China Samples Food M&A With Yili NZ Buy 中国食品企业或掀起海外并购热潮
Just a month after Shanghai’s Bright Food Group gobbled up British breakfast cereal maker Weetabix, we’re hearing that rival dairy products specialist Yili (Shanghai: 600887) has developed its own appetite for global M&A with its purchase of a New Zealand dairy. This latest purchase could mark the beginning of a broader wave of M&A by Chinese food makers, who are looking outward not only to tap foreign food markets but also to hopefully learn a lesson on how to better control the quality of their food.
The food safety factor has become a hot topic in China over the last 5 years, dating back to a scandal involving milk tainted with the industrial chemical melamine, which went on to embroil Yili and most other Chinese dairy product makers. More recently, Bright has also become involved in a series of smaller scandals, mostly arising from quality control issues, that led the Shanghai government to last month take the unusual step of fining the company for numerous food safety violations. (previous post)
Before any further discussion of the food safety issue, let’s step back and look at this latest deal from Yili, which has announced it is purchasing New Zealand-based Oceania Dairy. Using the Oceania as its investment vehicle, Yili will then set up a New Zealand-based project to produce 47,000 tons of infant formula annually. (English article) Total value of the investment, which presumably includes the build-up of the infant formula operation, is NZ$214, or about $170 million.
Unlike the Bright-Weetabix deal, which looked more like a broader strategic purchase, this new move by Yili looks very targeted and aimed at producing infant formula for export to China. Put simply, infant formula from this project would be designed to appeal to Chinese consumers by playing on their mistrust of domestically produced dairy products following the melamine scandal.
Many new Chinese parents are now happy to pay a big premium for imported infant formula, with the result that markets like Hong Kong and New Zealand have had to place restrictions on their domestic markets to prevent the informal export to China of too much of their product meant for domestic consumption. I suspect this new Yili project will export nearly 100 percent of its infant formula back to China, where its packaging will undoubtedly proclaim it is made in New Zealand by Oceania Dairy without any mention of the fact that Yili is the real owner of the company.
I can’t really fault Yili for this approach, and it’s not completely uncommon for companies to use multiple brands like this in a single market to target different customer segments. In an ideal world, companies like Yili and Bright Food would also learn some valuable lessons about food safety from their foreign partners as they make these overseas purchases. But my main concern is that just the opposite could happen, namely that these Chinese companies could actually bring some of their lax quality control habits to their foreign ventures, raising new risks for consumers in these markets.
At the end of the day, such quality control issues will probably be a short-term problem, since local governments in New Zealand and other western markets are much more vigilant about food safety problems. In the meantime, look for more Chinese food companies to sniff out their own overseas M&A opportunities in the next few years, with a special focus on companies whose products can eventually be exported back to China.
Bottom line: Yili’s investment in a New Zealand dairy is part of a growing outbound M&A trend by Chinese food makers, which are targeting firms whose products can be exported back to China.
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