China is consolidating, but diversifying?
Growth is at the forefront of business minds operating in China and the country’s food sector is undergoing a period of consolidation, James Roy, senior analyst at China Market Research (CMR) said.
“As part of this, a number of large companies are using acquisitions to get larger and gain knowledge about more different sectors within food,” Roy told FoodNavigator-Asia.
The majority are acquiring numerous smaller companies; those available to them, he added.
Diversifying across such a broad sector needs weight though, he said, and “many of the food companies that have enough scale to be doing this are either state-owned firms or started out as state-owned.”
There is evidence of consolidation throughout China’s food industry, Roy said, with many agricultural Chinese firms operating in the packaged goods sector, such as Bright Food and Deyu, and other large internationals like Nestlé producing food and operating dairy land in China.
“An overall aim of consolidation is to improve quality by having large organisations that can professionalise processes across all of their different units, but in practice there can be problems,” Roy said.
“Especially if companies expand too quickly and don’t integrate the acquired companies well enough to have strong control over them,” he added.
Acquisitions are seemingly a first-choice strategy employed by most companies in China looking to broaden market reach however there are some choosing not to buy-out knowledge.
Recently Shanxi-based corn and wheat specialist, Deyu Agriculture, launched a new fast-moving consumer goods (FMCG) noodle product line following six months of internal research. It is however working with noodle production specialists across the country.
Entering new sectors without buy-outs like this can work well, Roy said, “but even if you branch into another product area organically you still do need to bring in know-how on way or another, for example through hiring people who work in that area.”
“It’s not the best strategy to start completely from zero,” he added.
Vertical integration is an alternative growth strategy that can provide a competitive advantage for Chinese companies as it keeps ingredients and transport costs down.
Made in China…
Chinese companies have also been diversifying across markets in a bid to gain traction in other world markets, with most choosing to inject capital into acquisitions to do so.
This is because “while many have been successful at developing strong brands and products in their own market, most are inexperienced in other markets and are eager to learn about how to do so internationally from companies that have already established strong brands,” he said.
Bright food for example has been interested for some time in making overseas acquisitions to expand its food business into other markets, he said, and been “in the mix to buy both United Food and General Mills in the last few years.” Hangzhou based food and beverage giant Wahaha has also been eyeing possible overseas buy-out targets, he added.
Last year, the state-owned diversified food company with agricultural roots bought a 75% stake in Australia’s Manassen Foods for US$516m and has been linked to rumours about a possible buy-out of UK’s Weetabix.