A Bright future for Chinese food industry

Updated: 2012-05-18 10:57

By Mike Bastin (China Daily European Weekly)

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Dairy major's takeover of iconic UK brand could be just the sign of things to come

A Bright future for Chinese food industry

The international expansion of Chinese companies and their brands is now one of the most influential trends across the global business environment. My research and training within Chinese companies over the last few years has revealed a huge surge in confidence, ambition and determination to conquer global markets.

The Shanghai-based Bright Food Group's recent purchase of a controlling interest in the UK's Weetabix Ltd is yet another example of this global ambition and is easily the largest overseas acquisition from the Chinese food and beverage industry so far. The sums involved value the Weetabix brand at 1.2 billion pounds (1.5 billion euros).

This takeover is also significant because overseas takeovers by Chinese firms to date have consisted mainly of business-to-business acquisitions and have occurred most within the energy sector.

While Bright's acquisition of the Weetabix brand should be seen as a landmark takeover, it is not a huge surprise given the Chinese company's international expansion and attempted takeovers recently.

In only the last two years, Bright has acquired a majority stake in New Zealand dairy firm Synlait Milk and 75 percent of Australian food producer and importer Manassen Food. However, as well as missing out on the US food giant United Biscuits and the French yoghurt producer Yoplait, it was also defeated in the race to buy Australian sugar refiner Sucrogen and a reported interest in US vitamin retailer GNC came to nothing.

Bright's refusal to see itself as merely a Chinese company, operating only across the Chinese mainland and its sheer determination to succeed internationally should be a lesson to other Chinese food and drink companies.

While the Chinese food industry continues to grow at around 20 percent annually, it remains dogged by safety standard issues, especially across the dairy products sector. Of course, a powdered milk scandal at dairy major Sanlu in 2008 played a major part in this unenviable image. But this is only one of many recent food and drink safety scares across China. Such a reputation has opened up opportunities for overseas companies within the Chinese food and drink industry and also added to the urgency with which Chinese food and drink companies have been eyeing takeovers of successful overseas food and drink brands.

Nestle, for example, the world's largest food producer, has been particularly active recently in China with the purchase of a 60 percent stake in the Chinese company Yinlu last year. Yinlu is the clear market leader in China's canned/preserved ready-made-meals sector. Furthermore, earlier this year, Nestle demonstrated its long term commitment to the development and modernization of the Chinese dairy industry with the construction of a brand new farming institute in Northeast China's Heilongjiang province.

Dairy farm owners and workers from the northeast and other Chinese regions will be able to improve their farm management skills and learn how to use the latest agricultural technology. Local partners will be encouraged to help create an investment fund of 2.5 billion yuan (306 million euros) for the project.

Mengniu, the largest Chinese dairy producer, has also been very active over recent years with the purchase of a 51 percent stake in 2010 of Junlebao Dairy, a leading yoghurt producer and retailer in northern China. In addition, only last month Mengniu announced that Sun Yiping, former deputy general manager at COFCO Property Group, would be replacing the current chief executive officer, Yang Wenjun. Many believe that Mengniu's change at the top and of other top-level personnel may herald a new concept of development at the company, putting emphasis on product quality in an attempt to rebuild consumer and investor confidence in the Mengniu brand. Sun has already made it clear publicly that overseas expansion via acquisition of foreign food brands is now a key part of Mengniu's development plan.

It is, therefore, no surprise that Bright has moved swiftly to acquire not only the well-known and highly regarded Weetabix brand but also the Alpen and Ready Brek brands which are also part of the deal. Bright's move has also been influenced considerably by significant changes taking place across the Chinese food and drink industry, and not just a result of consistent growth in this market.

On the consumer side, milk and other dairy products are increasingly becoming a part of the Chinese daily diet. Such demand is evident in the high priced market entrant TeLunSu branded UHT milk by Mengniu (retailing at 1.90 euros per liter) and some of the so-called organic milk brands such as YuanZhen (retailing at 1.93 euros per liter) and GuiYuan (retail price of 2.60 euros per liter) and pasteurized fresh milk WonderMilk (retail price of 2.8 euro per liter). The quest for higher quality and safer food that prompted the organic revolution in many parts of Europe and the US has also added to the Chinese consumers' desire for the same standards. High-priced imported products, highly valued by Chinese consumers, have triggered much-needed innovation within the domestic market in order to counter this threat from overseas-based competitors. This shift in consumer awareness and values is fundamental in driving healthy industry growth.

On the supply side, the increasingly competitive food and drink industry in China is forcing all industry participants to improve quality standards and increase production efficiency. For example, the antiquated farming methods used to provide raw milk from families in small villages no longer makes economic sense. Fontera, Mengniu, Yili and Bright Dairy themselves are all building mega farms in order to meet far higher safety levels and achieve economies of scale.

On the distribution side, cold storage delivery facilities are becoming more readily available in China's first-tier cities (Beijing, Shanghai, Guangzhou, Shenzhen, and Tianjin) and growing in many second-tier cities, enabling fresh pasteurized milk to be sold in modern supermarkets, hypermarkets and convenience stores.

Further, UHT products are distributed in the second- and third-tier cities and the countryside, contributing to further industry growth. Better logistics and market information have also enhanced product marketing and given many food brands greater competitive edge.

Finally, on the category side, more value-added products will continue to emerge as a result of increases in disposable income and consumer desire for a better, healthier lifestyles. Greater variety of flavor and shorter product life cycles will also become a feature of the Chinese food industry and tastes become more varied and younger Chinese consumers value change and novelty more and more. Packaging will also become far more of an emotional selling point across China's food and drink industry due to intense competition and with this more difficulty in achieving sustainable competitive advantage via functional differentiation. Fermented yogurt, flavored milk drinks, non-powdered ice cream and cheese are among the food and drink categories that could see dramatic growth in the short term.

So, back to Bright's audacious takeover of the Weetabix brand. Not only does this enable Bright to enter the more lucrative European market, it also paves the way for aggressive expansion of the Weetabix brand across China.

Clearly, this is no whim or even short-term asset-stripping exercise, as many takeovers are, from Bright. Instead it appears an impressive, considered part of a long-term strategic plan to build a global food and drink company. Both Bright's and Weetabix's senior management are excited with this acquisition. Indeed, the UK company's management appears to relish the interest and investment from Bright and is already talking publicly about future expansion across Asia and China in particular.

Bright's takeover also will allow the Chinese company to learn from the considerable management experience and knowledge at Weetabix, especially the skills and judgment needed to succeed internationally. Weetabix' cutting edge production technology will also provide Bright with a great opportunity to build an internationally competitive, global company.

But most important of all, Bright's acquisition represents demonstrable proof that more and more sectors of Chinese industry now possess not just the necessary resources to pursue such rapid international expansion but also the self-belief to go global. Expect more of the same soon.

The author is a researcher at Nottingham University's School of Contemporary Chinese Studies. The views do not necessarily reflect those of China Daily.