M&A

Infant industry

Why latest Nestlé acquisition is all about Chinese babies

With more than $9 billion of cash in reserve, Nestlé has the resources for a little shopping – and has been doing so in China this year.

The Swiss consumer group has announced two major deals so far in 2011. In April, it bought 60% of family-owned Yinlu, which makes ready-to-drink peanut milk and ready-to-eat canned rice porridge (see WiC110). And last month, it also announced plans to buy 60% of the Dongguan-based candy maker Hsu Fu Chi for $1.7 billion (WiC114). The deal is still subject to regulatory approval.

Bloomberg is now reporting that Nestlé is preparing another bid, this time for Pfizer’s baby-food unit, Wyeth. Although this is not specifically a China deal, analysts say the acquisition of Wyeth, which makes SMA Gold, would help Nestlé seize more of China’s baby formula business.

Nestlé is already a global leader in infant nutrition, the fastest-growing segment of the packaged-food industry. However, the company lost ground in China during 2005 when it withdrew two varieties of milk powder after authorities discovered they contained too much iodine.

It faced another public relations crisis in June this year when Chinese media reported that the company had recalled a baby food brand in France after glass was discovered in a jar. Nestlé later issued a statement saying that the product isn’t sold in China.

With close to 15 million newborns a year, China’s baby-food market has plenty of new consumers. In fact, sales grew about 21% last year to more than Rmb42.1 billion ($6.5 billion) and will probably expand at least 17% a year from 2010 to 2015, according to Euromonitor, a London-based market research firm.

Chinese parents also have a strong preference for foreign formula makers. Thanks to the tainted milk scandal in 2008, many turned to imported dairy products. WiC has written before how nervous parents spend vacation time in Hong Kong and Macau stocking up on foreign-produced milk powder.

“Chinese parents now are more concerned about the safety of baby milk powder. They would rather pay a higher price for ‘premium’ products, which is creating big opportunities for producers entering the premium market,” Chen Xiang, an industry analyst in Shanghai, told the China Daily.

Statistics from the National Commercial Information Centre in 2010 showed that Dumex, which is owned by Danone Group, has about a 17% share of the market for infant milk formula in China, followed by Nestlé, with about 11%. Wyeth, meanwhile, has about 5%. So buying Wyeth will help Nestlé almost match Danone’s share.

“Such a dominant position will also mean more influence on infant formula prices in the long term,” says Yan Qiang, a consultant from Beijing-based Adfaith Management Consulting.

“China is the single most attractive baby-food market and the company has been losing share there,” according to Ildiko Szalai, an analyst at Euromonitor International in London. “It’s a priority for them.”

Still, competition in the milk formula market looks set to become increasingly intense.

China’s largest beverage manufacturer Hangzhou Wahaha announced last year that it will be expanding into the infant formula market with a high-end product called Aidisheng (the Chinese pronunciation of Edison). Initial production capacity of 100,000 tonnes is planned.

Wahaha will face headwinds – given some of the prejudices against domestic manufacturers in the sector . However, it has a formidable distribution network, as well as experience of building national brands.

Nor, as Danone will testify from an earlier tussle with its erstwhile local partner, does the beverage manufacturer show signs of being cowed by the challenge from overseas rivals.

Wahaha’s competitive threat will be anything but child’s play.


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