1. Selected financial information, information · 1. Selected financial information, information about the issuer, references and definitions 3 ... 2.2 Presentation of the Group

1. Selected financial information, information about the issuer, references and definitions 3

1.1 Selected financial information ..................................................................................41.2 Information about the issuer......................................................................................51.3 References and definitions ..........................................................................................6

2. Overview of activities, risk factors 72.1 History.......................................................................................................................................82.2 Presentation of the Group............................................................................................92.3 Description and strategy of the Divisions .......................................................102.4 Group strategic development priorities...........................................................112.5 Other elements related to the Group’s activity and organization.........122.6 Simplified organization chart..................................................................................172.7 Risk factors...........................................................................................................................17

3. Danone’s business highlights in 2012 and outlook for 2013 29

3.1 Business highlights in 2012......................................................................................303.2 Consolidated net income review..........................................................................323.3 Free cash-flow ...................................................................................................................383.4 Balance sheet and financial security review ..................................................403.5 Outlook for 2013..............................................................................................................443.6 Financial indicators not defined by IFRS ..........................................................47

4. Consolidated financial statements 494.1 Consolidated financial statements and Notes to the

consolidated financial statements.......................................................................504.2 Statutory auditors’ report on the consolidated financial

statements........................................................................................................................1074.3 Fees paid by the Group to the Statutory auditors and

members of their network .....................................................................................108

5. Financial statements of the parent companyDanone and other corporate documents 109

5.1 Financial statements of the parent company Danone.........................1105.2 Notes to the financial statements of the parent company

Danone...............................................................................................................................1125.3 Statutory auditor’s report on the Danone parent company’s

annual financial statements ..................................................................................1245.4 Related party transactions .....................................................................................1255.5 Information originating from third parties, expert opinions

and declarations of interest...................................................................................139

6. Corporate governance 1416.1 Board of Directors........................................................................................................1426.2 Audit Committee..........................................................................................................1496.3 Nomination and Compensation Committee .............................................1516.4 Social Responsibility Committee .......................................................................1536.5 Powers of the Chief Executive Officer .............................................................1546.6 Executive Committee ................................................................................................1556.7 Application of the AFEP-MEDEF Corporate Governance

Code for listed companies......................................................................................1556.8 Additional information.............................................................................................1556.9 Information on transactions entered into with members

of the Company’s Administrative, Management and Supervisory bodies .....................................................................................................156

6.10 Compensation and benefits paid to executives.......................................1566.11 Internal control and risk management ..........................................................166

7. Social, societal and environmental responsibility 173

7.1 Danone social, societal and environmental approach.........................1747.2 Information concerning the Group social, societal and environ-

mental performance in compliance with the Grenelle II law ...........1777.3 Other information related to the Group social, societal

and environmental responsibility .....................................................................200

8. Share capital and share ownership 2118.1 Share capital ....................................................................................................................2128.2 Treasury shares and DANONE call options held by the

Company and its subsidiaries ..............................................................................2138.3 Authorization to issue securities that give access to the

share capital.....................................................................................................................2168.4 Financial instruments not representing capital........................................2198.5 Dividends paid by the Company .......................................................................2198.6 Voting rights, crossing of thresholds ...............................................................2208.7 Share ownership structure as of December 31, 2012 and

significant changes over the last three fiscal years.................................2228.8 Market for the Company’s shares ......................................................................2248.9 Factors that might have an impact in the event of a tender offer .....2258.10 Change in control ........................................................................................................226

9. Combined Shareholders’ Meeting of April 25, 2013 227

9.1 Shareholders’ Meetings............................................................................................2289.2 Draft resolutions presented at the Shareholders’ Meeting ...............2289.3 Comments on the resolutions submitted to the Shareholders’

Meeting ..............................................................................................................................2379.4 Special reports of the Statutory auditors presented at the

Shareholders’ Meeting..............................................................................................254

10. Information on the Registration Document 25910.1 Incorporation by reference ....................................................................................26010.2 Persons responsible for the Registration Document ............................26110.3 Cross-reference tables...............................................................................................262

11. Appendix 26711.1 Documents available to the public...................................................................26811.2 Positions and responsibilities of the Directors and nominees

to the Board of Directors .........................................................................................269

Table of contents

Registration Document 2012 | Danone 1

Registration Document 2012Annual Financial ReportThis Registration Document includes all the items of the Annual Financial Report.

The French language version of this Registration Document (Document de Référence) was filed with the French financial markets authority(Autorité des marchés financiers, or AMF) on March 19, 2013, pursuant to Article 212-13 of its general regulations. This Registration Document maybe used in support of a financial transaction if supplemented by a Securities prospectus (Note d’opération) authorized by the AMF. This Registration Document was prepared by the issuer and its signatories are liable for its contents.

Copies of this Registration Document are available from Danone at: 17, boulevard Haussmann – 75009 Paris, on Danone’s website: www.danone.com and on the website of the Autorité des marchés financiers: www.amf-france.org.

This is a free translation into English for information purposes only.

Danone | Registration Document 20122


1

1.1 Selected financial information 4

1.2 Information about the issuer 5Legal name and trade name..................................................................................................................................................................................................................................................................5Registration number in the Register of commerce and companies ............................................................................................................................................................................5Date of incorporation and term of the Company ....................................................................................................................................................................................................................5Registered office............................................................................................................................................................................................................................................................................................5Legal form and applicable law .............................................................................................................................................................................................................................................................5Corporate purpose.......................................................................................................................................................................................................................................................................................5Statutory auditors.........................................................................................................................................................................................................................................................................................5

1.3 References and definitions 6

Selected financial information,information about the issuer, references and definitions

Sales (a) Free cash-flow (a) (b)

1.1 Selected financial informationThe financial information presented hereafter is extracted from section 3 Danone’s business highlights in 2012 and outlook for 2013 and from the Danonegroup’s consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS).

Consolidated financial statements and Notes to the consolidated financial statements are presented in section 4 Consolidated financial statements.

2010 2011 2012

Sales (a) 17,010 19,318 20,869

Like for like growth (b) +6.9% +7.8% +5.4%

Trading operating income (a) (b) 2,597 2,843 2,958

Trading operating margin (b) 15.27% 14.72% 14.18%

Like for like growth (b) +3 bps +20 bps (50) bps

Net income (a) 2,040 1,855 1,787

Earnings per share – Group Share (c) 3.05 2.77 2.78

Underlying fully diluted EPS (b) (c) 2.72 2.89 3.01

Free cash-flow (a) (b) 1,713 1,874 2,088

Selected financial information, information about the issuer, references and definitionsSelected financial information


2008

15,220

2009

14,982

2010

17,010

2011

19,318

2012

20,869

2008

1,183

2009

1,427

2010

1,713

2011

1,874

2012

2,088

(a) In € millions.(b) Financial indicator not defined by IFRS, see definition in section 3.6 Financial indicators not defined by IFRS.(c) In € per share.

Legal name and trade nameThe Company’s legal name is “Danone” (hereafter the “Company”),having been changed by the Shareholders’ Meeting of April 23, 2009from “Groupe Danone”.

Registration number in the Register of commerce andcompaniesThe Company is registered in the Paris Register of commerce andcompanies under number 552 032 534.

The Company’s APE Industry Code is 7010Z, which corresponds to theactivity of registered offices.

Date of incorporation and term of the CompanyThe Company was incorporated on February 2, 1899. The ExtraordinaryShareholders’ Meeting of December 13, 1941 extended the term of theCompany through December 13, 2040.

A new extension of the term of the Company by 99 years, i.e. untilApril 25, 2112, will be submitted to the Shareholders’ Meeting of April 25,2013.

Registered officeThe Company’s registered office is located at 17, boulevard Haussmann,in Paris (75009), France. The telephone number of the registered office is+33 (0) 1 44 35 20 20.

Legal form and applicable lawThe Company, a French corporation (société anonyme) with a Board ofDirectors, is subject to the provisions of Book II of the French commercialcode.

Corporate purposeIn accordance with Article 2 of Danone’s by-laws, the purpose of theCompany, whether directly or indirectly, in France and in any country,shall be:

• industry and trade relating to all food products;• the performance of any and all financial transactions and the

management of any and all property rights and securities, whetherlisted or unlisted, French or foreign, together with the acquisition andthe management of any and all real estate properties and rights.

In general, the Company shall be entitled to effect any and all property,real estate, industrial, commercial, and financial transactions relatingdirectly or indirectly or possibly useful in any connection whatsoever tothe Company in the fulfilment of its corporate purpose.

It shall be entitled to act and to effect the aforementioned transactionsdirectly or indirectly, in any form whatsoever, on its own behalf or onbehalf of third parties, and whether alone or in a joint-venture,association, grouping or company involving any other individuals orcompanies.

It shall also be entitled to acquire interests and holdings in any and allFrench and foreign companies and businesses, regardless of the purposethereof, by means of the establishment of special companies, throughasset contributions or subscriptions, through the acquisition of shares,bonds or other securities and any and all company rights, and, ingeneral, by any means whatsoever.

Statutory auditors

Principal Statutory auditors

ERNST & YOUNG ET AUTRES

Membre de la Compagnie Régionaledes Commissaires aux comptes de VersaillesTour First, 1, place des SaisonsTSA 1444492037 Paris-La Défense CedexRepresented by Jeanne BOILLET et Gilles COHEN

Start date of first term of office: April 22, 2010

Expiration date of term of office: date of the Shareholders’ Meetingdeliberating on the financial statements for the fiscal year endedDecember 31, 2015

PRICEWATERHOUSECOOPERS AUDIT

Membre de la Compagnie Régionaledes Commissaires aux comptes de Versailles63, rue de Villiers92208 Neuilly-sur-Seine CedexRepresented by Étienne BORIS et Philippe VOGT

Start date of first term of office: May 21, 1992


Substitute Statutory auditors

AUDITEX

Tour Ernst & YoungTour First, 1, place des SaisonsTSA 1444492037 Paris-La Défense Cedex



YVES NICOLAS

63, rue de Villiers92208 Neuilly-sur-Seine Cedex



1.2 Information about the issuer

Selected financial information, information about the issuer, references and definitionsInformation about the issuer


1

Unless otherwise noted:

• all references herein to the “Company” refer to Danone the issuer;• all references herein to the “Group” or “Danone” refer to the Company

and its consolidated subsidiaries;

• all references herein to “markets” for products in particular, or tomarket shares, refer to markets for packaged products and excludeproducts that may be otherwise marketed or sold;

• data pertaining to market shares or the Group’s market positions arebased on the value of sales;

• all references herein to market shares or to the Group’s marketpositions are derived from third-party market studies and data baseprovided notably by Nielsen, IRI, Euromonitor and Canadeaninstitutes;

• all references herein to “Fresh Dairy Products” and the fresh dairyproducts business or markets refer to processed dairy products andexclude milk, cream and butter;

• all references herein to “Waters” and the waters business or marketsrefer to bottled water, water sold in large containers (jugs), and watersold in small containers (cups);

• all references herein to “Baby Nutrition” and the baby nutritionbusiness or markets refer to baby formula (infant milk formula, follow-on milk, growing-up milks), milk-and fruit-based desserts,cereals, small pots of baby food and ready-made baby food;

• all references herein to “Medical Nutrition” and the medical nutritionbusiness or markets refer to adult or pediatric clinical nutritionproducts to be taken orally, or through a catheter in the event ofmalnutrition related to illness or other causes;

• all references herein to “Division” or “Divisions” refer to Fresh DairyProducts, Waters, Baby Nutrition and Medical Nutrition Groupbusinesses;

• all references herein to “mature countries” refer to Western Europe(including France and Southern Europe countries such as Spain, Italyand Portugal), North America, Japan, Australia and New Zealand;

• all references herein to “emerging countries” refer to other countrieswhere the Group is present;

• all references herein to “GPU” (Group performance units) refer tomedium-term variable compensation described in section 7.3 Otherinformation related to the Group social, societal and environmentalresponsibility;

• all references herein to “GPS” (Group performance shares) refer toCompany shares subject to performance conditions granted to certainemployees and executive directors and officers described in section7.3 Other information related to the Group social, societal andenvironmental responsibility.

1.3 References and definitions

Selected financial information, information about the issuer, references and definitionsReferences and definitions


2.1 History 8

2.2 Presentation of the Group 9Activities .............................................................................................................................................................................................................................................................................................................9Principal markets...........................................................................................................................................................................................................................................................................................9

2.3 Description and strategy of the Divisions 10Fresh Dairy Products ................................................................................................................................................................................................................................................................................10Waters................................................................................................................................................................................................................................................................................................................10Baby Nutrition..............................................................................................................................................................................................................................................................................................10Medical Nutrition .......................................................................................................................................................................................................................................................................................11

2.4 Group strategic development priorities 11Promote the Group’s product categories as a meaningful answer to public health issues .......................................................................................................................11Develop the Group’s geographic presence...............................................................................................................................................................................................................................12Develop sustainable industrial and agricultural models ..................................................................................................................................................................................................12

2.5 Other elements related to the Group’s activity and organization 12Distribution....................................................................................................................................................................................................................................................................................................12Marketing........................................................................................................................................................................................................................................................................................................13Competition ..................................................................................................................................................................................................................................................................................................13Acquisitions ...................................................................................................................................................................................................................................................................................................14Research and Development................................................................................................................................................................................................................................................................14Plants and equipment ............................................................................................................................................................................................................................................................................15Raw materials purchasing ....................................................................................................................................................................................................................................................................15Social and environmental responsibility.....................................................................................................................................................................................................................................16IT systems........................................................................................................................................................................................................................................................................................................16Financial risk management .................................................................................................................................................................................................................................................................17

2.6 Simplified organization chart 17Consolidation scope ................................................................................................................................................................................................................................................................................17Principal publicly traded equity interests...................................................................................................................................................................................................................................17

2.7 Risk factors 17Risk identification and control policy............................................................................................................................................................................................................................................17Operational risks related to the Group’s business sectors................................................................................................................................................................................................18Operational risks specific to the Group’s activity and organization...........................................................................................................................................................................20Legal risks........................................................................................................................................................................................................................................................................................................23Industrial and environmental risks .................................................................................................................................................................................................................................................23Financial market risks ..............................................................................................................................................................................................................................................................................25Insurance and risk coverage................................................................................................................................................................................................................................................................27


2

Overview of activities, risk factors

The Group’s origins date back to 1966 when the French glassmanufacturers, Glaces de Boussois and Verrerie Souchon Neuvesel,merged to form Boussois Souchon Neuvesel, or BSN. In 1967, BSNgenerated sales of around €150 million in flat glass and glass containers.In 1970, the BSN group began a program of diversification in the foodand beverage industry and successively purchased BrasseriesKronenbourg, Société Européenne de Brasseries and Société Anonymedes Eaux Minérales d’Evian which were, at the time, major customers ofthe BSN group for glass containers. These acquisitions made the BSNgroup France’s market leader in beer, bottled water, and baby food. In1973, BSN merged with Gervais Danone, a French food and beveragegroup specialized in dairy and pasta products, becoming the largestfood and beverage group in France, with consolidated sales of around€1.4 billion, 52% out of which in food and beverage.

During the 1970s and 1980s, after selling off its flat glass operations, theBSN group focused its growth on food and beverages, primarily inWestern Europe. This expansion included the acquisition of (i) breweriesin Belgium, Spain, and Italy; (ii) Dannon (the leading producer of yogurtin the United States); (iii) Generale Biscuit, a French holding companywhich owned LU and other European biscuit brands; (iv) the biscuitsubsidiaries of Nabisco, Inc. in France, Italy, the United Kingdom andAsia; and (v) Galbani, Italy’s leading cheese maker. With consolidatedsales of €7.4 billion in 1989, the BSN group was the third largestdiversified food and beverage company in Europe, and the largest inFrance, Italy, and Spain.

In the early 1990s, the BSN group started consolidating the positions ithad acquired in previous years, developing synergies within WesternEurope and expanding into growing markets. The BSN group also laidthe first milestones of its development strategy outside Western Europe.The group expanded its operations significantly, acquiring a significantnumber of companies and creating a number of joint ventures. InWestern Europe, for example, BSN acquired Volvic in France tostrengthen its position in bottled water. Outside Western Europe, the

Group pursued an active acquisition strategy to expand internationally(in the Asia-Pacific region, Latin America and Eastern Europe, as well as inselected markets such as South Africa and the Middle East).

In 1994, in order to consolidate its position as an international food andbeverage group, the BSN group decided to change the BSN parentcompany’s name to “Groupe Danone” (in 2009, the shareholdersapproved the modification of the relevant article of the by-laws tochange the legal name of the Groupe Danone parent company to“Danone”).

In 1997, the Group decided to focus on three worldwide business lines:Fresh Dairy Products, Beverages, and Biscuits and Cereal Products. TheGroup accordingly made several major divestitures in its Grocery, Pasta,Prepared Foods, and Confectionery Products operations, primarily inFrance, Belgium, Italy, Germany, and Spain. In 1999 and 2003, the Groupalso sold 56% and 44%, respectively, of the capital of BSN Glasspack, theholding company of its Glass Containers business, and in 2000 the Groupsold most of its European Beer activities. In 2002, the Group also sold (i)Kro Beer Brands, which held the Kronenbourg and 1664 brands, amongothers; (ii) its Italian Cheese and Meat activities (Galbani); and (iii) itsBrewing operations in China. The Group also sold its Sauces operations(i) in the United Kingdom and United States in 2005 and (ii) in Asia in2006. In 2005 the Group also finalized its exit from its European Brewingactivities, selling its interest in the Spanish company Mahou.

The year 2007 marked the end of a 10-year period during which theGroup refocused its operations on the health sector. In 2007, the Groupsold nearly all of its Biscuits and Cereal Products business (to the KraftFoods group). That same year, it also acquired Numico, which enabled itto add the baby nutrition and medical nutrition to its portfolio. Sincethen, the Group has pursued its growth strategy, notably with theacquisition of Unimilk group’s companies in Russia (in 2010) andWockhardt group’s nutrition activities in India (in 2012).

2.1 History

Overview of activities, risk factorsHistory


Activities

The Group’s strategy is consistent with its mission of “bringing healththrough food to as many people as possible”. Since 2007 and theacquisition of Numico, this mission has been implemented through fourDivisions:

• the Fresh Dairy Products Division (production and distribution ofyogurts, fermented dairy products and other specialty fresh dairyproducts) accounted for 56% of Group sales in 2012;

• the Waters Division (production and distribution of packaged natural,flavored and vitamin-enriched water) represented 18% of Group salesin 2012;

• the Baby Nutrition Division (production and distribution of specializedfood for babies and young children to complement breast-feeding)accounted for 20% of Group sales in 2012;

• the Medical Nutrition Division (production and distribution ofspecialized food for people afflicted with certain illnesses or frailelderly people) made up 6% of Group sales in 2012.

Consolidated sales by Division(in € millions)

Each Division has a global management unit, to which the dedicatedlocal entities report.

The Group enjoys the following leadership positions: No. 1 worldwide forfresh dairy products, No. 3 worldwide for packaged water and No. 2worldwide for baby nutrition.

Principal markets

The Group is present in all of the regions of the world:

• Europe, including Russia, the other CIS countries and Turkey – accountedfor 52% of Group sales in 2012, spread across all four Divisions. Theleading countries in this region include Russia, France, Spain and theUnited Kingdom;

• Asia represented 17% of Group sales in 2012, notably in China andIndonesia in the Waters and Baby Nutrition Divisions;

• the Rest of the world, which includes the activities in North America,Latin America, Africa and the Middle East, accounted for 31% of Groupsales in 2012:

- the United States is the leading country in the region thanks torobust activity in the Fresh Dairy Products Division;

- Mexico, Argentina and Brazil are the main contributors in LatinAmerica, with contributions from all four Divisions;

- in the regions of Africa and the Middle East, Saudi Arabia and SouthAfrica are the largest markets, focused entirely on the Fresh DairyProducts Division.

Consolidated sales by geographic region(in € millions)

The Group’s top 10 countries in terms of consolidated sales are asfollows:

Year ended December 31

2012

Russia 10%France 10%United States 8%China 6%Spain 6%Indonesia 6%Mexico 5%Argentina 5%United Kingdom 5%Brazil 4%

2.2 Presentation of the Group

Overview of activities, risk factorsPresentation of the Group


2

10,848Europe

3,584Asia

6,437Rest of the world

11,675Fresh Dairy Products

3,649Waters

1,288Medical Nutrition

4,257Baby Nutrition

The Baby Nutrition Division focuses on specialized foods for babies andyoung children to complement breast-feeding while always complyingwith the World health organization (WHO) Code and local laws. Theinfant formula segment accounts for more than 80% of this Division’sactivity, with a special emphasis on the development of second and

third stage follow-up milks (designed for children between the ages ofone and three). Solid foods for babies, also known as “weaning food”,account for one-fourth of the activity and are concentrated mainly inEuropean countries such as France, Italy and Poland.

Baby Nutrition

The Waters Division comprises the natural waters business along withflavored and vitamin-enriched waters business:

• the main international brands include Evian and Volvic (France,Germany, United Kingdom, Japan), Bonafont (Mexico, Brazil and,recently, Poland), and Mizone (China, Indonesia);

• the main local brands include Fontvella and Lanjarón in Spain,Villavicencio and Villa del Sur in Argentina, Aqua in Indonesia andZywiec Zdroj in Poland.

The Division’s strategy is based mainly on (i) the promotion of hydration-related health benefits and (ii) the management and protection of high-quality natural water resources.

Given the bipolarization of its markets (mature/emerging), the Grouphas adopted a strategy that reflects local concerns:

• in mature countries, average penetration and consumption levels arealready high and therefore do not offer strong growth potential in this

category in the years ahead. In addition, consumers are increasinglypaying attention to the environmental impact of packaged water. Inresponse to these constraints, the Division, during the last years, onone hand, developed its research and communication regarding thehealth benefits of the natural water consumption, and, on the otherhand, reinforced its efforts in order to reduce its environmentalfootprint. For example, the Division developed the use of new plant-based materials for the Volvic and Lanjarón brands, and in 2011achieved its goal of a carbon-neutral footprint for Evian (see section7.2 Information concerning the Group social, societal and environmentalperformance in compliance with the Grenelle II law);

• in the emerging countries, the Division’s strategy consists ofaccelerating the development of its growth model, notably by (i)identifying and preserving new water resources, (ii) strengthening itslocal retail experience, and (iii) rolling out certain brands in severalcountries, such as Bonafont, which was successfully deployed inMexico, Brazil and Poland, as well as Mizone in China and Indonesia.

Waters

The Fresh Dairy Products Division produces and markets yogurts,fermented fresh dairy products and other specialized fresh dairyproducts.

The Division’s strategy consists of developing consumption of theseproducts in all regions around the world. The strategy is based notablyon:

• strengthening the Division’s position in the major markets with stronggrowth potential such as the United States, Russia, Brazil, Mexico,Japan and South Africa, where per capita consumption of fresh dairyproducts is low;

• maintaining business volume in mature European countries, notablythrough product quality, product line extensions and innovation;

• the development of new regions such as Egypt, Chile and Indonesia.The Division relies on its capacity to further develop its product lines andcontinuously introduce new products in terms of flavor, texture,ingredients, nutritional content and packaging, enabling to reach newconsumer segments and develop new consumption moments whilecovering the full range of price points.

The local deployment of global brand platforms enables the Division tooptimize the allocated resources. Given the Group’s decentralized

organization, this deployment enables each country to innovate basedon the local culture and preferences while supporting the verticalstrategy applied to the main brands, thereby promoting the broad andrapid spread of products with high sales potential.

The Division’s main brands and product lines are as follows:

• Activia, which has been marketed for more than 20 years, is nowpresent in 72 countries;

• Actimel, on the market for more than 10 years;• brands aimed at children and pre-adolescents, such as Danonino,

which have been replicated in more than 50 countries (notably underthe Fruchtswerge, Danoninho and Petit Gervais brand names), as well asDanimals in the United States, Serenito in Argentina and Milkuat inIndonesia;

• functional brands such as Danacol and Densia;• indulgent lines such as Oikos, Danette and Fantasia;• Vitalinea, also marketed under the Taillefine and Ser brand names,

which comprises the low-fat product lines;

• so-called core business brands, which include basic fresh dairyproducts such as plain and fruit yogurts.

2.3 Description and strategy of the DivisionsThe Group defines a specific strategy for each of its four Divisions.

Fresh Dairy Products

Overview of activities, risk factorsDescription and strategy of the Divisions


Through Danone’s Food Nutrition Health Charter published in 2009, theGroup has reaffirmed its mission of “bringing health through food to asmany people as possible”.

This charter confirms Danone’s commitment to providing answers tocurrent food-related public health issues (obesity, diabetes, cardiovasculardiseases and nutritional deficiencies). These commitments include:

• adapting products to the needs of consumers in terms of nutritionalquality, taste and affordability;

• developing products that provide health benefits;

• providing consumer information presented in a clear (notably withrespect to the nutritional labelling of products) and responsible(advertising) manner;

• promoting healthy lifestyles;• supporting nutrition and health research programs;• dialogue with public health authorities, consumer groups and

scientists;

• sharing of knowledge with the scientific community and healthprofessionals.

2.4 Group strategic development priorities

Promote the Group’s product categories as a meaningful answer to publichealth issues

The Medical Nutrition Division focuses mainly on people receivingmedical treatment, babies afflicted with certain illnesses and frail elderlypeople. The Division’s products are designed primarily to treat disease-related malnutrition by satisfying special food needs. These products –most of which are eligible for insurance reimbursement – are prescribedby healthcare professionals (doctors, medical personnel in hospitals andclinics, pharmacists).

Under the umbrella brand Nutricia, the Group has a large portfolio ofbrands marketed in several countries, including for example:

• Nutrison: tube feeding for dietary treatment of patients who are notcapable of feeding themselves normally or who suffer from illness-related malnutrition;

• Fortimel/Fortisip: liquid oral nutritional supplements, with the mostconcentrated versions recently introduced in some of the Division’slargest markets (United Kingdom, France, Spain, etc.);

• Neocate: hypoallergenic products aimed at babies and children withlactose or multiple food protein intolerance or allergy-related troubles;

• Nutrini/Infatrini: oral and feeding tube food products adapted for thedietary treatment of infants and children incapable of feedingthemselves normally or sufficiently or who suffer from illness-relatedmalnutrition.

In 2012, the Group also introduced to four countries the nutritionalproduct Souvenaid, which satisfies special medical needs as part of thedietary handling of early onset Alzheimer’s disease.

The Group’s strategy consists of increasing its global coverage bypenetrating new countries and developing various distributionchannels. Thus, the Division developed a new platform known as “OTX”for marketing products that are not eligible for insurancereimbursement through new distribution channels (notably pharmaciesand drugstores) in countries such as Austria (test market for the Fortifitbrand) and Brazil.

The Group estimates that the medical nutrition market’s growthpotential is significant, mainly as a result of (i) the aging of thepopulation in some countries, (ii) the increased awareness of the role ofnutrition in health (notably for preventive purposes), (iii) the emergenceof new illnesses and allergies, and (iv) the growing number of screeningprocedures enabling early treatment of afflicted patients. Moreover,current research to accompany certain illnesses and allergies treatmentscould contribute to this growth potential.

Medical Nutrition

The Division’s various local brands are deployed from internationalbrand platforms, thereby enabling the rapid global dissemination ofbest practices from each country:

• the Immunity platform includes in particular the Aptamil, Nutrilon,Almiron and Gallia brands;

• the Superior Nutrition platform includes the Bebelac, Cow&Gate,Blédina and Malyutka brands among others.

The Division’s development strategy focuses on the following areas:

• build the credibility of the baby nutrition brands as an answer to thespecific needs of babies and young children by making this productcategory better known and understood among opinion leaders,healthcare professionals and order-givers in the sector;

• continue the Division’s geographical development, notably in therapidly growing emerging countries.

Overview of activities, risk factorsGroup strategic development priorities


2

Although they vary to reflect local specificities, the Group’s distributionmodels reflect two main approaches:

• distribution aimed at major retail chains;• distribution to traditional commercial sales points.Moreover, a significant portion of the Group’s products in the baby

nutrition and medical nutrition markets are distributed through morespecialized distribution channels of hospitals, clinics and pharmacies.

The Group is constantly streamlining its logistics flows in order toimprove service quality while reducing costs. This policy is based on anongoing assessment of its organization, notably through outsourcing ofdistribution in collaboration with specialized companies.

2.5 Other elements related to the Group’s activity andorganization

Distribution

The Group’s strategy increasingly relies on the upstream segment of itsactivity (its raw materials, operations and the environment), not just tomanage costs but also to make it a genuine mechanism for creatingvalue and standing apart from the competition.

The upstream work in particular enables Danone to develop and securehigh-quality supplies, notably for milk and spring water, its two main rawmaterials in terms of volume:

• in the milk supply chain, the Group works closely with local producersto improve animal husbandry practices in both developed andemerging countries. For example, collection entities and cooperativesopen to small producers were created in six countries (Egypt,Indonesia, India, Mexico, Turkey, Ukraine) in order to help membersmanage their farms, optimize their purchases, improve the herd’s feedor get veterinary treatment. This system provides higher revenues tofarmers and offers Danone quality and quantity guarantees;

• in the waters area, Danone has also instituted an innovative approachaimed at protecting and securing springs by promoting thedevelopment of non-polluting activities around catchment areas.Initiated in 1992 through the creation of the “Association pour laProtection de l’Impluvium de l’Eau Minérale d’Evian” (APIEME), this

approach involves the associations and local authorities in theprotection of the ecosystems surrounding the springs. It has sincebeen extended to other Group-owned springs such as Volvic in France,Aqua in Indonesia, Salus in Uruguay, Bonafont in Mexico andVillavicencio in Argentina.

In addition to its work on supplies, the Group is also working onoptimizing its resources’ utilization. In the Fresh Dairy Products Division,micro-filtration technologies were implemented enabling to select andseparate the various milk components in order to optimize their use inthe main product preparations.

Finally, in order to reduce the environmental footprint of its activities, theGroup is rethinking its product packaging, working to reduce its weightand excess packaging and also through using recycled materials. In thatregard, Danone may contribute to develop the recycling of its packagingin several countries.

All of these initiatives contributed to the implementation of the Group’senvironmental policy, a long-term economic challenge (see section 7.2Information concerning the Group social, societal and environmentalperformance in compliance with the Grenelle II law).

Develop sustainable industrial and agricultural models

The development of activities around the world, in particular emergingmarkets, represents a key mechanism by which the Group successfullycarries out its mission of “bringing health through food to as manypeople as possible” while ensuring its long-term growth. In 2012,emerging markets accounted for 53% of Group sales.

This development strategy focuses first around the so-called MICRUBcountries (Mexico, Indonesia, China, Russia, United States, Brazil), whereDanone has solid positions in rapidly growing markets. In thesecountries, the Group is continuing to develop the consumption of itsproducts, largely through innovation. In 2012, for example, Danonecompletely renovated its Dumex brand in China, launched Souvenaid inBrazil and increased its Oikos greek yogurt production capacity in theUnited States.

Moreover, Danone is continuing its expansion into other countries. TheGroup recently entered the Indian market across the four Divisions: inbaby nutrition and medical nutrition with the acquisition of the

Wockhardt group’s nutrition activities, in waters with the Qua and B’luebrands and in fresh dairy products with the launch of the Danone andDanette brands as well as the Fundooz brand, a line of nutritionalproducts aimed at the most economically distressed populations.

In order to pursue its geographic expansion and develop its long-termgrowth potential, the Group is testing out small-scale models in newmarkets such as various Asian countries where the Group does not yetoperate as well as African countries, given their growing economic andsocio-demographic stature as well as the emergence of a middle classand medium-sized cities (more than one million residents) in thesecountries. Based on its strong experience in Africa in recent years,notably in the Maghreb region, the Group is developing new positions innew markets (Ivory Coast, Cameroon, Kenya, etc.) through nutritionalproduct offers adapted to local conditions and consistent with the Worldhealth organization Code.

Develop the Group’s geographic presence

Overview of activities, risk factorsOther elements related to the Group’s activity and organization


The Group’s competitors in its respective business lines include (i) largemultinational food and beverage corporations such as Nestlé, PepsiCo,Coca-Cola, General Mills, (ii) large corporations in the medical nutritionand baby nutrition segments such as Abbott, Mead Johnson, Fresenius,(iii) more local and smaller companies specialized in certain product lines or markets, or (iv) retail chains offering generic or private labelproducts.

The packaged food and beverage sector is highly competitive due to thelarge number of national and international competitors. The Group isconfident that its strategy for profitable growth is strongly supported by

its products’ quality, convenience, affordability and innovative aspect,and by the powerful brand image conveyed on health, nutrition orsocietal and environmental responsibility.

Considering that success in this food and beverage industry is achievedthrough strong local market positions, the Group strives to be themarket leader of each segment in every country where it operates,always in compliance with laws and regulations relating to competition.This strategy allows for a long-lasting, balanced and constructiverelationship with major distribution networks, by marketing keyproducts yielding growth and profitability for both parties.

Competition

Key success factors underpinning the Group’s strategy are its brandreputation and close ties to consumers. The Group therefore strives tomaintain an ongoing dialogue with consumers by adapting to mediatrends and consumption methods. This dialogue takes place at severallevels:

• at the level of communication, through traditional channels (TV, press,etc.);

• through online campaigns (Evian live young campaign, etc.) andinteractive sites (Cow&Gate information platform…);

• at the product and packaging level, by differentiating the productexperience for the consumer as much as possible;

• at the sales points level, through measures that feature the products.In the baby nutrition and medical nutrition markets, communicationswith consumers takes place for the most part through healthcareprofessionals (general practitioners and specialists, medical personnel inhospitals and clinics, pharmacists).

Danone’s operating companies in each Division and country areresponsible for their own advertising, promotional and sales strategies,adapted to local consumption patterns. They are all supported bycommon foundations defined by dedicated central organizations, whichensure the coherence of the policies implemented, the sharing of know-how and optimization of costs.

Marketing

Major retail chainsIn 2012, the Group’s top 10 customers worldwide (of which five areFrench) accounted for approximately 20% of its consolidated sales; thetop five customers represented approximately 14% of its consolidatedsales.

The Group establishes global partnerships with its main distributors inorder to help develop the sales of its products. These partnerships arerelated in particular to logistics collaboration and food safety management.Matters involving pricing policies, which are up to each subsidiary, arenot included in these agreements.

In particular, the Group has taken several initiatives to work closely withlarge retailers in order to optimize the flow of goods and the inventorylevels of its customers with the Efficient Consumer Response (ECR)approach. In addition to inventory management, automatic inventoryreplenishments and just-in-time delivery, ECR aims at working withdistributors to better manage consumer demand and expectations atthe sales points. To that end, the Group has implemented sharedinventory management systems with its leading distributors, that areused to coordinate inventory levels among stores, as well as at thedistributors’ and Danone’s warehouses.

The Group also works with its customers to develop specific marketingactivities such as joint promotions.

Traditional market outletsGlobally, and in the emerging countries particularly, a large portion ofDanone’s sales is generated through traditional market outlets thanks tosmall-scale sales points networks. An in-house sales force and exclusivityagreements with wholesalers represent a competitive advantage for theGroup in countries where traditional commerce and independentsupermarkets continue to account for a significant share of food andbeverage sales.

Moreover, in Latin America and Asia, a significant portion of the WatersDivision’s products is directly distributed to consumers (Home and officedelivery or “HOD”).

Specialized distribution channels of hospitals, clinicsand pharmaciesIn the baby nutrition and medical nutrition markets, a significant portionof products are marketed in hospitals, clinics and pharmacies, throughspecialized distributors or following a tendering process. Danone alsomaintains an ongoing relationship with healthcare professionalsthrough its medical representatives, who meet with generalpractitioners and specialists (pediatricians, nutritionists, etc.) as well aspharmacists.



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The Group’s Research and Development Department’s mission is to:

• develop innovative products enabling to contribute to better dietsaround the world;

• improve dietary practices and promote better food for all. Danonetherefore promotes nutrition research, educates and trains healthprofessionals on diet-related matters and contributes towardimproved dietary practices for the population through educationaland informational campaigns;

• create products adapted to local nutritional needs tastes and customs.This process is conducted in compliance with a policy ofuncompromising food safety and through the development ofinnovative production processes that strive to optimize productioncosts.

The Group’s Research and Development Department includes, withinDanone Research, some 1,500 people, including 500 in France. Theteams’ work is split among a balanced overall model between:

• four general research centers:- Utrecht Innovation Center in the Netherlands (replacing the

Wageningen center);- Daniel Carasso Center in Palaiseau (greater Paris region) in France;- Packaging Center in Evian;- Singapore Baby Research Center.

• local teams created in most countries where the Group is present.Their primary mission is to adapt the products (texture, aroma, size,packaging and nutrition) to the local consumer preferences anddevelop products specific to their market.

The Group aligns its Research and Development orientations with theCompany’s strategy. For example, the Group has created scientificexpertise in the following areas:

Life sciencesThe Group has developed scientific expertise in understanding thedigestive system, and in particular lactic bacteria, probiotics andprebiotics. For the past several years, Danone has also conductedresearch on the bacteria that make up the intestinal microbiota. Thismicrobiota plays a part in the digestion of certain foods, affects theimmune system and protects against certain bacteria. Prebiotics andprobiotics can have a positive impact on the composition of theintestinal flora and therefore provide positive health benefits.

For all their work in these areas, the Research and Development teamsuse the latest techniques in genomics, cellular biology and robotics. Theycollaborate with internationally recognized, high-level scientific partnerssuch as the Institut Pasteur (Pasteur Institute), Institut National de laRecherche Agronomique – INRA (the French National Institute forAgricultural Research), Washington University in Saint Louis (UnitedStates), Wageningen University (Netherlands) and Harvard MedicalSchool (United States).

Nutrition and foodDanone is building a nutrition strategy together with experts and public-sector authorities around two key areas:

• an understanding of local challenges involving nutrition and food, andan understanding of major food-related public health challenges. Thisenables Danone to develop products that are more closely adapted tolocal market conditions. Danone has mapped nutrition and publichealth challenges in more than 40 countries in order to identify fooddeficiencies and excesses in these countries and thereby adapt theGroup’s product recipes. This expertise also leads the Group to lookinto dietary practices and trends, and the role of various food groupsin the local cultures;

• continuous improvements to the nutritional quality of products.Pursuant to the recommendations developed by the World healthorganization (WHO), the Group determines nutritional targets bynutrient, product category and consumer group. The Groupimplements progressive action plans aimed at reconciling the productingredients with the targets defined by WHO.

Sensory analysis and behavioral scienceDanone puts the consumer at the heart of its development projects.Taking consumer needs into account when defining research areasrequires integrating the consumer upstream of the products’development. It is therefore necessary to understand the humanparameters of food consumption and identify consumer expectations interms of taste, typical use in daily life and targeted benefits.

The Group regularly conducts researches in collaboration with externalentities such as universities and public research centers. The Groupbenefits from the expertise of external scientific committees on strategicthemes such as probiotics or water. The Group also maintains permanentcontact with the scientific community to better understand health andnutrition issues. This ongoing dialogue with scientists and researchsupport are two of the commitments made by the Group in its FoodNutrition Health Charter.

As part of its contribution to nutritional research, 18 Danone Institutes(non-profit organizations) around the world have been created to helpfurther understanding of the links between food, nutrition and health.Their initiatives support everything from scientific research’s support toinformation and training for health professionals, to public education.

Research and Development

In the pursuit of its international development strategy, the Group willcontinue to make acquisitions any time suitable for opportunities toarise, in order to strengthen its various Divisions. To that end, the Group

is constantly examining acquisition opportunities. In this context, theGroup may notably enter into partnerships or create joint-ventures.

Acquisitions



The Group’s raw materials needs consist mainly of:

• materials needed to produce food and beverage products, mainly milkand fruits (the “food raw materials”). On a value basis, milk representsthe main raw material purchased by the Group. These purchasesconsist mainly of liquid milk, for which the operating subsidiariestypically enter into agreements with local producers or cooperatives.Liquid milk prices are set locally, over contractual periods that varyfrom one country to another. The main other food raw materials arefruit-based preparations and sugar;

• product packaging materials, in particular plastics and cardboard(“packaging”). Packaging purchases are managed through global andregional purchasing programs enable to optimize skills and volumeeffects. Prices are influenced by supply and demand at the global andregional levels, economic cycles, production capacities and oil prices;

• energy supplies. They account for only a limited portion of the Group’soverall purchases.

The price trends of major raw materials may have a significant impact onthe volatility of the Group’s results (see Note 30 of the Notes to theconsolidated financial statements). In that context, the Group managescost inflation of raw materials through the following measures:

• continuous improvement of its productivity and optimization of theuse of raw materials, notably through reductions in production waste,lighter packaging and better use of milk sub-components in theGroup’s various products;

• implementation of a purchasing policy (“Market Risk Management”)that consists of defining rules for securing the physical supply andprice setting with suppliers and/or on financial markets when theyexist. The monitoring of exposures and of the implementation of thispolicy is made at the level of each raw materials category by theGroup’s central purchasing staff. The buyers typically negotiateforward purchase agreements with suppliers, since no financialmarkets exist that would allow full-cover hedging of the volatility ofthe Group’s main raw materials purchase prices. Forward purchaseagreements are monitored at the Group level at the end of each year.The information regarding these future purchasing commitments ispresented in section 3.4 Balance sheet and financial security review.Also, with respect to the Group’s two main raw materials categories(milk and dairy ingredients and plastics including PET), a sensitivityanalysis for the impact of changes in their prices on the Group’s annualpurchasing costs (applied simultaneously in all countries where theGroup has a production activity) is presented in Note 30 of the Notesto the consolidated financial statements.

Moreover, the Group’s strategy increasingly relies on the upstreamportion of its activities and in particular its supply of raw materials, notonly to manage its costs but also to make it a genuine source of valueadded and differentiation relative to the competition (see section 2.4Group strategic development priorities).

Raw materials purchasing

The Group’s policy is to generally own its production facilities. The Grouphas many, widely-dispersed production facilities except in the BabyNutrition and Medical Nutrition Divisions, for which the sites are moreconcentrated.

The Group has production facilities around the world in its principalmarkets. As of December 31, 2012, the Group had 194 production sites(see section 7.2 Information concerning the Group social, societal andenvironmental performance in compliance with the Grenelle II law).

Fresh Dairy ProductsIn 2012, the production of the Fresh Dairy Products Division represented6.6 million of tons. The five leading plants of the Division were located inMexico, Argentina, Brazil, United States and Saudi Arabia and accountedfor approximately 28% of the Division’s total production.

WatersIn 2012, the production of the Waters Division represented 22.1 billion ofliters. The Division’s two largest bottled water facilities, located in France,accounted for approximately 20% of the Group’s total bottled waterproduction capacity in 2012, and the two largest production facilities forwater in large containers, both located in Indonesia, accounted for closeto 21% of the Division’s total water in large containers production in 2012.

Baby NutritionIn 2012, the production of the Baby Nutrition Division represented 0.6billion of liters. The Group’s largest facility in the Baby Nutrition Divisionis located in Indonesia and accounted for close to 13% of the Division’sproduction in 2012.

Medical NutritionIn 2012, the production of the Medical Nutrition Division represented 0.1billion of liters. The Group’s largest facility in the Medical NutritionDivision is located in the Netherlands and accounted for close to 72% ofthe Division’s production in 2012.

Lastly, the Group rents some facilities, notably offices and warehouses(see section 3.4 Balance sheet and financial security review).

The production sites are inspected regularly to assess possibilities forimproving quality, environmental protection, safety, and productivity.On the basis of these reviews, management establishes plans for theexpansion, specialization, upgrading, and modernization (or closing) ofspecific sites.

Plants and equipment



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The Group has a policy for developing specialized IT (informationtechnology) systems and deploying them in its subsidiaries in order tooptimize and streamline investments in information technology whiletaking advantage of global synergies and limiting risks. Thedevelopment and deployment of IT systems are the responsibility of acentralized team within the Group’s IT Systems Department. This ITsystems policy covers all of the Group’s functions and activities, inparticular:

Integrated information systemAt its subsidiaries, the Group implements an integrated informationsystem, Themis, based on an SAP architecture.

The activities supported by Themis account for 75% of consolidatedsales in the Fresh Dairy Products and Waters Divisions (excluding Unimilkgroup’s companies) as of December 31, 2012. The roll-out of this systemis continuing in the Unimilk group’s companies.

The system is in the process of being implemented at the subsidiaries ofthe Medical Nutrition and Baby Nutrition Divisions (covering currentlyaround 20% of combined sales for these two Divisions as ofDecember 31, 2012).

Research and DevelopmentThe Artemis system (developed by SAP) was developed in order toconsolidate all formulations of products and raw materials used in thisarea. This application enables to take advantage of and share allnutritional and food safety information related to products andingredients used by Danone and to accelerate the design phases for newproducts.

For example, the Waters Division initiated the Hydre project forsystematic quality measurement of hydrological resources that combinesan analysis’ management application with a GPS (Global PositioningSystem) application and will continue to roll it out for all the springsmanaged by the Group (France, Poland, Argentina and Uruguay in 2012).

PlanningThe APO sales forecasting and production planning solution (developedby SAP), which is already used by the Fresh Dairy Products Division, iscurrently being rolled out in the Baby Nutrition and Medical NutritionDivisions. As of December 31, 2012, this system had already beendeployed at 15 subsidiaries and 7 plants in Europe. This program aims tocover all the entities of the two Divisions and will be actively pursued in2013.

Purchasing and Supply ChainThe Group has implemented a Supplier Relationship Managementsolution, which covers the processes for analyzing expenditure, selectingsuppliers, managing contracts, and analyzing suppliers’ performance.This system is designed to structure and reinforce the internalprocurement processes and the relationship with suppliers.

In particular, the Fresh Dairy Products Division has developed an SAP-based application for analyzing the value of fruit preparations. Thisapplication enables a collaborative approach with suppliers in order tooptimize the preparations.

As for the supply chain, the Group offers its suppliers and industrialpartners a range of EDI (Electronic Data Interchange) messages toautomate and digitize information flows from orders to invoices(eSupply Chain).

IT systems

A direct result of Danone’s dual economic and social project, CorporateSocial Responsibility (CSR) is deeply anchored in the Group’s strategy.

In 1972, Antoine RIBOUD noted that “corporate responsibility does notstop at the factory gate or the office door”. This vision was thenformalized into the dual economic and social project that forms the basisfor Danone’s development and organizational model.

Since 1996, Franck RIBOUD has lent increasing weight to societalconcerns, making corporate social responsibility and sustainabilityessential levers for strong and lasting growth.

2006 marked a key stage, with the formalization of Danone’s mission:“bringing health through food to as many people as possible”.

This mission is reflected in the Group’s major social welfare challenges:

• social challenges: employment, increased employability andprofessional skills, due consideration for employees’ commitment andwell-being, for occupational health and safety standards, and for thelocal and regional areas where the Company operates;

• challenges linked to products and consumers: taking nutrition andfood into account as basic elements in public health policies;

• environmental challenges: satisfying the needs of an ever-increasingnumber of consumers while limiting the environmental impact of theGroup’s activities.

To satisfy these challenges and grow in accordance with its mission,Danone decided to focus on four strategic priorities to ensure sustainedand responsible growth:

• Health: strengthening of the Group’s capacity to deliver relevantbenefits with respect to nutrition and health challenges;

• For All: establishment of economic models to bring high-qualitynutritional solutions to populations with limited purchasing power ina growing number of countries;

• Nature: recognition of environmental impact through reductions inthe Group’s carbon footprint and water consumption;

• People: transformation of the Company as a place for thedevelopment of all employees.

These four strategic priorities (Health, For All, Nature, and People) are aguiding principle by which Danone designs, produces and markets itsproducts.

See also sections 7.1 Danone social, societal and environmental approach,7.2 Information concerning the Group social, societal and environmentalperformance in compliance with the Grenelle II law and 7.3 Otherinformation related to the Group social, societal and environmentalresponsibility.

Social and environmental responsibility



Danone maintains an active risk management policy aimed atprotecting and developing its assets and reputation and protecting theinterests of its shareholders, employees, consumers, customers,suppliers, the environment and its other stakeholders.

Since 2002, the Group has implemented a global risk identification andmanagement system that prioritizes challenges in terms of their

probability of occurrence and their estimated impact on the Group. Ituses a special risk mapping methodology called “Vestalis”.

This mapping is designed to identify the risks related to the variousstrategies and activities, to prioritize them at the local level and toconsolidate and contextualize them at the regional level. This mappingthen leads to the definition of key risk mitigation actions through

2.7 Risk factors

Risk identification and control policy

The Group holds, directly or indirectly, equity stakes in the followinglisted companies:

• Yakult Honsha (Fresh Dairy Products – Japan) listed on the Tokyo StockExchange;

• Centrale Laitière du Maroc (Fresh Dairy Products – Morocco) listed onthe Casablanca Stock Exchange.

These companies are consolidated using the equity method (see Note12 and Note 33 of the Notes to the consolidated financial statements).

Principal publicly traded equity interests

As of December 31, 2012 the Group consolidated 252 companies, ofwhich 231 were fully consolidated and 21 were associates.

The list of all consolidated companies with country of origin, percentageof ownership and control as of December 31, 2012 appears in Note 33 ofthe Notes to the consolidated financial statements.

2.6 Simplified organization chart

Consolidation scope

The Group’s policy consists of (i) limiting the impact that its exposure tofinancial market risks could have on its results and, to a lesser extent, onits balance sheet, (ii) monitoring and managing such exposure centrally,whenever the regulatory and monetary frameworks so allow, and (iii)using derivative instruments only for the purpose of economic hedging.

Through the Treasury and Financing Department, which is part of theGroup Finance Department, the Group possesses the expertise and tools

(trading room, front and back office software) to act on different financialmarkets following standards generally implemented by first-tiercompanies. In addition, the Internal Control and Internal AuditDepartments review the organization and procedures applied. Lastly, amonthly treasury report is sent to the Group Finance Department,enabling it to monitor the decisions taken to implement the previouslyapproved management strategies (see section 2.7 Risk factors).

Financial risk management

EnvironmentThrough a joint effort with IT systems developer SAP, the Groupdeveloped an innovative application to measure the carbon footprint ofits products. Based on an analysis of each product’s life cycle andoperational monitoring of these various stages, this application enablesto measure the carbon footprint of each product. This solution is alreadyoperational at 29 subsidiaries equipped with the Themis system.

The collaboration with SAP continued in 2012 with the implementationof a reporting application (Nativ project) for all environmental indicators(more than 150 in all). This application will be used for the first time in 2013 by most of the Group subsidiaries to collect indicators related to 2012.

Sales and MarketingContinuing the initiatives launched during the last year to satisfy theneeds of its customers and consumers, the Group’s efforts focused on, inparticular:

• the implementation of systems allowing the performance improvementof its Trade Marketing operations, notably those involving promotionalinitiatives;

• the deployment of analytical solutions for sales points performance,notably involving inventory shortages, through several projectsimplemented in conjunction with its customers;

• the development of Digital Marketing platforms enabling a betterunderstanding of the customers’ expectations, notably on socialmedia, as well as special work on eRetailing in conjunction with itscustomers.

Overview of activities, risk factorsRisk factors


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I. Risks associated with the volatility of prices andthe availability of raw materials

Risk identificationThe Group’s principal raw material needs consist primarily of:

• materials needed to produce Danone’s food and beverage products,primarily milk and fruits (“food raw materials”);

• materials needed for packaging its products, primarily plastics andcardboard (“packaging”);

• energy supplies. They account for only a limited portion of the Group’spurchases.

Variations in supply and demand at global or regional levels, weatherconditions, government controls, regulatory changes and geopoliticalevents could substantially impact the price and availability of rawmaterials and of the materials needed to package the productsconcerned, which could have an adverse effect on the Group’s results. Inparticular, a potential increase in their prices may not be passed on,either in full or in part, in the sales price of the Group’s products andcould have in any event a significant adverse effect on the Group’sactivities and on its results.

Risk managementIn the context of high raw materials price volatility, the Group managesthis commodity inflation through the following measures:

• continuous improvement of its productivity and optimization of theuse of raw materials, notably through reductions in production waste,lighter packaging and better use of milk sub-components in theGroup’s various products;

• establishment of a purchasing policy (“Market Risk Management”)that consists of defining rules for securing the physical supply andprice setting with suppliers and/or on financial markets when theyexist. The monitoring of exposures and the implementation of thispolicy is made at the level of each raw materials category by theGroup’s central purchasing staff. The buyers typically negotiateforward purchase agreements with suppliers, since no financialmarkets exist that would allow full hedging of the volatility of theGroup’s main raw materials purchase prices.

Additional information is provided in section 2.5 Other elements relatedto the Group’s activity and organization and in Note 30 of the Notes to theconsolidated financial statements.

II. Risks associated with the concentration ofdistribution and the default of a customer

Risk identificationWhile the end customers of Danone products are individual consumers,the Group sells its products mainly to major retail and grocery chains.Overall, the distribution market has become increasingly concentratedglobally and locally. In 2012, the Group’s top 10 customers worldwide (ofwhich five are French) accounted for approximately 20% of itsconsolidated sales; the top five customers represented approximately14% of its consolidated sales. A continuation of the movement toconcentrate distribution at the global level along with the emergence ofkey players at the local level would result in a smaller number ofcustomers for the Group companies and could lead to retailersdemanding better terms. This could affect the operating margin of thesecompanies and therefore of the Group, change their market sharesand/or represent a counterparty risk in the event of a default by a majorcustomer, and consequently have a significant adverse effect on theGroup’s activities and results.

In some countries, certain subsidiaries of the Baby Nutrition and MedicalNutrition Divisions have commercial relations with public and quasi-public organizations, health insurance and supplementary healthinsurance companies, as well as hospitals, whose default risk is relativelylimited but which have long payment terms. It is possible that some ofthese organizations would collaborate and issue joint tenders, whichcould have a significant negative impact on the results of the respectiveDivisions.

Risk managementThe Group manages this risk mainly through an action program in thesales policy area focused on the large key accounts and CreditCommittees or equivalents in Danone subsidiaries, as described insection 2.5 Other elements related to the Group’s activity and organization.

Moreover, the Group’s exposure to unpaid trade receivables not yetimpaired is limited, as indicated in Note 16 of the Notes to theconsolidated financial statements.

III. Risks associated with competition

Risk identificationThe Group conducts its business in highly competitive markets thatinclude large multinational companies and numerous local players ofdifferent sizes. In Western Europe and North America, the Group’s

Operational risks related to the Group’s business sectors

preventive measures, which may be local or global as appropriate, orthrough the establishment of crisis management plans.

Since 2002, Vestalis has thus been deployed in the companies in theFresh Dairy Products and Waters Divisions, and since 2009 its use hasbeen largely and progressively extended to the companies in theMedical Nutrition and Baby Nutrition Divisions. In 2012, Vestalis wasdeployed in 148 Group operating subsidiaries, which represent 99% ofthe Group’s consolidated sales.

The most significant risks are reviewed once a year by the managementteams of the geographic regions during specific meetings. In 2012,almost all regions general managers’ and finance directors’ participatedto a risk committee meeting focusing on the risks faced by theirsubsidiaries. A general review of the Group’s risks is regularly performedby Danone’s General Management. The Audit Committee is also

regularly informed of these risks, and operating managers occasionallyattend these meetings in person in order to report on the risks related totheir areas of responsibility.

The risk management system is described in greater detail in theChairman’s report on internal control and risk management in section6.11 Internal control and risk management. It is an integrated systemwhich relies significantly on the Group’s risk management, internalcontrol and internal audit activities but which also benefits from theother activities of the Group Finance Department and several othercentral functions.

The operational risks generally related to the business sectors in whichDanone is active, those specific to the Group’s activities andorganization, legal risks, industrial risks, environmental risks and marketrisks are presented hereafter by thematic category.

Overview of activities, risk factorsRisk factors


markets tend to be relatively mature, and competition is thereforeparticularly intense, both in terms of pricing and innovations. Withrespect to the Group’s activities in the Rest of the World, a fewinternational food and beverage groups also hold strong positions insome emerging markets and seek to expand such positions or enter newmarkets. In addition, certain retail and grocery chains, having developedtheir own brands, could reduce the shelf space occupied by the Group’sproducts in favor of their own products.

The Group is thus facing national and international competition whichcould lead it to reduce its prices to defend its market shares, which couldhave a significant adverse effect on the Group’s results.

Risk managementTo be able to compete effectively with the main operators in thesemarkets, the Group has decided to differentiate from its competitors interms of products’ range, quality/price ratio and positioning.