IN Danone SA's China, diamonds are free, milk powder is forever. The French dairy giant is handing out the jewels as prizes in promotions to win back consumers it lost last year in claims of high prices, accusations of bribery and food safety scares. On milk, it's spending big. With investors restless over its inability to grow in China, this month Danone paid $665 million to lift its small stake in the country's No. 2 milk maker, China Mengniu Dairy Co Ltd. Sealed at a hefty premium, the Mengniu deal and Danone's aggressive online campaign to promote its Dumex milk powder brand show the world's largest yoghurt maker is determined to convince shoppers and investors alike it can make large profits in China after a string of failed tieups there. A breakthrough remains some way off: Danone has a 0.5 percent share of China's dairy market, according to Euromonitor, and for some customers, its brand remains tarnished. The Paris-based company is just one of a string of foreign firms facing tighter scrutiny as China patrols pricing and product safety more closely, saying it needs to protect consumers in the world's second-biggest economy. “I don't really trust Dumex,” said Pei Qianqian, 29, an office worker in Shanghai with a 17-month-old daughter to feed. “If it's just one problem then perhaps it's just the side-effect of industry competition, but if there's two and then three in a row, I think this milk powder really has problems.” The home of brands like Evian mineral water will report earnings for the October-December quarter and the whole of 2013 on Thursday that may show how last year's China problems weighed on its overall performance. With much of its business rooted in lower-growth Europe, Danone has long targeted emerging markets like China as future growth streams. According to business consulting firm Frost & Sullivan, China's dairy market will nearly double to about $89 billion in 2017 from 2012. Danone's search for lasting growth has long been driven by a need to anchor its independence: Without a key controlling shareholder, the smallest of the major global food companies regularly features among investment bankers' wish-lists of potential juicy acquisition targets. Record Online Noise The shadow of a crisis in China can loom large over international firms, especially in more sensitive sectors such as nutrition and health. Amid fervent condemnation from the country's growing online community, KFC-parent Yum Brands Inc has struggled to win back consumers over a year after a food scare at a local chicken supplier. Chatter around Danone's “1000 Day Plan” promotion drives on China's popular social network Sina Weibo has risen to record levels. Yet Internet watchers warn that a campaign designed to highlight Dumex milk powder safety after health scares across the industry in China last year may instead have the effect of keeping Dumex's problems in people's minds. Mother Tang Jiahui, 27, said she was not swayed by Dumex's online campaigns and free give-aways. “All I'm looking at when I choose which brand of milk powder is quality; an online prize draw won't change my mind,” the Shanghai resident said. Still, in January alone, users re-posted its Weibo campaign messages over four million times, in the hope of being chosen in a draw for prizes including diamond-studded brooches or iPad tablet computers, according to a Reuters analysis. At the same time, messages about Dumex that were not campaign-related tripled to 2.6 million in January compared to November, while those mentioning other international brands that were affected by health scares last year dropped back to pre-problem level. Non-campaign posts often referred to issues Dumex faced last year, including an unfounded botulism scare and a state television report on corruption in the milk powder sector. It's an effect that echoes that experienced by KFC-parent Yum Brands last year, with some Chinese diners being put off by its “Operation Thunder” and “I Commit” campaign to allay food safety fears. “It's really hard to hide or delete the social buzz on the Internet nowadays,” said Linda Du, managing director of APCO Worldwide's Shanghai office. APCO has worked previously with Dumex in China on crisis management and social media strategy. Danone's Dumex competes with international rivals Mead Johnson Nutrition Co, Nestle SA, Abbott Laboratories, as well as local competitors in the Chinese infant milk formula market. A number of international dairies were hit last year in China. New Zealand's giant Fonterra Co-operative Group Ltd sparked product recalls in August after a false alarm over potentially fatal bacteria, while several firms were fined for price fixing. In September state TV accused some milk powder firms of bribing doctors to promote their products. “Rivals have moved on faster than Danone because it wasn't just hit by one issue, but several altogether. Going forward, it's going to be tough for Danone to find a way to market itself for China,” said Cherry Du, Shanghai-based project manager for consulting firm SmithStreetSolutions. – Reuters
