Danone reignites controversy over redundancies in profitable firms

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In January 2001, the French press reported the content of a leaked memo indicating that the Danone food-processing group is planning to close several biscuit production sites in Europe. This measure is reportedly aimed at improving the profitability of this division, which is nonetheless making profits, to forestall future demands for its divestment by shareholders. The affair has reopened the debate on the possibility of framing legislation to deal with mass redundancies in companies enjoying healthy economic positions.

On 11 January 2001, the French press revealed the content of a confidential memo from the management of the Danone group dated 31 August 2000, which outlined the communication plan to be adopted in making public a forthcoming restructuring plan. According to the reports, Danone, the world's second-largest food processing group, is planning the closure of seven French biscuit factories and three other sites in Belgium, Italy and the Netherlands. This would affect 3,000 jobs, more than half of which are in France. Only a dozen "European-scale" biscuit production units would remain open. In the most recent financial year, Danone's biscuit branch made a profit of EUR 690 million, up 14% on the previous year, but its profitability (with an operating margin standing at 7.3%) is lower than the group's two other activities, drinks (a margin of 12.7%) and dairy products (10.9%), and lower than that of its competitors. The management reportedly feels that the company should begin restructuring this activity in order to avoid financial investors one day forcing the group to abandon it. Unlike the situation in the other two activities, the acquisitions policy very actively implemented by Danone over the last few years has not been accompanied by any reorganisation.

Job losses and company image

Danone's "drinks" and "fresh dairy products" lines underwent 5,000 job losses in Europe between 1996 and 1999. These redundancies, which passed relatively unnoticed, gave rise to several disputes, one of which, in 1996, led to the company and the International Union of Food, Agricultural, Hotel, Restaurant, Catering, Tobacco and Allied Workers' Associations (IUF) - with which the company has a long-standing relationship - signing a joint understanding regulating the measures to accompanying any future restructuring affecting employment or working conditions on a global scale. On several occasions, trade unions emphasised the contradiction of carrying out redundancies despite the positive industrial relations image acquired by the group during the presidency of Antoine Riboud. Indeed, Mr Riboud was well known for the stances he adopted - particularly those set out in his 1987 report to the French Prime Minister, Modernisation, mode d'emploi, ("Modernisation: operating instructions") - which stated that companies ought to base their competitiveness on the mobilisation of their employees' skills and respect for their personnel. However, his son Franck, his successor, has reorganised the group according to standards grounded in the criteria of good governance of businesses which are valued by American and British institutional investors: he recently refocused the group on three main activities, which were clearly distinguished and therefore independently assessed.

The communication plan put forward in the internal memo leaked to the press therefore sought to preserve the group's image, and avoid provoking violent reaction in French public opinion, which has proved highly sensitive to the consequences of globalisation on several occasions. The idea was reportedly to postpone the announcement of the reorganisation plan until after the French local elections in March 2001, and then present it as having been imposed by the necessity to safeguard competitiveness rather than as yielding to the demands for profitability made by the shareholders. If Danone acquired an image of being ready to sacrifice jobs to improve profitability for its shareholders, this could not be considered as insignificant, or fail to provoke a strong reaction.

This concern is all the more pertinent as a precedent has already unleashed a strong wave of protests. In October 1999, the tyre manufacturer Michelin simultaneously announced an increase in half-yearly profits of 17%, and 7,500 redundancies (FR9910113F). That episode made a deep impression on people's attitudes. Prime Minister Lionel Jospin admitted to being powerless to act, conceding that the state had very little leverage. Yet the left-wing of his governing coalition protested vigorously at the abandonment of the principle of state intervention to save employment, and produced a bill obliging employers to begin negotiations on introducing a 35-hour week (FR0001137F) before any announcement of a redundancy plan. This bill (often referred to as the "Michelin amendment") has recent been inserted into the new "social modernisation law" passed just as the Danone memo hit the headlines (FR0101121F). The Danone affair has thus reignited debate, although the Michelin amendment is not applicable to this case, in that the group was one of the first to have negotiated the reduction of working time (for many operations as long ago as the Antoine Riboud era).

Reactions

Danone's employees reacted angrily, stating their incomprehension of the reported decision, which they felt ignored their efforts for the group and their productivity levels. The Calais factory reacted first by going on strike for a few days. From then on, the other sites were scenes of frequent stoppages. A day of action, called by the unions, was organised in all the group's biscuit factories on the day that an emergency meeting of the group's European Works Council was held in Geneva. From the first day after the memo was unveiled, the CFDT trade union had called for an extraordinary meeting of the French company-level works council to be held "quickly". CGT criticised the "unprecedented selling off of a part of French industry's potential", while CGT-FO criticised the alleged hypocrisy of a management that had told unions they would be informed immediately of restructuring plans in the biscuit-manufacturing sector. On the part of the management staff, CFE-CGC said that it was concerned about the "imminent reorganisation of the headquarters of Evian, Lu and Danone", and the "clustering of research centres at the new Vitapôle centre in Palaiseau". However, CGT, which is the majority union within the group in France, and CFDT, the second most-supported union, demonstrated a difference of views over the relevant level at which the protest action should be targeted. While the former perceived in the fact that management had met the European Works Council before its French counterpart a manifestation of its desire to "speed up its restructuring policy at the European level", CFDT objected that the European level was "the most relevant tier at which to make demands, because four countries are involved in the restructuring".

In addition to the unions, reactions have also come from the mayors of the towns which would be hit by the reported factory closures, who have decided to meet jointly with Danone's chief executive.

Commentary

The Danone affair has not simply reinforced the impression given by the Michelin case - ie that corporations are being made to take decisions to make redundancies in the sole interest of the shareholders. It is above all highly symbolic: the "industrial logic" of building up the group's competitiveness and making efforts to improve productivity appear to be relatively unimportant in comparison to the "financial logic" of the shareholders. Some 60% of Danone's capital is held by institutional investors (18% of whom are French and 24% British and American). In December 2000, the group had to give up its takeover of the US-based Quaker Oats under pressure from the financial markets. Management's business plan states that its "strategy contributes to making the creation of share value a priority". Faced with this, the recommendations of the 1987 Riboud report seem to have little weight, and this is probably the most worrying aspect of the case. These recommendations relate to the improvement of productive efficiency and competitiveness. This reasoning has little to do with the financial reasoning of the shareholders, who, without concerning themselves with productive efficiency, are seeking an increase in profitability that can be achieved by reducing the capital invested and still obtaining identical results.

The framing of legislation to deal with collective redundancies in companies in strong economic positions will be difficult to achieve. The idea of public authorities forcing companies to risk having to yield later to the pressure of shareholders demanding the jettisoning of activities that have not been rationalised, seems unlikely. However, in terms of the chances of management in companies such as Danone being able to justify industrial strategies for the improvement of productive efficiency and competitiveness to their shareholders, and getting the latter to acknowledge the validity of such policies, a yawning communication gap is becoming painfully obvious. (Pascal Ughetto, IRES)