitment to has often stressed, corporate responsibility is is a promise of continued nonetheless entail significant challenges in social responsibility, starting with strict adhe- a matter of day-to-day practices in and around vitality for DANONE’s day-day practice. In response, we have for sion to the International Labour Organization’s factories and other sites, not just at headquar- defining values.

Groupe DANONE initiatives in social responsibility programs and initiatives are reviewed in our 2003 Social and Environmental Responsibility report.

DANONE 2003 • 56 THE YEAR IN REVIEW • 57 THE BIG PICTURE THE BIG PICTURE

In some parts of the world, there Water is no real Long seen as inexhaustible, supplies of fresh alternative rights proportional to the Ramsar Convention, an amount of water it takes out. international organization water are increasingly rare and fragile. to bottled In some cases, our businesses are dedicated to the conservation So much so that securing access is one of the required to maintain stocks of water that local and restoration of wetlands, which play an water. authorities can call on if there is a shortage. essential role in replenishing groundwater and great challenges of the new century. preserving biodiverse ecosystems. (1) DANONE is also actively committed to ILLUSTRATIONS ÉRIC GIRIAT/VIRGINIE protecting water resources in general—not D How does DANONE help bring healthy only those we operate—by proving fi nancial water to more people around the world? support for major initiatives in this area. Since By making water more accessible. Producers hile bottled water accounts for particularly at the bottling stage, backed 1998, DANONE has been a partner of the of bottled water are always on the lookout only a tiny part of total consump- up by a battery of tests and quality control for new sources of supply, standing ready tion, businesses in the sector are procedures. Safety standards in bottled water to invest in surveys, drilling and collection Woften asked what they are doing are no doubt more rigorous than for any other equipment to increase the overall amount of to preserve resources, ensure optimum quality kind of food or drink. water available. This is particularly the case and make their products accessible to as many Preserving springs and other sources of in regions where water does not naturally rise people as possible. supply is another prime responsibility, and to the surface and there is no alternative to is also essential to the future of our busi- drilling and bottling. D Can large producers of bottled water really ness. Signifi cant investments are required to help manage the world’s water resources? In some countries, too, the investments needed protect catchments and the areas the water to pipe water to homes are too high, and DANONE produces some 12 billion liters of fl ows through before it is tapped, in large part bottled water is the only form of supply. Here water in bottles and large containers each through measures to preserve the natural envi- growth of home and offi ce deliveries in large year. Which is a lot, but still represents no more ronment and support non-polluting economic jugs and containers offers new promise. than 0.004% of total fresh water consumption activities in the vicinity. (1) worldwide. DANONE has nonetheless always But price is clearly just as important as avail- A third essential concern is not to take more considered that we have special responsibili- ability, which is why DANONE offers not only from nature that it can give, and to maintain ties of several kinds where water resources premium brands but also more affordable resources at a constant level. In practice, this are concerned. ranges on its strategic markets. In countries means that the volume of water DANONE takes such as Mexico and Indonesia, distribution is In developing countries, some 80% of all out of each of its springs every year is lower through small shops, which means that quality illnesses are attributable to contaminated than the volume of natural renewal. drinking water is readily available to a majority water or lack of hygiene. It is thus absolutely of people—even away from city centers. essential to ensure that the water DANONE D How does DANONE pay society back for offers to consumers remains pure from the the water it bottles and sells? (1) For more details, see our Social and Environmental time it is collected until it is drunk. Which In addition to looking after the water resources Responsibility report. in turn calls for stringent rules of hygiene, we use, in most countries DANONE pays

DANONE 2003 • 58 THE YEAR IN REVIEW • 59 THE BIG PICTURE THE BIG PICTURE

approach. First of all, this means continually already initiated over 40 educational enhancing the nutritional value of existing programs extending well beyond the products. This is illustrated by efforts to reduce promotion of Groupe products and the sugar content of some dessert creams reaching millions of people. and fruit yogurts without any loss of eating D Do you take ethical advertising pleasure. seriously? Just as important is the principle that DANONE’s policy on advertising and consumers must not be misled—which means, other communication is built on a continuing for example, that DANONE does not attribute commitment to responsibility, especially in health benefits to products designed for messages addressing children. All advertising pleasure. for Groupe brands must comply with these basic principles: Finally, DANONE is continuing its longstanding Health and nutrition came in for plenty of attention support for nutrition research and the promo- n consumers must not be misled about product An exclusive in 2003. Issues included obesity—a growing concern tion of a healthy, varied diet. This is central to benefits the mission of DANONE Institutes, which have focus on in the developed world and the subject of much debate. n advertisements must not encourage over- eating or excessive snacking during the day three types At times, the global responsibility of the food industry n inactive or unhealthy lifestyles must not be has been questioned. presented in an attractive light of product n the authority of parents and the advice ILLUSTRATIONS ÉRIC GIRIAT/VIRGINIE they give their children on food must be respected. gives Groupe n this fast-moving field, DANONE has played Illustrating this special commitment, the DANONE has adopted a set of procedures a pioneering role and continues to stand out DANONE International Award for Nutrition, DANONE applying to all group business throughout from the crowd. made every two years, offers top nutrition the world to ensure that health claims and scientists a €120,000 prize to continue their ID On what grounds can DANONE claim to arguments in advertising, on wrappings and special work. In addition DANONE Institutes, first set have positioned itself as favoring health and in brochures are properly documented up in 1991, have so far supported over 500 nutrition? and presented. credibility on research programs and provided funding in It is now seven years since DANONE took the excess of €8 million. As a result, DANONE is now strategic decision generally recognized as the world’s most cred- health issues. to concentrate ible food business on health issues, as is borne exclusively out in studies conducted by Morgan Stanley, on three core JP Morgan and Ipsos, the French market businesses research institute (see opposite). with special significance D What is your position on obesity? for health: Obesity is on the rise and is a serious concern. fresh dairy products, water and The causes are many and complex, including biscuits—the last an important genetic factors and increasingly sedentary Recent studies confirm the position of DANONE result is consistent with the findings of another foodstuff rather than an indulgence in lifestyles as well as diet. Yet while diet is far as the leading name for health in the food study published by JP Morgan in April 2003. many countries. This decision was consistent from the sole explication, the food industry industry. In October 2003, Morgan Stanley Based on a review of the product portfolios of with the efforts DANONE has made to expand cannot shrug off all responsibility. Which does knowledge of nutrition fundamentals, the not mean denying the pleasures of eating— published the results of a survey of consumers the world’s 16 leading food businesses, that focus of our dedicated research center, DANONE has every intention of continuing in the US, the UK and France. This put DANONE report rated DANONE the best placed by far as well as a wide range of scientific to develop and market products designed for first for healthy products, with our lead on the to address health issues. initiatives taken over many years. taste appeal. But we also uphold a responsible runner-up a wide 20 percentage points. The

DANONE 2003 • 60 THE YEAR IN REVIEW • 61 THE BIG PICTURE THE BIG PICTURE

When DANONE moves into emerging markets, it does so to produce Economic globalization has come in for These factors make in-depth support is in many cases offered and sell locally, understanding of local conditions to help these producers achieve violent criticism from some sectors of public developing and demand all-important. Which is optimum quality. Assistance is also opinion, and big international businesses have why DANONE’s expansion relies so much available for animal nutrition and products within on equity investment, including acquisition veterinary care, as was the case this year in been accused of wanting to relocate production, of minority interests in local companies, many Portugal, where the development of specially reach of the of them family owned. Similarly, management designed software helped producers raise impose their culture or cut employee rights committees of Groupe companies are made up profitability. of a majority of local staff and enjoy consid- largest possible Looking beyond the relationships that directly to the bone. Here’s what DANONE has to say. erable latitude in implementing policies. To concern our business operations, all subsid- number of take an example, DANONE has nearly 23,000 ILLUSTRATIONS ÉRIC GIRIAT/VIRGINIE iaries are actively encouraged to contribute to employees in China, but only 30 of them are local development, offer training programs for consumers. expatriate managers. This approach allows us young people, and support local associations. to better appreciate factors specific to each A large number of initiatives are undertaken in market and put one of our fundamental values, n the space of a few years, DANONE has culture and partly due to the nature of our these areas each year, most of them described proximity, into practice. seen spectacular international expansion. businesses. Fresh dairy products, for example, in our Social and Environmental Responsibility Just ten years ago, only 7% of our work- cannot be kept for more than 28 days, so they report. D How do DANONE subsidiaries fit into the cannot reasonably be transported more than a force was based outside Western Europe, local environment? I How does respect for local conditions fit a proportion that has now reached 70%. few hundred miles—which means that they can D Since 1997, DANONE has been involved in be exported to a neighboring country, but not First of all, by adapting to the needs and in with efforts to harmonize human resource over 40 acquisitions and joint ventures, mostly from one continent to another. In the case of expectations of local consumers. In coun- policies? in developing bottled water, transport over long distances tries where standards of living remain low Our immediate aim is not to bring conditions countries in makes for significantly higher costs, and export and where nutrition is often inadequate, our in all parts of the world into line with human Asia, Latin sales can only concern top-of-the-range brands companies develop affordable products, resource practices in Europe. Instead, we America, North such as Evian. available through traditional retailing outlets, are working to achieve concrete progress Africa, the Middle that also make up for some of these dietary DANONE has thus moved into new markets step by step, beginning with the fundamental East and Eastern Europe—markets shortcomings. Calcium-enriched biscuits on to make and sell its products locally, not to rights defined by the International Labour that now account for nearly a sale in Egypt, India, Indonesia and Malaysia relocate existing production. This is true of Organization. DANONE also makes dialog and third of consolidated sales. are an example. our businesses in China, as it is in Morocco and employee representation an essential require- Mexico. Moreover, markets where culture and As regards purchasing, ment. In 2003, we thus conducted a survey Why has DANONE been expanding D deeply rooted national traditions play a crucial our strategy is to favor of 60 subsidiaries, focusing in particular on so rapidly on emerging markets? role—as is generally the case with food—cannot local suppliers. Here recently acquired businesses in developing The sole purpose of international be successfully won over with a single type of partnerships with countries. Results showed that employee expansion is to access new markets, and product. And differences of purchasing power local producers representation is assured in nearly all cases not to take advantage of cheap labor or raw make it doubly impossible to simply replicate play an important and collective labor agreements are negoti- materials. This is partly a matter of corporate products developed in Europe. role, and financial ated at 70% of Groupe companies.

DANONE 2003 • 62 THE YEAR IN REVIEW • 63 MANAGEMENT

Campus Campus participants Campus, DANONE’s mobile corporate university, serves a dual purpose, developing management know-how while at the same time providing a focus for networking 2% Western Europe 82% among managers from different countries working in 16% Eastern Europe different areas of business. Five or six times a year, 3.7% 0.4% Campus brings together up to 250 managers, each North America 0.2% 19% time in a different location, for a week of training in Latin America 13.7% 52% specific areas of expertise and general management. Rest of world 11% Programs at three levels—Fundamentals, Advanced, 461 participants 533 participants Excellence—are designed to meet the needs of both 2002 2003 recent recruits and more experienced staff, ensuring that all share the practices and approaches that are the Beverages 16% 24% hallmark of DANONE. In Fresh Dairy Products 19% Biscuits & 12% 16% 2004, three Campus Cereal Products sessions will be held Other Food Business 5% in Europe, one in 38% Corporate 32% 21% New York and one 17% in Buenos Aires. 2002 2003 Human Resources: Personal progress

for business success 8,300 operational managers and 600 members of Networking for new efficiency management boards throughout Groupe DANONE. Training is not the only way to develop know-how and enhance performance. In a business as large as ours, In view of their importance, a special program has been set the exchange of information and good practices among up under the name Odyssée to promote these practices Training managers in different parts of the world is also vital. “There can be no lasting business onsolidation of know-how and expertise is and, by the same token, develop management resources. an area where the interests of employees This type of networking is an effective way to make the 7,981 Launched two years ago, Odyssée saw a number of success without progress for people” and those of the business clearly converge. most of expertise available from individuals and teams managers trained impor-tant initiatives in 2003. They included individual throughout the group and thus avoid needless replication Staff members naturally want to get 40,746 is the conviction underpinning the dual C plans for 200 management committee members using of efforts already made. ahead, acquire new skills and, in so doing, expand non-managers trained 360° assessments, which have been carried out for nearly commitment to business performance and their career opportunities. Equally, every business A program to encourage networking reflexes was first 700 staff members since 2001. Other new developments 366,054 needs skilled, committed workers to drive perfor- launched at the end of 2002 and in spring 2003 was social progress that DANONE has fostered were the introduction of coaching available to executives hours of management mance. DANONE has thus always made it a prime given a formal structure. Franck Mougin, head of Human training on request and the launch of general management responsibility of all managers to develop know-how Resources, has special responsibility in this area. As he and developed for three decades. training options. In 2004, highlights will be a seminar 835,752 among their team members and win their loyalty. explains, “Sharing good practice is a form of transac- hours of And in keeping with this conviction, to help newly recruited or promoted managers fulfill tion—the provider is someone with a solution and the non-management training Odyssée—building management resources for the their role and a second seminar, developed with input person encountering difficulties and seeking to improve developing employee skills from long term from an international consultancy, focusing on strategy. performance is the recipient.” the executive office to the factory floor DANONE management practices, attuned to our Other management training will include two programs values and employee expectations, are essential to devoted to fundamentals, one covering interpersonal While this approach is already intuitively adopted to remained a top priority in 2003. the role of the 160 executives heading subsidiaries relationships and the other devoted to staff assessment varying degrees in many countries, there is a need to PHOTOS DALIA BENAÏS and corporate departments, as they are for our and development. place it on a more systematic footing. Moves in this

DANONE 2003 • 64 THE YEAR IN REVIEW • 65 MANAGEMENT MANAGEMENT

2003 Highlights Maintening close links Employees by region with students is essential DANONE Spain is in making DANONE an rated the country’s employer of choice in all the second best employer countries where we operate.

by the Great Place to Work North Africa/ France 46% 46.2% Europe Consortium and Middle East Other Western the European Commission Western Europe Europe (Employment and Social Affairs). Central Europe Central Europe 15.3% 10% 18% 11.4% DANONE signs an N. & S. America N. & S. America 0.6% agreement with France’s 12.5% Asia-Pacifi c 13.5% Asia-Pacifi c Education Ministry to 26.5% set up training programs 2002 2003 leading up to recognized qualifi cations for over 800 non-management staff members in July. Young International Graduates: In its third direction have included a wide range solving, and machine operation and safety procedures. year, the program—designed of communications initiatives and The system is to be extended group-wide from 2004 on. Management Survey previous surveys, particularly to promote recruitment of the development of practical tools. The DANONE Management as regards values—now clearly international staff—shows While skills development is only one aspect of the human fresh progress, with 80 The 2003 management survey Survey plays a key role in an integral part of our corpo- resource policies deployed in 2003, it is particularly young graduates recruited (see next page) showed that 70% guiding decision makers at rate culture and identity. The for their fi rst position outside signifi cant and a focal point for many key concerns. of respondents were not involved operational level as well as in concept of social responsibility their native country and These include internationalization and ways to reconcile is also viewed more favorably, 75 internships conducted in a networking process. The current aim is to inverse human resources. The 2003 general principles with the demands of varied social outside France. that trend, achieving the same proportion of positive ”A manager’s fi rst survey, conducted by ISR and a growing number of systems, enhancing management performances to Business Units are taking up RH Maturity gets answers by 2007. of the US, called on 8,300 under way in Africa responsibility is underpin profi table growth, and employment security managers to give their views the cause. Finally, performance and the Middle East, Production workers—organization built on skills at a time when jobs cannot be guaranteed forever. Which of how the business operates. reviews and skills assessments helping local subsidiaries set Commitment is important not only for managers but at all to help the whole in turn means providing training to enable workers to The fi rst strong point for are now better understood priorities for labor relations. levels. In production, too, overall business results hinge move on to new positions or fi nd a new employer. And this third survey was a 78% and more favorably perceived, December launch on personal performances and the individual commit- team advance.“ all this, of course, relates to our broader commitment response rate, compared although demand for added of Trust by DANONE, ment of operators. Expanding and enhancing the skills with 71% in 2001 and 73% in training remains very strong. a business strategy game to social responsibility. that is the fi rst to factor of production workers, by the same token opening up 1999. Findings also pointed to in social responsibility. new career opportunities for those concerned, is now a “ At LU France, which employs 3,500 people including some improvements from the The game is initially being critical challenge—and one where everyone stands to gain. 2,000 operators at ten factories, some 300 people made available to business The fi rst essential step is to defi ne precisely the type and schools and engineering were involved in the development of job specifi cations institutes in six countries. level of skills required for each production job. As Sylvain through working groups bringing together operators, Results of the 2003 Lobry, Assistant Human Resources Director explains, supervisors and employee representatives.” Managers Survey were sent to each manager Once job specifi cations have been drawn up, the really individually. important part can begin—assessing the skills of individual operators and agreeing with them on ways for them to progress and in so doing increase their incomes. This Employees process got under way at LU France in the second half by business line of 2003 following the signature of an agreement with unions. A major innovation was to introduce individual

Beverages performance reviews for operators. This includes inter- 1.5% views with their direct supervisors, a procedure previ- 44.2% Fresh Dairy Products 24% ously reserved to managers and supervisors. The next Biscuits step was the launch of personalized training programs Other Food Business covering themes such as maintenance diagnosis, problem

Corporate functions 27.1% 3.2% Developing production workers’ skills is a key challenge. 2003

DANONE 2003 • 66 THE YEAR IN REVIEW • 67 CAHIER CHIFFRES Key Figures

70 Groupe DANONE worldwide

72 Groupe DANONE performance

76 Groupe DANONE and shareholders 2003For more information, see the DANONE 2003 Form 20—F.

THERAPPORT YEAR D’ACTIVITÉIN REVIEW • 6679 GROUPE DANONE WORLDWIDE MAIN COUNTRIES GROUPE DANONE WORLDWIDE MAIN COUNTRIES

WESTERN EUROPE EASTERN EUROPE Germany Bulgaria Belgium Hungary Spain Poland France Czech Republic Greece Romania Italy Russia Netherlands Sales: €0.9 billion Turkey Sales: ¤1.2 billion Portugal 7% of consolidated total 9% of consolidated total United Kingdom No.1 in Fresh Dairy Products Tied for No.1 spot in Fresh Dairy No.1 in Biscuits and Cereal Products Products 10,046 employees No. 1 in HOD Main brands: DANONE, LU, OPAVIA, 2,728 employees ZYWIEC ZDROJ Main brands: EVIAN, DANNON, SPARKLETTS, STONYFIELD FARM, CRYSTAL SPRINGS Sales: €8 billion 61% of consolidated total No.1 in Fresh Dairy Products No.1 in Biscuits and Cereal Products No.2 in Packaged Water 23,487 employees Main brands: EVIAN, DANONE, VOLVIC, LU, BLEDINA, FONT VELLA Sales: €2 billion NORTH AMERICA 15% of consolidated total No.1 in Biscuits and Cereal Products Canada No.1 in Packaged Water US 40,960 employees Mexico Main brands: WAHAHA, ROBUST, AQUA, DANONE, BRITANNIA, GRIFFIN’S, AMOY

LATIN AMERICA ASIA-PACIFIC No. 1 in Fresh Dairy Products Argentina in South Africa. Danone equity China affiliates hold strong positions Brazil India in Saudi Arabia, Morocco, Tunisia, Indonesia Uruguay Algeria and Israel Japan Main brands: DANONE, BIMO, AL SAFI, Sales: €1 billion DJURDJURA, SOTUBI Malaysia 8% of consolidated total New Zealand No.1 in Fresh Dairy Products No.1 in Water (smaller than 2-liter size) No.2 in Biscuits and Cereal Products 10,817 employees Main brands: LU, BAGLEY, BONAFONT, VILLAVICENCIO, DANONE, LA SERENISIMA

AFRICA & MIDDLE EAST South Africa Algeria Saudi Arabia Egypt Israel

Morocco Fresh Dairy Products Tunisia Beverages Biscuits and Cereal Products (white: imports only)

DANONE 2003 • 70 THE YEAR IN REVIEW • 71 GROUPE DANONE PERFORMANCE GROUPE DANONE PERFORMANCE

Sales by business line Financial Highlights B everage s (€ millions) (€ millions) Fre sh Dairy Product s

2002 2003 B is c uit s & Cere al Product s Fresh Dairy Products 6,276 6,185 2002 2003 Change Other Food B usine s s Beverages 3,691 3,557 23% Net s ales 13,555 13,131 7.2% (1) 3% Operating income 1,590 1,604 Bisc uits and Cereal Products 3,232 3,071 Operating margin 11.7% 12.2% 48bp Other Food Business (1) 356 318 27% Net income (excl. excep tional one-time items) 828 8 39 + 1.3% Groupe to tal 13,555 13,131 Excep tional one-time items (net) 455 0 47% Net income (excluding minorities) 1,28 3 8 39 Cash flow from operations 1,578 1,460 ( 1 ) O t h e r Fo o d s B u s i n ess co m p r i ses sa u ces i n t h e U K , t h e U S a n d C h i n a . I n 20 03, sa l es rose 1 . 8% l i ke - fo r- l i ke to a cco u nt fo r a cco u nt 2 . 8% Capital expenditure 603 543 of t h e G ro u p e tota l . Free Cash Flow 1,017 1,149 Investmen ts in subsidiaries and affiliates 49 5 1,088 Net earnings per share (excluding excep tional items) ¤6.11 ¤6.45 + 5.6% Net dividend per share (€) ¤2.30 ¤2.45 + 6.5% Sales by region Europe Return on capital invested 11.8% 12.7% (€ millions) Asia-Pacific Net financial borrowing 2,269 2,692 2002 2003 17% Rest of World Stockholders’ equity (including minority in terests) 5,8 16 5,528 Europe 8,841 8,876 Deb t/equity ratio 39% 49% Asia-Pacific 2,080 1,957 No. of shares at Dec. 31 (‘000) 137,335 134,975 Rest of World 2,634 2,298 15% 68% Share price at Dec. 31 (€) 128.2 129.4 Groupe to tal 13,555 13,131 Market capitalization at Dec. 31 (‘000.000) 17,606 17,466

* submitted to the Annual General Mee ting of Shareholders (April 15, 2004) for approval (1) at constan t struct ure and exchange rates

Sales growth Sales by region at constant structure and exchange rates 3% 4% and business line 26% 28%

52% Groupe total By business line By region 68% 19% past 5 years

Western Europe Asia-Pacific +9.9% Sales: €8 billion Sales: €2 billion +7. 0% +7.2% +9.6% +10 .9% +5.7% +6. 0% +10 .4% 4% +5.1% 14% +7.2% 33% +7.2% 34% +5.4 % 19% 62% 59% Beverages +1.8% 8% 67% Fresh Dairy Products +0 .4 %

Biscuits & Cereal Fresh B everages B isc uit s Other Groupe Europe Asia- Rest of Groupe Products 1999 2000 2001 2002 2003 Dairy & Food to tal Pacific World to tal North America Eastern Europe Latin America at cons tan t s truct ure and exchange rate s Product s Cere al B usiness Sales: €1.2 billion Sales: €0.9 billion Sales: €1 billion Other Food Business Product s

DANONE 2003 • 72 THE YE AR IN REVIEW • 73 GROUPE DANONE PERFORMANCE GROUPE DANONE PERFORMANCE

Sa l es a n d o p e ra t i n g m a rg i n o v e r 5 y e a r s Ten- y e ar financial dat a (€ millions ) 199 4 - 2 00 3

1999 2 000 2 001 2 00 2 2 00 3 S ale s 13 ,2 9 3 14 ,28 7 14 , 4 70 13 ,5 5 5 13 ,13 1 199 4 199 5 199 6 199 7 199 8 1999 2 000 2 001 2 00 2 2 00 3 Published change +2.8 % +7.5 % + 1.3 % (6.3 %) (3 .1%) S ummary o f oper ations (¤m ) Lik e-f or-lik e change (1) +5 .7 % +7. 0% +5 .1% +6. 0% +7.2% C ons olidat ed s ale s 11,711 12,112 12,7 9 7 13 , 4 88 12,9 3 5 13 ,2 9 3 14 ,28 7 14 , 4 70 13 ,5 5 5 13 ,13 1 Oper ating mar gin 10 .5 % 10 .8 % 11.1% 11.7 % 12.2% S ale s gr o wth (lik e-t o-lik e) + 3 .8 % + 4 .6 % + 2.6 % + 2.3 % + 4 .6 % + 5 .7 % + 7. 0% + 5 .1% + 6. 0% + 7.2% (1) at constant structure and exchange rates Oper ating inc ome 1, 0 2 5 1, 0 70 1,140 1,2 24 1,2 9 3 1,3 91 1,5 50 1,609 1,5 90 1,604 As % o f s ale s 8.8 % 8.8 % 8.9% 9.1% 10 . 0% 10 .5 % 10 .8 % 11.1% 11.7 % 12.2% Ne t inc ome 5 3 8 3 2 5 5 16 5 5 9 5 9 8 68 2 721 13 2 1,28 3 8 3 9 Employ ee s C ash flo w and c apit al e xpendit ur e (¤m ) at Dec ember 3 1, 2 00 3 Oper ating c ash flo w 1, 090 1,13 2 1,212 1,2 2 9 1,3 2 7 1, 4 2 3 1,5 5 8 1,6 11 1,5 78 1, 460 Pre s enc e C apit al e xpendit ur e 54 5 6 2 5 684 7 9 7 711 70 3 7 9 8 7 3 7 60 3 543 E ur ope 3 2,5 3 3 people In v e s tmen t s in sub sidiarie s 8 9 3 608 1,140 4 70 4 8 5 9 34 2,84 9 1, 0 71 4 9 5 1, 088 w orldwide Asia-P acific 40 ,9 60 people and equit y me thod c omp anie s at Dec ember 3 1, 2 00 3 R e s t o f W orld 14 ,114 people Fr ee C ash Flo w (1) 60 2 464 5 28 5 3 7 64 7 6 2 2 6 24 1,50 3* 1, 0 3 8* 1,110* 12 0 c oun trie s To t al emplo y ee s 88,607 people Financial po sition (¤m ) S t ockholder s ’ equit y 2 0 3 plan t s 6,121 6,3 2 9 6,8 9 5 7,268 7,2 9 7 6,867 8, 019 6,72 7 5 ,8 16 5 ,5 2 8 (incl. minorit y in t er e s t s ) Ne t deb t 2, 4 12 2,5 14 3 ,28 9 2,75 2 2,8 7 3 3 ,119 4 , 401 4 ,8 2 7 2,26 9 2,6 9 2 Deb t /equit y r atios 3 9% 40% 4 8 % 3 8 % 3 9% 4 5 % 5 5 % 72% 3 9% 4 9% S t ockmark e t dat a O p e ra t i n g m a rg i n a n d i n co m e b y b u s i n e s s l i n e Shar e pric e at Dec. 3 1 (€) (1) 5 8 6 1 5 5 8 3 12 2 117 160 13 7 128 12 9. 4 Beverages (€ millions ) Number o f shar e s at Dec. 3 1 (‘000) 13 9,3 70 14 2,5 9 2 14 5 ,2 78 146,144 14 7,8 50 14 8,2 72 14 9, 086 14 1, 0 3 3 13 7,3 3 5 134 ,9 75 Fresh Dairy Products Mark e t c apit aliz ation at Dec. 3 1 Oper ating mar gin Oper ating inc ome 7,9 46 8,74 9 8, 005 11,9 64 17,9 71 17,34 7 2 3 ,8 54 19,3 2 2 17,606 17, 466 Biscuits & (€ millions ) 2 00 2 2 00 3 2 00 2 2 00 3 Cereal Products P er shar e dat a (€) Fr e sh Dairy Pr oduct s 12.8 % 13 .7 % 80 2 84 5 Other Food Business EP S ( fully dilut ed) 3 .9 2. 4 3 .6 3 .8 4 .1 4 .7 5 .1 0 .9 7 9. 43 6. 4 5 B e v er age s 12.6 % 15 .1% 464 5 3 7 49.2% EP S be f or e amortiz ation o f goodwill 4 .3 2.8 5 4 .1 4 .5 4 .75 5 . 4 6.1 2.11 10 .34 7.18 B is c uit s & C er e al Pr oduct s 9.8 % 9.1% 3 17 2 80 16.3% Dividend per shar e Other Food B usine s s 17.1% 17.9% 6 1 5 7 1.9 1.9 2. 0 2.1 2.3 2.6 2.9 3 . 09 3 . 4 5 3 .68 (2) 3.3% (including Fr ench t ax cr edit ) (3) Unalloc at ed it ems -54 - 115 Work f or c e Gr oupe t o t al 11.7 % 12.2% 1,5 90 1,604 31.2% To t al emplo y ee s 68,18 1 7 3 ,8 2 3 8 1,5 7 9 80 ,63 1 78,9 4 5 75 ,9 6 5 86,6 5 7 100 ,560 9 2,2 09 88,60 7 W e s t ern E ur ope 54 , 06 1 5 2,3 86 50 ,7 70 44 ,863 4 2,170 3 3 ,764 28, 0 2 3 28,3 0 2 2 3 ,8 5 7 2 3 , 4 90 O p e ra t i n g m a rg i n a n d i n co m e by re g i o n Out side W e s t ern E ur ope 14 ,12 0 21, 43 7 3 0 ,809 3 5 ,768 3 6,7 75 4 2,2 01 5 8,634 72,2 5 8 68,3 5 2 6 5 ,117 Europe (€ millions ) * includes impact of securitization. Asia-Pacific Oper ating mar gin Oper ating inc ome (1) Cash flow from operations less capital expenditure and change in working capital requirement (prior year figures have been adjusted to this definition). 2 00 2 2 00 3 2 00 2 2 00 3 Rest of World (2) Subject to the approval of the Annual Meeting. E ur ope 13 .5 % 14 . 0% 1,19 2 1,244 72.4% (3) Assumes 50%, actual rate depends on law applicable to beneficiary. Asia-P acific 13 .3 % 14 .3 % 2 7 7 2 7 9 16.2% R e s t o f W orld 6.6 % 8.5 % 175 19 6 Unalloc at ed it ems -54 - 115 11.4% Gr oupe t o t al 11.7 % 12.2% 1,5 90 1,604

D ANONE 2003 • 74 THE YE AR IN REVIEW • 75 GROUPE DANONE AND SHAREHOLDERS GROUPE DANONE AND SHAREHOLDERS

A relationship built on a mutual trust For more information www.danone.com Main indexes (from 01/01/1999 to 31/12/2003)

Stockmarkets hit a low in April 2003 during the management and individual shareholders. Investor Relations war in Iraq, but then rallied sharply to finish Over 1,500 individual shareholders attended 17, bd Haussmann, 75009 Paris, France 200 the year up 11.4% for the CAC 40 and 9.5% for the last General Meeting held at the Carroussel Toll-free information line for investors calling from France: 0800 320 323 the EuroStoxx 50. Food stocks lagged behind du Louvre in Paris on April 11. CAC 40 Email: fi[email protected] 175 general indexes in term of performance as they Groupe DANONE ensures that full financial Share buybacks and cancellations often do in times of market recovery, with the DJ information is readily accessible. 150 Stoxx Food & Beverage index down 4.8% Over 1 million shares in July 2003 Announcements of earnings, acquisitions and 1.7 million shares in December 2003 the same period, DANONE’s share price held its other significant financial developments are 8,406,726 own shares held on December 31, ground, falling only 0.8% which is a testament 125 quickly and widely circulated in France and 2003 (2). Groupe DANONE to our group’s model for profitable growth. other countries, via networks of press agencies Legal limits on share buybacks and cancellations Annual returns on investment in DANONE and websites. in France 100 Eurostoxx 50 shares averaged 2.9% from 1998 to 2003, • a company may not hold more than 10% of its Our website at www.danone.fr is regularly own shares at any time. compared with only 0.7% achieved by a sample 75 updated to provide detailed information on • no more than 10% of shares may be cancelled of stocks from the main sector.* all major financial developments and includes in any period of 24 months. DJ Stoxx Food & Beverages Group management maintained a permanent press releases, presentations and main finan- Holdings of own shares and cancellations are 50 dialogue with financial analysts and investors, cial publications (hard copies available on also subject to the approval of the Annual 1999 2000 2001 2002 2003 General Meeting.** with over 340 meetings and other contacts in request):

the course of 2003. DANONE was also on hand n The year in review

at the main conferences organized around the n Shareholders’ newsletter * Source: Bloomberg, Dec. 31, 1998 to Dec. 31, 2003. Stockmarket data (at December 31) world for blue chip companies in mass-market n Reference document (1) Unilever, Nestlé, Cadbury Schweppes, General Mills, consumer goods. The Annual General Meeting n Form 20-F Kellogg, PepsiCo, Coca-Cola; calculations based on euro 1999 2000 2001 2002 2003 values is always a high point of the year, offering a n The site also displays the latest DANONE € millions (2) An additional 1.3 million shares were cancelled in unique opportunity for meetings between share prices. February 2004 Market capitalization at Dec. 31 17,347 23,943 19,322 17,606 17,466 Closing price for the year 117 161 137.0 128.2 129.4 Share ownership (at December 31, 2003) Share performance High for the year 138 173 163.3 150.4 137 Low for the year 103 91 124.9 109.4 104.2

+37% ‘000 72% Institutionals Average number of shares traded daily 525 600 590 787 689 Institutionals 14% 32% 8% Individuals France

UK - 6 . 5% Treasury stock and Groupe DAN O N E 8% 14% - 5% -1 5% + 0.9% Employees US Per share data (at December 31) Board members 6%6% Other 1999 2000 2001 2002 2003 18% ‘000 1999 2000 2001 2002 2003 Number of shares representing capital stock 148,271 149,086 141,033 137,335 134,975 Number of shares for the calculation of diluted EPS 148,990 141,373 142,697 137,241 131,598 Groupe DANONE shares Main shareholders € Diluted EPS 4.69 5.09 (3) 5.51 (3) 6.11 (3) 6.45 (3) Nominal value : ¤1 per share (1) (at December 31, 2003) % % of of voting Growth in EPS 15% 13.2% (3) 8.3% (3) 10.9% (3) 5.6% 134,975,493 shares outstanding (1) equity rights Listed with: Euronext Amsterdam, Brussels and Paris (eligible for deferred payment Net dividend per share (1) 1.8 1.9 2.06 2.3 (1) 2.45 (1) service). Listed in London, Switzerland and New York (2) Eurazeo 4.04 8.12 Net dividend plus tax credit (2) 2.6 2.9 3.09 3.45 (1) 3.68 (1) Main identifying codes: EUROCLEAR: 12064 - REUTERS: DANO.PA - Payout ratio 35% 37% (3) 38% (3) 36% (3) 37% (3) BLOOMBERG:BN.FP - DATASTREAM: F: BSN Caisse des dépôts et 2.56 2.58 (1) Subject to approval of the Annual General Meeting. DANONE is a component stock of: DJ Eurostoxx 50 - CAC 40 - DJ World Food consignations (2) Dependent on law applicable to beneficiaries, given here as 50% of the dividend. (1) at Dec. 31, 2003 - (2) via American Depository Shares (ADS); 5 ADS for one underlying share. (3) Excluding exceptional one-time items.

DANONE 2003 • 76 THE YEAR IN REVIEW • 77 FOR MORE INFORMATION…

20 - F

DANONE 2003 SOCIAL AND ENVIRONMENTAL FORM 20-F AT A GLANCE RESPONSIBILITY REPORT

Design/layout: Burson-Marsteller • French text: Angie • Burson-Marsteller • Groupe DANONE • Photos: Yuri Abramochkin/Gamma • Jean-Claude Aunos/Gamma • Dalia Benaïs • Grégoire Korganow/Métis • Stéphanie Tétu/Métis • Studio Papillon • DANONE IMAGE BANK • AFP • Getty-Images • All rights reserved • Illustrations: Éric Giriat/Virginie • English text: Blake, Durban, Gee

DANONE 2003 • 78 Groupe DANONE • 15, rue du Helder • 75439 Paris cedex 09 • Visitors: 17, bd Haussmann • 75009 Paris • Tel: +33 (0) 1 44 35 20 20 • Corporate Communications • Tel: +33 (0) 1 44 35 20 71 / 20 75 • Investor Relations • Tel: +33 (0) 1 44 35 20 76 • Toll-free number for shareholders: 0800 320 323 (free from fixed lines in continental France) • Financial Information • www.finance.danone.com • www.danone.com