Discussion document: Dairy Market CHINA: … document: Dairy Market CHINA: ... Milk powder produced by the Hebei Sanlu ... products after the 2008 melamine scandal. Year
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The Chinese food market has experienced strong growth in recent years and is
expected to continue to grow at a CAGR of 8% in the next 3 – 5 years
▐ The Chinese food market has been growing at a rapid pace for several years. The number of high-income earner is surging, benefiting from a significant rise in wages. This has resulted in a soaring demand for new products, concepts and brands
▐ Both international and domestic grocery retailers are expanding quickly in China with diverse formats and entering new regions
▐ Hypermarkets and supermarkets continue to account for the greatest proportion of overall sales. Meanwhile, internet retailing is booming due to its competitive prices and home delivery services
China packaged food industry distribution
Hypermarket, supermarket;
63%
Food & drinks
specialists; 18%
Convenience store and gas station; 16%
Others incl. online; 3%
Source: Euromonitor
China’s Top 10 Grocery Retailers in 2012
Local Chinese companies dominate the grocery sector in China, only 2 foreign
companies can be found in the top 10 players list
Ownership Company name China retail sales, bn RMBGrowth
The top three players Mengniu, Yili and Bright Dairy controlled an aggregated
market share of about 68% of the Chinese drinking milk market in 2012
▐ After the melamine scandal in 2008, unlike in the infant formula market, the domestic brands in the liquid milk market recovered quickly. Foreign brands are disadvantaged by high transportation costs and insufficient access to the market.
� Own logistic system to deliver directly from the farm to the consumers, cutting out the middlemen in order to increase freshness and increase food traceability
▐ Key challenge:
� High costs to develop nationwide cold chain logistics
Integrated; 68%
Vertical; 27%
Special food; 5%
Shanghipremium B2C food
Source: Industry expert interviews; MelchersRaffel analysis
What customers said about online grocery
In addition to food safety concerns, convenience and rich product variety are also
key motivations for Chinese consumers to buy food from online platforms
�Female
�Female
�Beijing MNCmanager
�Age: 44
▐ “The vegetables are really fresh.”
▐ “Supermarket food doesn't look that fresh, especially if you only get there in theevening. Or you can also get some cheaper vegetables in markets during day
time, but I really worry about the safety of the products sold there."
▐ “I stopped buying domestic milk brands two years ago. Due to safety concerns, I
would prefer to buy imported milk, although it's much more expensive than
would prefer to buy imported milk, although it's much more expensive thandomestic milk.
▐ “Now I usually buy the imported milk from reputable online platforms. Quality isguaranteed and delivery service is free of charge at a certain purchase amount.”
▐ “I would buy packaged food online since they have more choices available. It
would be time-consuming for me to search for those niche, festive Japanese foodgift set in a traditional supermarket.”
▐ “I am also impressed by the efficiency of the delivery. It’s very convenient whenyou can order soft-drinks and snacks by clicking a few buttons online, especially
for party occasions like BBQ gathering for a big crowd.”
Processed meat � Chi. acquired American � In 2013, Chinese Shuanghui (largest meat processor) acquired US Smithfield Foods
Breakfast food � Chi. acquired European � In 2012, Chinese Bright Food Group acquired UK breakfast brand, Weetabix
Dairy � Chi. acquired Chi. � In 2011, Sanyuan (agriculture and animal husbandry SOE) acquired Hunan Taizinai (dairy)
� Intl. acquired Chi. � In 2011, Nestle (Dairy, confectionery, etc.) acquired 60% share of Xiamen Yinlu Group (canned food, dairy, etc.)
� Chi. partnered with European
� In Nov 2013, Chinese dairy group, Yili formed partnership with Italy’s Sterilgarda Alimenti SpA to enhance its technological capabilities and for securing better milk sources
� Chi. acquired Australian � In January 2014 Bright Foods, Chinas second largest dairy company, announced its acquisition of the Australian dairy firm Mundella Foods
Selected examples for cross border M&A and long term partnerships in the dairy sector:
Chinese dairy companies seek and offer equity participation with foreign
partners to secure their milk supply
Selected examples for cross border M&A and long term partnerships in the dairy sector:
Date Acquirer Target Deal value Details of the deal
2010 Bright Dairy Synlait
370 mn RMB(45 mn EUR)
51% stake
- Bright Dairy, China's third-biggest dairy company by volume, bought a majority stake in New Zealand`s Synlait, which by then had a new milk powder processing plant under construction, allowing to double its output capacity in the following year
2012 Arla Foods Mengniu
1.9 bn RMB(226 mn EUR)
- Arla Foods, a world leader in dairy farming and related production processes purchased an indirect equity share in China´s largest dairy company Mengniu.
- The deal allows Arla Foods to participate in China´s vast
- The deal allows Arla Foods to participate in China´s vast and growing dairy sector and enables Mengniu to secure their milk supply and benefit from the latest sector related production techniques and know how
2014 Bright Dairy MundellaNot disclosed
yet
- Bright food announced in January 2014 to acquire the cheese and yoghurt maker through their Australian arm Manassen Foods. The Chinese company acquired a 75% stake of Australia's Manassen in 2011.
2012
Partnership
770 mn RMB(92 mn EUR)
- Synutra and Sodiaal signed a long term cooperation agreement in which Sodiaal supplies Synutra´s newly established milk powder processing plant in France with demineralized liquid whey and milk.
Synutra Sodiaal
Cro
ss-b
ord
er
Currency: 1Euro= 8.3 RMB
Examples of Sino-foreign partnerships in the dairy sector
By partnering with domestic companies, multinationals getting well positioned to
access consumers with their wide range of products
▐ In May 2013, Danone and the Chinese dairycompany Mengniu announced plans to set up adairy venture in China, a JV will invest in and
▐ In 2011, Nestle announced the acquisition of a60% stake in China's family-owned Yinlu
dairy venture in China, a JV will invest in andmanage a portfolio of chilled yogurt in thecountry
▐ Danone will hold a 20% stake in this partnership,which will operate 13 plants across China
▐ The tie-up will help Danone to boost sales inChina’s yogurt market, Mengniu held a 16.8%market share in the Chinese yogurt market in2012, Danone held a 1.6% share, according toEuromonitor. Through the partnership, Danonewill benefit from Mengniu’s extensive distributionchannels in China, and also gain access to theChinese dairy company’s production bases.
60% stake in China's family-owned YinluFoods Group, the shareholders will jointlyinvest $394 million to expand current and buildnew production facilities nationwide
▐ This deal will strengthen Nestle’s penetration inChina and demonstrates its long-terminvestment in the Chinese market andcommitment to the further development of localbrands
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