Nestlé has a presence spanning more than a century in most of the 80 markets around the globe it operates in. But for mainland China, its engagement only started in 1987 with collections of milk from dairy farmers in northeastern Heilongjiang province. That relatively late entry did not stop the country from becoming the Swiss food giant’s second largest market by sales from 2013 onwards, thanks in part to its willingness to localise through mergers that have tappped into China’s shifting consumer tastes. When appropriate it has also made divestments for the same reason.
Its latest move falls into the latter category: Nestlé has agreed to offload Yinlu Foods, best known for its peanut milk and canned rice porridge, in a transaction that sees the Xiamen-based company sold back to its founder Chen Qingshui.
However, Nestlé will continue to contract Yinlu as the manufacturer of its ready-to-drink coffee brand, a partnership that had previously paved the way for Nestlé’s initial acquisition of a 60% stake in the family-owned business in 2011 (see WiC110).
The disposal has been in the works since February when Nestlé attributed the tripling of its 2019 restructuring costs to a write-down of Yinlu’s value. According to 36Kr, a local news source, Yinlu’s sales have slowed dramatically in recent years, with revenues diving from Rmb11 billion ($168 million) in 2013 to Rmb5 billion last year.
“The Yinlu brand is becoming obsolete,” warned Huxiu, a news portal, noting that the company (founded in 1985) has failed to innovate and expand its product range to keep pace with consumers, who enjoy widening choices in the food and snack market. “In tier-four, tier-five cities or villages, Yinlu’s peanut milk and rice porridge were still popular as people purchased them as gifts during Chinese New Year. Even so, they are facing fierce competition from cheaply-priced knock-offs,” it added.
The rationale for the tie-up nine years ago was to help Nestlé expand in non-coastal regions, using Yinlu’s distribution network. Initial success drove Nestlé to plough more than Rmb900 million into upgrading Yinlu’s production facilities and raise its stake, reported Caijing, a magazine. But unsuccessful efforts to revive Yinlu’s aging brand and products have led to plunging sales.
Both Nestlé and Yinlu were tight-lipped over the sale price of the latest transaction. Bloomberg reported in July that it was supposed to fetch $400 million for Nestlé, although at the outset of the disposal process the firm was being valued at $1 billion. The decision to sell coincided with Nestlé booking a double-digit sales decline in China. Mark Schneider, Nestlé’s first non-Swiss CEO in over a century, is under shareholder pressure to prune the firm’s extensive portfolio.
In August Nestlé sold its bottled water business in China to Tsingtao Brewery, which saw the transfer of local brand Dashan Yunnan Shan Quan and three factories to the local beverage firm.
Nestlé, nevertheless, said it will continue to supply Chinese customers with its premier international water brands Perrier, San Pellegrino and Acqua Panna. Nestlé’s decision to retain control over its ready-to-drink coffee business – not part of the Yinlu sale – suggests it hopes to grab a bigger share in the country’s fast-growing coffee market too (see WiC521).
In May Nestlé also announced a roughly $100 million investment in Tianjin to grow its production capacity for pet food and to build a manufacturing facility for plant-based products, which will be Nestlé’s first in Asia. Riding on the rise of alternative protein in China, the company launched six plant-based meat products under its Harvest Gourmet brand on Wednesday.
Other segments that will see increased investment include infant nutrition, confectionery and dairy, according to a statement by the company. Healthy snacks should be on the list too (see WiC501). In April Nestlé launched nesQino in China , an innovative offering that allows consumers to create healthy ‘superfood’ drinks, tailored to their preferences using a digitally connected Q-cup machine and sachets. With advanced flash-freezing and drying techniques, ingredients in the sachets are said to be naturally preserved with no additives, preservatives, artificial colours or flavours.
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