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Chinese Dairy Companies Look to Joint Ventures and Foreign Acquisitions to Repair Reputation

1/6/2014
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China is expected to become the world’s largest dairy market in 2018, and this expectation has made both international and Chinese dairy companies reassess the way that they are doing business. A string of recent food safety scandals has seriously undermined Chinese consumers’ faith in Chinese brands, and this has led to a growing appetite for foreign dairy products and baby milk formula. At the same time, most international dairy companies have found the scale, local milk supply and fragmented nature of China’s retail market daunting. What is quickly becoming apparent is that Chinese companies need the reputation of foreign dairy brands as much as foreign companies need the Chinese market for their own growth strategies, and this has led to the development of a 2-pronged approach.

Image is Everything: Mengniu’s Share in the Chinese Market Falls

ChineseDairyConsolidationLineGraph

Joint Ventures Provide a Medium-Term Boost for Chinese Brands…

In January 2014, WhiteWave Foods and Mengniu became the latest international dairy couple, with their joint venture taking the US company into new fast-growing territory and the Chinese company winning a much-needed international partner to restore its reputation. The move is important for WhiteWave, which has already announced its first acquisition of the year, but it is also vital for Mengniu, which has been in dire need of a new partnership to revive its market share.

This arranged marriage, however, is by no means the only pairing in the Chinese dairy market; in fact, Mengniu has been previously wedded to both Arla and Danone. Starting in 2013, Tingyi and Japanese food and beverage giant, Asahi, agreed to work together to sell baby milk formula in China. Rival, Yili, has also not been idle, partnering with Dairy Farmers of America. These agreements with foreign companies help Chinese companies associate themselves with the higher quality and safety standards of international brands.

These joint venture agreements tend to suit both parties well at the time, but they are rarely long-lasting strategies for success. In the longer term, international companies will need to navigate the Chinese market for themselves in order to fully understand where all the opportunities lie, whilst Chinese companies will need to develop their own quality milk supply and ensure its safety in order to win the hearts and mouths of the Chinese consumer.

…but Longer-Term Strategy Likely to Revolve Around Brand Acquisition

With China a fast-growing and sustainable source of revenue for domestic companies, acquisitions have never been more important to their overall strategies. 2013 saw the largest ever acquisition of a US company by a Chinese one with food safety and supply at the heart of the decision. In dairy, similar moves have been seen with China Bright taking a large share of New Zealand’s Synlait Milk.

Joint ventures are likely to continue in the near to mid term as Chinese companies do what they can to restore faith in their brands. Acquisitions, however, will definitely form the backbone of corporate strategy as the race for quality milk supply continues and small, well-respected foreign dairies find themselves the subject of Chinese commercial cravings.

 

 

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