China Consumer

Digestion problems

COFCO starts to deal with the aftermath of its massive acquisition binge

cofco junding vinyard

COFCO has sold its interest in this Shandong vineyard resort

Ning Gaoning was appointed as boss of COFCO in 2005. In 11 years he quadrupled the state food giant’s assets, primarily through mergers and acquisitions. Yet the executive known in the local press as the ‘M&A maniac’ left his post concerned that COFCO still wasn’t big enough.

When Ning departed the firm in January he penned a long letter to employees. “If we can do what we really want, I really want to see COFCO become a competitive, international food giant with a fully integrated value chain,” he wrote.

According to CBN, Ning’s farewell missive was full of emotion and veteran employees “cried the entire afternoon” after reading it.

Not that everyone was devastated to see Ning depart. With the sale of three lossmaking consumer food units this year, the merits of the “fully integrated value chain” – his core strategy – have come under greater scrutiny, something that we first flagged in WiC331.

In fact, some of COFCO’s senior decisionmakers couldn’t wait for the post-Ning era to begin. Just a few days after his official departure in January (Ning was appointed to head Sinochem, see WiC311), COFCO’s Hong Kong-listed unit China Foods announced a plan to sell its confectionary business, including the Leconte chocolate brand to its sister firm COFCO Properties for Rmb611 million ($93 million).

What initially appeared to be a routine asset restructuring soon had analysts wondering whether something smelled wrong: why put a chocolate-maker under a real estate subsidiary?

Leconte is China’s leading domestic chocolate brand and has been in production since 1991. Sales peaked in 2012 when they topped Rmb600 million, CBN reports, but the company has since delivered four consecutive years of losses.

The candy firm has struggled with escalating competition from foreign brands, like Ferrero, the family-run producer of Nutella and the Ferrero Rocher selection, which opened its first production plant in China last year (see WiC274).

“Foreign brands such as Ferrero have successfully repositioned themselves as ‘light luxury items’, selling chocolate that’s more expensive then beef… but Leconte is stuck in an older era of ‘cabbage prices’. That’s why it is losing out in a market driven by younger consumers,” explains CBN.

In response Leconte considered overhauling its business model and becoming a contract manufacturer for foreign confectioners. This would have kept its production facilities intact, although it would have culled a national brand – unthinkable in the Ning era.

Now the takeover by COFCO Properties seems to indicate more interest in the company’s real estate assets than its chocolate. Closures of some of Leconte’s factories since April have resulted in demonstrations from workers, and even lawsuits against the firm. The unrest has spilled over into Leconte’s retailers, who say that Leconte is damaging its brand. According to Sina Finance, more than 100 distributors of Leconte’s goods gathered outside COFCO’s headquarters in Beijing this month, demanding the repurchase of chocolate stock worth up to Rmb200 million.

There are tensions in other outposts of COFCO’s food and beverage empire too, including its premium wine unit. Wine was one of Ning’s early enthusiasms and almost a decade ago, one of his first engagements as the new boss was to fly to Shandong province to unveil COFCO Junding.

The 400-hectare chateau commanded an upfront investment of Rmb350 million and was another flagbearer for Ning’s fully integrated value chain.

Junding positioned itself as Asia’s largest vineyard, integrating viticulture, wine production and leisure tourism. However, in a stock exchange announcement this month, COFCO’s subsidiary China Foods said it had sold its controlling stake in Junding for Rmb1.

The buyer – COFCO’S former joint venture partner at Junding – is taking on the lossmaking chateau’s debts of Rmb392 million.

Previously COFCO had tasked Junding with spearheading the promotion of domestic premium wine, and Junding was the first chateau in China to set up an exclusive members-only club, offering customers everything from premium bottles to cigars, karaoke and 18 holes of golf.

However, the Chinese wineries have struggled to compete with foreign rivals in the premium market, where imports from respected producers in France, Spain and Australia are often cheaper than their homegrown competitors.

Independently-owned boutique wineries like Grace Vineyard in Shanxi have had some success, but the state-owned firms haven’t built up much of a following.

Like many others, Junding’s business was also badly hit by the anti-corruption campaign launched by President Xi Jinping in 2012.

Junding was even mentioned by the state media as an example of exactly the sort of excess that was now being discouraged. In 2014, for instance, China Business Journal said that the chateau had become an “exclusive club for the rich and for senior officials. While it cost Rmb220,000 to become a member, Junding has not obtained all the necessary land use permits,” it reported.

Alongside Junding and Leconte, COFCO also sold a Yunnan-based sugar firm earlier this year and Beijing News says the company is under pressure to shed more of its lossmaking units. “After the aggressive expansion during Ning’s era, COFCO is now in dire need of a diet,” the newspaper reported.

When Ning took over COFCO in 2005, it had assets of Rmb60 billion and net profits of Rmb980 million. By the end of 2014, its assets were worth Rmb250 billion but most of its nine listed units were either lossmaking or barely profitable.

Some analysts have blamed Ning’s overreaching ambition.

“Not many multinational firms dare to take on a fully integrated value chain. Cargill is the world’s biggest agricultural commodity producer and it entered China 40 years ago. However, it has never introduced consumer brands but just maintains its business-to-business focus,” CBN warned, pointing to COFCO’s failures at Junding and Leconte.

“B2B and B2C [business-to-consumer] are two entirely different games,” CBN added.

The current streamlining strategy was made more urgent when COFCO got the final approvals to swallow up fellow state firm Chinatex, a textiles and cotton trader, in July. As a result it now has to absorb another 30 subsidiaries and 40 production plants from the Chinatex portfolio. The merger is part of a broader effort at consolidation among state firms in which COFCO was identified as a prime case for improved returns on investment. But for the new management the takeover puts pressure on the priority to go for efficiency over size. In fact, deals like the Chinatex one seem to run counter to the edicts to break up larger companies to increase their competitiveness. Nor does COFCO have much experience in Chinatex’s textile and cotton-spinning businesses.

In the meantime it is talking a good game, announcing in July that it will cut staff numbers at its head office from 610 to 240 as part of new efforts to restructure into a “pilot investment firm”.

Those that keep their jobs are going to be busy as COFCO has been given instructions by Sasac, the asset management firm that oversees the key state-owned enterprises, that its losses must be reduced by more than half in the next three years. At least 65 subsidiaries have been identified for improvement and 91 more for “intensive management”.

COFCO will restructure a further 102 subsidiaries through mergers and acquisitions, according to Sasac’s summer statement.

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