Mengniu agrees nutrition products tie-up with US firm

China Mengniu Dairy Co Monday announced that it has signed an agreement with leading US consumer food and beverage company WhiteWave Foods Co to jointly expand into the Chinese nutrition market.

In order to produce and sell nutrition products in China, a joint venture will be set up with the Chinese dairy producer holding a 51 percent stake and 49 percent to be held by WhiteWave, according to a statement filed by Mengniu on Hong Kong Stock Exchange on Monday. The venture formation is expected to obtain approval from Chinese authorities in the first half of this year.

Meanwhile, the venture has agreed to offer 376.7 million yuan ($62.2 million) to purchase Chinese infant formula maker Yashili's nutrition plant, which is still under construction currently in Zhengzhou, Central China's Henan Province, said the statement.

Mengniu is Yashili's majority owner.

Mengniu has to diversify its product range, as the company's core business - liquid milk - does not have much room for growth amid fierce competition from imported brands, Chen Lianfang, an analyst from Beijing Orient Agribusiness Consultant Ltd, told the Global Times Monday.

"China has seen a fast annual growth rate of more than 100 percent in imported liquid milk amounts in the past two years, as domestic consumers tend to prefer foreign dairy brands in the wake of the powdered milk scandal in 2008," Chen said.

The latest financial information about Mengniu's operation is not available to the public on the company website, but its mid-term financial results ending June 30, 2013 showed that the company gained 20.7 billion yuan, while its major rival Yili raked in more money over the same period, totaling 24 billion yuan.

According to the two companies' mid-term financial reports, the sales of liquid milk products contributed to 88.3 percent of Mengniu's overall revenues, with the rest mainly coming from ice cream.

Yili got about 75 percent of its revenue from liquid milk, but also makes money from products such as ice cream, milk powder and mixed animal feeds.

Mengniu also has been in the domestic milk powder market since 2006, but the company does not have a fairly satisfactory performance in this segment, resulting in its embrace of the country's nutrition market this time, Yan Qiang, a researcher from Beijing-based Hejun Consulting, told the Global Times Monday.

An April report by Shenzhen-based market research firm China Competition Information stated that sales in the domestic nutrition industry reached 113 billion yuan in 2012, 32 percent growth year-on-year, forecasting the amount will surpass 430 billion yuan in 2018.

As China's aging population is getting larger and the central government will implement the new second-child policy announced last November around the country in the near future, the demands for high-quality, especially foreign-branded or -invested, nutrition products will spike, said Yan.

Gregg Engles, CEO of WhiteWave, also sensed the potential boom in China's nutrition market, as he expects that the tie-up with Mengniu could help his company access China, a promising market "with a rapidly growing, multi-billion dollar nutritious products segment," according to a press release issued Sunday.

Mengniu could benefit a lot from the cooperation with WhiteWave in terms of technology as well as establishing its brand in the nutrition sector, Yan noted.

WhiteWave sells various goods such as plant-based foods and beverage as well as dairy products throughout North America and Europe.

However, Chen held a wait-and-see attitude toward the prospect of Mengniu's nutrition operation, as the sector in China is faced with loose regulations and fairly chaotic competition.

"Mengniu, widely known as a liquid milk giant, will have to spend a fairly long time and lots of vigor in gaining consumers' trust in the nutrition market," Chen said.