China Consumer

Brand reinvention

COFCO hopes Danish partner will boost trust in China’s biggest dairy firm

Brand reinvention

Great Dane strategy: Mengniu

“I wouldn’t touch that with a ten-foot pole’ is an American expression with a usage going back as least as far as 1843. That’s the year it first appeared in print, in a sentence describing how America’s aristocracy wouldn’t “condescend to touch a poor man with a ten-foot pole”.

Some years later, the phrase reached Britain, but in the altered form that ‘I wouldn’t touch that with a barge-pole’. According to website The Phrase Finder, Lady Monkswell employed it in a diary entry in 1893 when discussing the idea of Irish ‘Home Rule’.

Now commonly used, the expression denotes something best avoided.

And in the Chinese context it’s a phrase that foreign business executives use to describe the country’s troubled dairy industry. Mired by a series of scandals that date back to 2008 – when melamine was illegally added to milk, leading to the deaths of infant children – regular readers of WiC will be all too familiar with the industry’s reputational problems.

Further scares have cropped up on a routine basis, leading many Chinese to avoid locally-produced milk when they can. Accordingly, on trips to Hong Kong or Macau mainland parents often stock up on foreign milk powder for their babies.

So it comes as a surprise that foreign investors still want to venture into this scandal-ridden business area. But as the 21CN Business Herald reports, a firm from Denmark has decided to dispense with the proverbial barge-pole to buy into Mengniu Dairy. On June 15 it was announced that Arla Foods had become the Chinese firm’s second largest shareholder after state-owned COFCO.

Arla is the fifth biggest player in the global dairy industry, with revenues of $9.32 billion. It’s also the world’s largest organic dairy firm. Founded in 1863, it has built its reputation for quality over a century and a half. But the lure of China’s fast-growing market seems to have persuaded the Danes it’s worth taking a risk and associating itself with Mengniu.

As 21CN points out, COFCO lured Arla specifically to “crack Mengniu’s quality problem”. To this end, Arla has purchased a 5.9% stake for HK$2.2 billion ($284 million) from private equity firm, Hopu.

In fact, Arla isn’t going into the venture blind to local conditions. Prior to the deal it had set up a JV with Mengniu to specialise in infant formula. But the plan now is for Arla to participate in the management of Mengniu as a whole and introduce a Danish-style pasture management system.

COFCO’s boss Ning Gaoning explains the rationale: “Arla will bring about substantial improvements in Mengniu’s milk management, quality traceability and product research and development, and in the medium to long term have a good impact on the Chinese dairy industry.”

The local industry needs to find a way to restore public trust. Economic Information Daily points out that imports of foreign milk powder have surged since 2008 – from 140,000 tonnes to 480,000 tonnes in 2010. In the first four months of this year milk powder imports grew a further 29%.

On the flipside, the opportunity is huge. China’s rising prosperity has led to a growing demand for milk. To keep pace, Chinese firms imported 100,000 dairy cattle from Australia, New Zealand and Uruguay last year. Mengniu has said it plans to spend Rmb3.5 billion setting up 12 new dairies by 2015.

But Arla’s management faced an early test last week, when Mengniu’s image took another bashing after an an intern posted photos online of unhygienic conditions at Tianfu Dairy, a supplier for Mengniu’s ice cream products.

To its credit (Arla’s influence at work already?) Mengniu management promptly acknowledged “safety irregularities” at the factory. It gave Tianfu 48 hours to improve conditions and likewise said a nationwide inspection would vet all of its other ice cream suppliers.

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