May 14, 2012

 

Food safety fears trigger China Mengniu Dairy's company revamp

 

 

Ever since tainted milk killed children in 2008, the security of food quality has been a factor to an executive revamp and soul-searching at the country's biggest dairy, China Mengniu Dairy Co. Ltd.

 

The reshuffle in April followed a sell-off of the company's Hong Kong-listed shares after Mengniu officials admitted in December the discovery of dangerous levels of aflatoxin in some products.

 

Skepticism about the company's ability to ensure safety spread from stock investors to Mengniu's largest stakeholder, state-owned foodstuffs conglomerate COFCO Group Co. Ltd. which apparently led a push for new faces in the front office.

 

Some board directors were replaced, and COFCO Property (Group) Co. Ltd. Deputy General Manager Sun Yiping was named Mengniu president. Sun took over from Yang Wenjun, who had served two terms as president of the company and its subsidiary Inner Mongolia MengniuDairy (Group) Co. Ltd.

 

Yang retained positions as a vice chairman at each company. Before stepping down from the president's post, he had been the last of the 13-year-old company's 10 founders still on the core management team.

 

Damaged Reputation After a humble start in Hohhot, Inner Mongolia, Mengniu expanded rapidly to satisfy exploding consumer demand for milk, yoghurt and ice cream in traditionally non-dairy China. It now controls about one-third of the domestic dairy market.

 

The company survived the 2008 scandal that began after officials found dairy farmers, including Mengniu suppliers, had added the dangerous chemical melamine to raw milk to artificially enhance its nutritional value. The milk was powdered and sold as baby food.

 

A source close to COFCO said the aflatoxin incident, which began when the General Administration of Quality Supervision, Inspection and Quarantine found unsafe levels of the mould-related chemical in 250-milliliter boxes of Mengniu milk, dealt a fresh blow to the company's reputation and precipitated Yang's removal.

 

Mengniu apologised to the public, but investors dumped its stock as soon as the Hong Kong Stock Exchange reopened December 28 after a Christmas break.

 

Some HKD10 billion (US$1.29 billion) in market capitalisation vanished within hours as the stock price fell 24% to about HKD14 (US$1.8) a share. In comparison, the melamine scandal had erased 30% of the stock's value four years earlier.

 

Officials at COFCO, which bought a 30% stake in Mengniu in 2009 with a pledge to function as a hands-off investor, then rescinded its pledge to stay out of management decisions.

 

The hands-off strategy initially paid off: Mengniu under Yang and with COFCO financial support reported solid financial performance. Last year, for example, operating revenues climbed to more than 37 billion, up 23% from the 2010 level and nearly four times 2005 sales. It surpassed its chief rival Inner Mongolia Yili Industrial Group Co. Ltd. in 2005, and ever since it's been the nation's largest dairy.

 

Contributing to the company's success was Yang's decision to introduce special Tetra Pak containers, which gave Mengniu milk a longer shelf life and streamlined long-distance distribution. The company was the first Chinese dairy to use the packaging. A clever Mengniu marketing campaign encouraged consumers to drink more milk without specifically mentioning which brand to buy. Company marketers reasoned they would benefit from any increase in milk consumption in China - and they were right.