The Chinese consumer increasingly avoids domestically produced
dairy products if they can afford imports, and for good reason. So
why did a Danish multinational just buy a strategic stake in
China's biggest milk products company?
[caption id="attachment_64703" align="alignright" width="300"
caption="Would you buy milk from this guy?"]
In 2008, infant formula adulterated with the industrial chemical
melamine killed 13 babies in China and made more than 6,200 ill.
Since then, foreign producers have seized up to 80% of the Chinese
Dumex, a subsidiary of Groupe Danone (
), leads the pack with a 17% market share, followed by Mead Johnson
) and Nestle (
), according to CIConsulting in China. Nestle paid $11.9 billion in
April to buy Pfizer's (
) baby food division, largely to gain market share in China.
Last week, Denmark's privately owned Arla Foods, maker of Lurpak
butter and other well-known European brands, unveiled a different
strategy: buying into China Mengniu Dairy Co. (
), the largest Chinese milk producer by volume. Arla paid $289
million for a 5.9% stake, making it Mengniu's biggest shareholder
except state holding COFCO Corp.
Mengniu is not immune from its industry's quality control
problems or the Chinese consumer distrust that they breed. Even as
Arla was announcing its share purchase, Hong Kong-based Mengniu was
weighing whether to cut off
an ice cream supplier in Inner Mongolia after an intern posted
photos showing a garbage-laden environment on the internet.
Yet the market cautiously welcomed Arla's move anyway. Mengniu's
shares jumped 11% on the news before subsiding toward the end of
The acquisition is driven by compelling logic. Imported milk
powder is two to three times more expensive than domestic product.
The Chinese consumer is finding the extra cash to protect their
babies, but native brands like Mengniu remain dominant in everyday
Rather than compete with the local giants, Arla aims to make
Mengniu more reliable by consulting with the company on milk source
management and production quality control. Mengniu hopes that the
stamp of European healthiness will give it an edge over Chinese
competitors like Inner Mongolia Yili Group, the top dairy provider
by revenue. Yili recently issued a recall of baby formula tainted
with excessive levels of mercury.
"By cooperating with one of China's most popular brands, Arla
has access to the huge consumer pool already established by Mengniu
as well as its milk source, farms and processing," says Wan Ge, an
analyst at consulting firm ChinaVenture.
The Arla-Mengniu partnership will be closely watched by other
multinationals mapping their strategy for China, and investors
wondering about the competitiveness of other Chinese consumer goods
The Chinese consumer at this point strongly prefers foreign
brands if the price difference from domestic is relatively small,
says Tony Nash, managing director for Asia at U.S.-based consultant
HIS. A case in point is hair products. Global icons occupy 75% of
the Chinese market, led by Procter & Gamble (
), with close to 60% on its own, and Unilever (
Milk and other food products are different though. They account
for a much bigger slice of Chinese consumer budgets, and the price
differential to imports is higher. Count on multinationals with a
strong foothold to keep building Chinese sales. But "Made in China"
may not be a derogatory phrase forever.