October 23, 2007

China's Mengniu ousts Nestle as KFC China's supplier
 

KFC, the global fast food chain Monday (October 22, 2007) signed a dairy product supply agreement with Mengniu Dairy Industry (Group), China's top dairy producer.

The move, coming at a time when global buyers are casting doubts on Chinese products, was a ringing endorsement of the dairy company. 

The agreement would allow Mengniu's dairy products to be sold at more than 2,000 stores spread over China next year, according to China Daily.

The company is not precluding other dairy products from Mengniu to be sold at KFC outlets Although this is not an exclusive agreement, both sides hinted the two companies would not consider partnerships with each other's competitors for now, China Daily reported.

This is a significant step that demonstrates KFC's commitment to localise in China, China Daily quoted Mark Chu, KFC brand general manager with Yum! Brands Inc (China Division) as saying.

Nestle had been supplying KFC for the past two decades. Although KFC did not specify why it is switching to Mengniu, foreign companies have often partnered local suppliers to cut costs.

While observers say Mengniu products would be expected to be priced lower than those of Nestle at KFC outlets, both companies have not indicated it would be so. This would be the second major account Mengniu won over from Nestle. In June, Starbucks switched its dairy supplier from Nestle to Mengniu as well.

Chu said KFC has had its eye on Mengniu for many years. "Its explosive growth, high-quality products and brand popularity among Chinese consumers are more impressive than its counterparts."

Set up in 1999, Mengniu has become the lead player in China's highly competitive dairy market in seven years, with revenue during the first half of 2007 jumping 32 percent to RMB 10.02 billion (US$1.33 billion). 

Nestle's executive vice president for Zone Asia, Oceania and Africa Michael Garrett has aimed for China to become the company's second largest market after the US by 2010. Currently China stands around 16th or 17th in the Nestle market list and analysts do not it expect it to make second place before 2012 and 2015. The company currently has 25 factories in China and would add one more in 2007. It is currently focusing on expanding capacity rather than building new factories.