France's Danone launches joint projects with Mengniu

French food giant Groupe Danone SA has invested in two joint projects with China Mengniu Dairy Co Ltd, a move that will help improve Danone's sliding market share in China and restore consumers' confidence in the country's dairy market.

Danone will invest about 325 million euros ($417.17 million) in the projects.

Through the deals, Mengniu will likely achieve breakthroughs in the high-end yogurt sector, which will allow it to rival domestic competitors, said Jian Aihua, an analyst at CIConsulting.

She said the French company, which has tried for years to expand its market share in the country, will benefit from Mengniu's large distribution network.

Danone signed an agreement with China National Cereals, Oils and Foodstuffs Corp - Mengniu's largest shareholder - to form a joint venture in which COFCO will own a 51 percent stake and Danone 49 percent.

State-owned COFCO, China's largest food company, has agreed to sell about 148 million shares in the Hong Kong-listed China Mengniu to the joint venture.

After the transaction, COFCO will remain Mengniu's single largest shareholder with a 27.83 percent stake, while Danone will own an indirect stake of about 4 percent in Mengniu, with an aim to increase it in the future.

Meanwhile, Danone - the world's largest yogurt maker - set up a joint venture with Mengniu to make and sell chilled yogurt products in China. Danone will own a 20 percent stake and Mengniu 80 percent.

Net sales are expected to reach about 500 million euros, and the joint venture will have an estimated market share of about 21 percent and 13 factories across China.

The two sides said the joint venture will use Danone's expertise in quality and product innovation, while fully leveraging Mengniu's distribution capability in China's yogurt business.

Danone will assign senior executives to the joint venture's top management team, helping Mengniu upgrade its management capabilities.

"Backed by COFCO's extensive expertise in the food industry and by Mengniu's nationwide leading platform in the dairy sector, our brands will benefit from significantly wider reach to the largest number of Chinese consumers," said Franck Riboud, Danone's chairman and chief executive officer.

Sun Yiping, Mengniu's CEO, said Danone's international expertise in product research and development, brand management, and sales and marketing will boost Mengniu's technical innovation capacity in the fresh dairy products market and help it deliver higher-quality products to consumers.

Mengniu accounted for 16.8 percent of China's yogurt market in 2012, up from 16.5 percent in 2011 and 15.9 percent in 2010, according to Euromonitor figures.

Song Liang, a dairy industry analyst at the Distribution Productivity Promotion Center of China Commerce, said Danone has seen a decreasing market share in northern China, while it has more advantages in the eastern and southern parts of the country.

Danone previously formed partnerships with local major beverage companies Hangzhou Wahaha Beverage Group and Bright Food (Group) Co Ltd, but both failed.

Jian at CIConsulting said the failure was a result of the French company's attempt to dominate the projects to strengthen its own brand development in China. How long the new marriage will last is the question, she added.

Mengniu also has made efforts to control the development of its diversified dairy businesses by increasing stakes in domestic milk suppliers and has tried to improve consumers' trust through international cooperation projects.

Earlier this month, Mengniu increased its stake in China Modern Dairy Holdings from 1 percent to 28 percent to secure a stable, long-term premium milk supply.

Last year, European dairy company Arla Foods became Mengniu's second-largest strategic shareholder, and a long-term strategic cooperation project was launched.

Danone's engagement in Mengniu will increase consumers' trust in locally produced dairy products, benefiting all the players in the Chinese dairy market, said Finn Hansen, Arla Foods' executive vice-president and a member of Mengniu's board of directors.