China Mengniu Dairy Co., Ltd (02319.HK), the nation’s biggest dairy producer, plans to bulk up on high-end offerings like baby formula in the coming few years to capitalize on China’s growing taste for the products.
“We will continue to launch more high-value-added products and the growth of these lines will exceed that of other dairy products,” chief executive officer Sun Yiping told EJ Insight.
The Hohhot, Inner Mongolia-based producer has introduced several new and more expensive products such as infant formula, yogurt and milk drinks this year. After that, sales revenue of its baby formula lines, in particular, more than tripled to 455 million yuan (US$74.59 million) in the first half, compared with 127 million yuan a year earlier.
Baby formula and other diary products may have made up just 2.2 percent of its sales income in the first six months, but it was up sharply from a mere 0.7 percent the previous year, according to company data.
Mengniu’s efforts to expand its presence in infant formula will be aided by its tie-up with Hong Kong-listed formula maker Yashili International Holdings Ltd. (01230.HK), which will “supplement [Mengniu's] product structure”, said Sun, who is the former deputy general manager of Shenzhen-listed COFCO Property (Group) Co., a unit of COFCO Corp., China’s biggest state-owned food conglomerate. COFCO is Mengniu’s largest shareholder.
In June, Mengniu paid roughly HK$12.5 billion (US$1.61 billion) for a 75.3 percent share of Yashili, which was the seventh-biggest seller of infant formula last year with 4.7 percent of China’s market, according to research firm Euromonitor International.
“The baby formula market still has vast potential to be tapped, and Yashili has good expertise and promising growth prospects in the sector. The deal will offer great synergy for us,” Sun said.
Mengniu has also been busy scouting for foreign partners to help it rekindle customer confidence in mainland dairy products after a series of food safety scandals hurt sales. To that end, Mengniu has set up a yogurt joint venture with French conglomerate Danone.
The company is also confident that it will benefit from Beijing’s industry consolidation drive to nurture a handful of leading domestic players.
“Government [consolidation] efforts will help establish a more orderly market and create a healthy environment for the long-term growth of industry players,” Sun said, adding that Mengniu will make the most of the chance to make homegrown baby milk brands more competitive.
Beijing’s shakeup of the highly fragmented industry includes offering incentives to five mainland dairy companies, including Mengniu, to absorb smaller competitors over the next five years. Beijing aims to shrink the number of milk powder firms to 50 from about 200 now, according to a plan from the Ministry of Industry and Information Technology.
Safety concerns have also prompted the company to step up quality management of its supplies. “The key to winning back customer confidence is quality, and we will strictly control the quality of our raw milk sources,” Sun said.
Mengniu said it has spent as much as 3.5 billion yuan in dairy farms to ensure the standard of its raw milk. As of June, Mengniu had established eight company-owned dairies, six of which are up and running. But it declined to detail their output.
In May, it spent around US$407 million to raise its share in China Modern Dairy Holdings Ltd., the nation’s largest raw milk producer, to 28 percent from previous 1 percent.
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