Danone to double Chinese dairy stake

In one deal, first announced back in November and approved by the Chinese authorities back in December, Danone will acquire a 3.85 per cent stake in Bright Dairy from Shanghai State-owned Assets Operation at a cost of RMB121 million.

A second transaction, yet to be approved, should see the addition of a further 2 per cent stake, acquired from Dazhong Transportation Group, for RMB78 million.

Together, the two deals will see Danone lift its share in Bright Food to 9.7 per cent, making the French firm the third-largest investor in one of China's three biggest dairy groups (along with China Mengniu Dairy Co. and Beijing Sanyuan Foods). The two major shareholders in the company are Shanghai Dairy (Group) Co Ltd and S.I. Food Products Holding, both of which hold a 30.78 per cent stake.

Bright Dairy is one of China's most successful dairy processors with a 19 per cent market share, and last year posted a 14.5 per cent increase in revenues to RMB6.9 billion. Net profits for the year were up some 12.6 per cent at RMB318 million.

Danone has made no secret of its desire to step up its activities in China, traditionally a minor market for dairy products but one which has seen rapid growth in recent years as China has turned increasingly towards western consumption patterns.

According to industry analysts Euromonitor​, the milk sector in China has increased by an estimated 188 per cent over the last five years, with sales of UHT and long-life milk outstripping their fresh liquid milk alternatives by 680.1 per cent (the UHT and fresh milk categories each notched up respective growth rates of 753 and 72.9 per cent).

And with the Chinese population showing lowest consumption of milk per capita in the world - an estimated two litres per year - there is massive potential for growth. However, Euromonitor suggests that the high levels of investment in a nationwide distribution network is likely to slow the expected flood of foreign players and favour established local groups such as Bright - who are also likely to become attractive takeover targets.

With the proliferation of western-style hypermarkets, dairy products are becoming increasingly well known in China - Carrefour, for example, is still the only place that Chinese consumers can buy French cheese - and the arrival of big dairy brands such as Danone and Nestlé, along with the advertising and promotional expertise they bring, should lead to a further step up in product awareness.

Despite the forecast growth in Chinese dairy sales, foreign groups remain wary of investing too heavily there after initial moves in 1993 proved to be broadly unsuccessful. This was mainly because they involved investing large quantities of money in building dairies and establishing distribution networks which in turn meant that the products had to be sold at a price too high to be sustainable given the low levels of disposable income.

Danone, Kraft, Nestle and Parmalat all invested in new dairies in China throughout the 1990s, and most found themselves forced to sell or lease factories to local producers. Danone for example, sold most of its Chinese dairy operations to Bright (which had been its local partner since 1992) in 2002/03.

But China's accession to the World Trade Organisation and the subsequent relaxation of the rule on foreign investment have allowed companies such as Danone to take a safer route to market through shareholdings in existing companies - many of which, ironically, profited from the failure of foreign companies by snapping up the modern dairy facilities they had built at a fraction of the cost of building one themselves.

Local players are also continuing to expand their operations, however. An agreement last week between Inner Mongolia Yili Industrial Group and the Niumama Dairy will see the two groups invest RMB250 million in building a new 300,000-ton milk production centre, with a daily processing capacity of more than 1,000 tons.

The two companies said that the new plant would allow then to improve the quality of their output, as well as meet the increasing demand for their products.