January 15, 2014

Danone takes legal action against Fonterra

   

Following a recall of baby milk products by Fonterra in 2013, Danone SA announced that it is cutting ties with Fonterra Co-Operative Group Ltd, in the latest dispute between both companies.

 

Danone said that it will stop working with Fonterra unless it can secure better food-safety guarantees. It is also taking legal action via an international arbitration panel in Singapore and a high court in New Zealand after failing to reach a compensation agreement with Fonterra.

 

Fonterra said that it is confident with its position and will vigorously defend any proceedings. "Fonterra stands by its track record of having world-class food safety and quality standards, quality systems and robust testing regimes across all its manufacturing facilities," the company said. It also voiced disappointment that on-going commercial discussion had resulted in legal action.

 

 

The Paris-based maker of Evian water and Activia yogurt is battling to win back market share in baby food, after Fonterra warned last August that some of its products might contain clostridium botulinum, which can cause botulism. While the food scare was later revealed to be a false alarm, Danone was hit hard by the incident as it relied heavily on Fonterra for the supply of baby formula in the rapidly growing and highly profitable Chinese market.

The recall added to a number of challenges Danone is already facing in China and prompted the company to issue a profit warning last October after third-quarter sales for its baby formula unit tumbled. Baby food is especially vulnerable to a loss of confidence, with parents reluctant to return to a brand perceived to be tainted.

 

Fonterra has denied any legal liability to Danone. Last year, it set aside US$14 million to cover costs related to the product recall for all eight companies affected by the warning. High Court documents confirm that Danone filed proceedings against Fonterra Co-operative Group.

 

The Fonterra cooperative controls one third of the world's dairy exports. Besides its ingredients in baby milk, cheeses and yogurts, Fonterra also sells its own Anchor brand.

 

Danone claims that its trust in Fonterra has been damaged. In a letter sent to Fonterra's CEO, Theo Spierings, in mid-December, Danone set a deadline of year-end to come up with a compensation proposal. The compensation is at an estimated US$475.4 million.