The Grameen Danone Foods Joint Venture in Bangladesh: A Case Study of a Successful Social Business

What Is a Social Business?

In 1932, U.S. President Franklin D. Roosevelt referred to an impoverished person as “the forgotten man at the bottom [base] of the economic pyramid.” Later, the term—shortened to “BoP”—became business jargon after publication in 2010 of The Fortune at the Bottom of the Pyramid.

Few places have more impoverished people than Bangladesh. With 169 million people in 2015, its per capita GDP at PPP was $3,581, with 43.3 percent of the population below the international poverty line of $1.25 per day. Thus, Bangladesh has conditions that correlate closely with poverty: an adult illiteracy rate of 42.3 percent, a high incidence of infectious diseases, a poor infrastructure, high underemployment, crowded conditions (imagine half the U.S. population squeezed into the state of Iowa), and more than its share of natural disasters—especially periodic flooding—that impede development. In the face of these ominous conditions, two companies—the Grameen Foundation from Bangladesh and Groupe Danone from France—formed a joint venture (JV) social business to serve Bangladesh’s BoP.

Mohammad Yunus, founder of the Grameen Bank in 1974 and winner of the Nobel Peace Prize in 2006, originated the social business concept, which aims to generate social benefit by creating a sustainable business. The Grameen Danone Foods JV was established to make a profit but pay no dividends. All earnings are reinvested, except that ­investors may recoup their original capital input. Unlike NGOs, charities, and not-for-profit organizations, a social business must sustain itself by earning profits competitively rather than receiving new contributions to carry on.

The Grameen Bank (GB) began when Yunus lent $27 to a group of indigent villagers who repaid the money even though he had required no collateral from them. This small beginning, contrary to Bangladeshi bank practices, led to GB’s microfinancing program. It has competed primarily with usurious money lenders who charge as much as 10 percent interest per day. GB’s typical rate of 20 percent per year may sound high, but Bangladesh has had an inflation rate of nearly 9 percent, and GB supports many noninterest loans as well. Some banks outside Bangladesh, such as Citigroup and Deutsche Bank, have since used GB’s example as a model.

Before GB, hardly any Bangladeshi loans went to women, and Yunus had to convince religious opposition that the Prophet Muhammad would have supported what he was doing. Today, about 97 percent of GB’s loans go to women, and audits show a repayment rate of 98 percent. (Borrowers must repay a loan in order to get a new one.) GB uses repayments and interest to make additional loans and to support the Grameen Foundation’s poverty-fighting projects. Its loans, which in 2015 came to almost $1.18 billion, have included initial financing for street vendors and construction of more than 600,000 houses. It provides more than 20,000 student loans and 50,000 scholarships per year. It has given noninterest loans to more than 70,000 beggars so they can sell trinkets during their house-to-house begging. The Foundation’s activities have expanded into a variety of businesses, such as telephone service, solar power generation, and health care. The above photo shows a Grameen bank member collecting money from borrowers.

The Grameen Bank and Foundation

France’s largest food company, Groupe Danone (spelled “Dannon” for the U.S. market) operates in four product divisions: dairy (world’s largest, with Danone being almost a generic word for yogurt); bottled water (ranked second globally, including such brands as Evian and Volvic); baby food (second globally under the Blédine brand); and medical nutrition (largest in Europe). It operates worldwide and had 2015 sales of €22.4 billion ($25.2 billion). Before its JV with Grameen, it had no Bangladeshi operations. In fact, it aimed most of its products, such as its Activia and Actimel brands of yogurt, at higher-end consumers.

Why would Danone, or anyone, want to invest in an operation that yields them no dividends or capital gains? Yunus contends that people are multidimensional and thus may desire more than economic gains for themselves. He points to business leaders (e.g., Carnegie, Gates, Rockefeller) who turned their attention to philanthropy after amassing large fortunes. Danone’s JV participation fits this multidimensional vision. In fact, it has a history of socially responsible behavior, with a corporate mission “to bring health through food to as many people as possible.” Nevertheless, Danone must generate profits, and its management must answer to shareholders. The Bangladeshi JV could offer several potential economic advantages.

The demand for Danone’s products has been maturing in wealthier countries, which have been Danone’s traditional markets. Hence, its management has been shifting more emphasis to poorer countries. Between 1999 and 2010, the share of its sales coming from LDCs increased from 6 percent to 49 percent. Yet, even there its sales have centered on affluent segments, about which its chairman, Frank Riboud, said, “It would be crazy to think only about the peak of the pyramid.” Thus, Bangladesh could serve as a laboratory for learning about customers and ways of operating at the BoP.

Critics complain that MNEs contribute to economic underdevelopment by pushing poor consumers to purchase superfluous products instead of nutritious food. In contrast, Danone’s products are all healthful and sanitary. Although one company’s successful marketing of such products is not likely to have a significant impact on development, it is a potential catalyst, which perhaps also leads to favorable publicity. Further, as BoP consumers move upward economically, they will have more to spend on other Danone products and may favor them because of their earlier experience. Riboud said, “When poverty is on the rise, my own growth prospects shrink. [This] means that combating poverty is good for my business.”

Groupe Danone

Being perceived as socially responsible may improve business performance in various ways. However, there are an almost infinite number of competing ways to be socially responsible. The amount Danone invested in the JV was $500,000, a small outlay for a company of that size, and Danone stood to get the money back if the operation became sufficiently profitable. Moreover, the fact that it would become one of the first major corporations to invest in a social business could generate free positive publicity globally.

At a 2005 lunch in Paris, Riboud asked Yunus what Danone might do to help the poor. When Yunus explained the social business concept, Riboud immediately said, “Let’s do it,” and the two shook hands on setting up their JV. Although this JV is one of the first social businesses established in partnership with a major MNE, Roosevelt’s “forgotten man” was not completely forgotten in the interim. Many organizations have marketed to the BoP (most notably in India during the 1970s’ heyday of the appropriate technology movement), with such devices as dung-powered stoves.

These experiences offer the following lessons for companies wishing to tap the BoP, especially with a nutritious product:

Price—Low and stable prices help create and sustain sales, so companies gain an advantage by finding new means to cut and stabilize their own costs, which they then pass on to customers.

Product compatibility—High nutrition at a low price alone is insufficient. Products must be compatible with the target market’s accustomed habits and visually appealing and flavorful to them. So it is vital to pick the right products and adapt them to local markets.

Education—Within some countries the BoP is largely illiterate, has low access to popular media, and is unconvinced about cause-and-effect scientific relationships. Hence, it may be important to reach people in this segment by nontraditional means, convince them that changes from nutrition are important and take time, and convey information that they will believe.

Promotion—Publicity prior to the start of sales is quite valuable, so the use of opinion leaders (those that the target market group accepts) is essential in developing credibility.

Competition—Given efforts to help the poor, competition may come from government programs, not-for-profit organizations, and charities. Thus, companies need to outperform this competition or find means of working cooperatively with it.

After their 2005 Paris handshake, the JV began production in less than two years. The partners started with a small rural factory to serve only its surrounding poverty-stricken area. Given the JV’s social objective, the partners agreed that product and production would be as green as possible. Even though the factory is the size of only one percent of Danone’s standard factories elsewhere, it has the latest equipment, treatment of both incoming and outgoing water, and solar panels to generate renewable energy.

The introductory plant and two more built by 2015 make only yogurt, a product of high nutritional value for children. It relies on efficient small-scale production and nearby supplies of the main ingredient (milk).

Through market testing, Danone decided to sell a sweeter and thinner yogurt, drinkable directly from the container (subsequent market feedback led the JV to include spoons as well). It fortifies the yogurt with 30 percent of the daily need for vitamin A, zinc, and iodine, and it uses biodegradable technology so that containers can be converted to fertilizer.

To keep costs and prices low, the plant uses mostly local ingredients, mainly from small suppliers such as farmers with only one or two cows, who collect and deliver milk in jugs (thus saving refrigeration and transportation costs). Because of fluctuating milk prices, the JV negotiated longer-term contracts with farmers to better stabilize prices; hence, the JV pays higher than market price sometimes and less at other times. Fixed sales costs are kept low by selling only on commission (about 20 percent to saleswomen and 80 percent to small local stores). To minimize saleswomen’s commissions, the company successfully suggested their selling additional products during house-to-house visits. Personnel costs have been kept low since completion of its start-up phase by employing only Bangladeshis. Although the yogurt plant lacks scale economies, its unit costs are equivalent to Danone’s larger plants elsewhere.