On
20 May, Mengniu announced that its majority shareholder, COFCO, has signed an
agreement with Danone, to form a JV named Prominent Achiever. COFCO has agreed
to transfer 148,014,022 shares in Mengniu to the JV, in which COFCO and Danone
will own stakes of 51% and 49% respectively. After the transaction, COFCO will
continue to be the single largest shareholder in Mengniu (with a stake of
27.8%, which was 28.1% before the transaction). Danone will become a
shareholder in Mengniu, owning a stake of about 4% initially, with the aim of
increasing the stake in the future.
In
addition, on the same day, Mengniu signed a framework agreement with Danone to
establish a JV for the production, promotion, marketing and sales of yoghurt
products (including the typical Danone range of yoghurt, yoghurt drinks and
spoonable dairy-based desserts) in China, with the aim to reorganize and
restructure their respective yoghurt business in China and developing an
extensive yoghurt product portfolio. After that, Danone will own 20% and
Mengniu 80% of the new JV (a separate project to Prominent Achiever). Danone
will invest about a total of USD419.9 million (RMB2.6 billion) in the 2
cooperation projects which are now in the phase of getting the approval of the
relevant government authorities, a process likely to take a few months.
The
intention is that the cooperation will leverage both businesses’ advantages in
marketing, management and sales channel in the dairy sector. Mengniu’s
performance has been mediocre of late, possibly in part due to the management
of COFCO, although product scare incidents have been the key factor. The
cooperation with foreign dairy giant Danone may help COFCO redynamise the
business.
The
strategy should enable Danone to expand its market share in China. As a leading
dairy processor, Mengniu has a powerful distribution network and its brand
reputation is relatively strong in China. In 2012, according to Mengniu’s
financial report, its sales of yoghurt were USD741.6 million (RMB4.6 billion),
representing 0.8% y-o-y growth.
Danone
has tried for years to expand its yoghurt business in China. Previous attempts
at partnerships with Chinese companies such as Bright Dairy and Wahaha failed
due to troubled relationships with its local partners and resulted in
substantial losses. These setbacks prompted Danone to attempt to expand its
business locally independently but this also foundered, with the company
stopping production in its 200,000 t/yr Shanghai yoghurt plant (please see
Dairy Products China News Vol.5 January Issue, p8).
Given
this background, Danone has witnessed a major loss in market share in China.
According to Euromonitor, its market share of yoghurt decreased sharply to 1.6%
from 11.4% in 2008. At present, Danone mainly sells its yoghurt in Beijing,
Shanghai and Guangzhou, but faces fierce competition from the large dairy
processors in these regions, such as Bright Dairy and Yili, which performs well
in the yoghurt sector.
The
deal should also benefit Mengniu, helping it to build its reputation for high
quality products. Mengniu is likely to achieve breakthroughs in the premium
yoghurt sector with the aid of Danone’s expertise in quality and product
innovation. Mengniu has been making a number of efforts to promote its dairy
business through cooperation deals. In May, it increased its stake in China
Modern Dairy Holdings from 1% to 28% to secure a stable, long-term premium milk
supply. Last year, Arla Foods became Mengniu’s 2nd largest strategic
shareholder, and a long-term strategic cooperation project was launched. Above
all the company is now highly risk averse after the food scare problems which
dented its sales, making it keen to increase customers’ trust in its products
through the “halo effect” of foreign cooperations.
The
cooperation will exert great pressure on the other yoghurt players, and the
rivalry with Bright Dairy will be especially fierce. Bright Dairy leads the
Chinese yoghurt market with a share reported at around 20% last year. According
to Mengniu, the combined market shares of Danone and Mengniu accounted for a
share of around 21% in 2012, with combined sales of about USD0.64 billion
(RMB4.0 billion) in yoghurt sector. Figures from Euromonitor showed slightly
lower figures, with Mengniu at 16.8% and Danone at 1.6%. Whatever the exact
position, there is no doubt that the cooperation will pose a significant threat
to the currently strong position of Bright Dairy.
However,
the cooperation may be difficult to progress well in practice – and not simply
because of the partners in this particular case. Even when such partnerships
work relatively well at the beginning, one partner company will often
ultimately seek control. Of course, Danone had a JV with Mengniu in 2006 which
ended in failure, reportedly as a result of both sides’ attempts to seek a
controlling stake. So how long the new cooperation will last remains to be
seen.
Interview
with Changfu Dairy
Rapid
Development of Milkbars
Key
Processor Results for 2012
Dairy
Industry Recovery Status in Q1
Trends
in IMAR Highlight Key Dairy Sector Changes
Government
Strengthens Raw Milk Supervision
Jiabao
Dairy Launches New Yoghurt Plant
Mengniu
+ Danone Combine to Accelerate Yoghurt Business
Yili
Proves an Active Marketer
Bright
Dairy to Set Up New Farm
Gansu
Launches Large-scale Dairy Farm Project
Xuelan
Launches “Memory Yoghurt”
Dairy Products China News, a
monthly publication issued by CCM on 30th or 31st, offers
you the latest information on new market dynamics, company development, new
products, technology, packaging and raw material supply, etc. It also focuses
on the government’s direction and polices, helping you get the whole picture of
the industry.
CCM is dedicated to market research in China
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