February 24, 2014     

Foreign companies join the fray for China's dairy market

Foreign companies are ramping up investments in the China's dairy industry, intensifying the consolidation of the country's hotly competed dairy sector.

Last week, French dairy giant Danone paid US$665.08 million to raise its stake in China's leading dairy company - Mengniu Dairy, from 4% to 9.9%. On the same day, China's Bright Dairy announced that the company is entering a joint venture with the private equity firm RRJ Capital, which has agreed to invest RMB1.52 billion (US$249.42 million) in Bright Dairy.

"The Chinese dairy industry in the next few years will be all about consolidation," a senior banker said. "If you are in the top tier and have scale, you will survive. Otherwise, you may have to exit or merge with one of the larger players to gain scale."

With ready-to-go product lines, foreign partners are attractive to domestic firms, as partnerships with foreign companies allow them to launch products immediately. Furthermore, after a series of food-safety scandals that have tarnished the domestic brands, foreign companies can also boost consumer confidence by providing branding.

For foreign companies, the distribution networks of the domestic dairy firms are what they are after. While dairy products sales are consolidated among a number of large supermarket chains in western markets, China's milk consumables are sold by a sprawling network of independent shops, some of which are very small operation.

China has seen its dairy industry growing rapidly in recent years. According to a report by Mengniu dairy, the Chinese market was worth US$40.6 billion as of 2013, compared to US$20.7 billion in 2008.

There are about 127 milk powder manufacturers in China. However, the Chinese government said in 2013 that it intended to cut that number to 50. The government would also like to see 10 largest dairy companies with an annual income of more than RMB2 billion (US$328.22 million) to take over 70% of the market in five years.