Nestlé seeks China growth

12 July 2011

BEIJING: Nestlé, the food group, is trying to bolster its Chinese presence by purchasing one of the biggest players in the country's confectionery category.

The Swiss multinational has announced its intention to acquire a 60% share of Hsu Fu Chi International for approximately $1.7bn.

"This proposed partnership will greatly reinforce our presence in China," Paul Bulcke, Nestlé's CEO, said.

"It combines Hsu Fu Chi's strong brands, its large portfolio of products at affordable price points, its efficient operations and entrepreneurship with our proven innovation and renovation capabilities."

"It also demonstrates our long-term commitment to China and enhances our ability to grow our portfolio of international and local brands in this dynamic market."

Insights provider Euromonitor International has estimated sales in the Chinese confectionery segment expanded by 63% between 2005 and 2010, reaching $9.2bn.

Euromonitor pegged Hsu Fu Chi's revenues at 4.3bn yuan in the year to June 30, 2010, making it the second-placed company overall, behind Mars on 9.4bn yuan.

Securities firm DMG & Partners argued Hsu Fu Chi holds 6% of the Chinese candy sector, benefitting from impressive equity levels with shoppers.

"The investment is good for Nestlé as Hsu Fu Chi has a very good distribution network in China and a decent brand profile," Tan Han Meng, an analyst at DMG & Partners, said.

Meanwhile, Standard Chartered Bank reported Hsu Fu Chi makes over 500 different lines, meaning it has already built an excellent distribution network, a significant advantage in this complex market.

"Hsu Fu Chi's direct distribution network forms a large barrier to entry," Stephen Hui, a Standard Chartered analyst, said.

"Hsu Fu Chi's wide product offering also targets a wide audience and could help Nestlé penetrate the mass market."

Under the terms of the agreement, the Hsu family, which founded Hsu Fu Chi, will retain 40% of the business, and run it as a joint venture with Nestlé.

One potential hurdle to the proposed deal is the need for approval from the country's commerce ministry, and the backing of Hsu Fu Chi's shareholders.

Coca-Cola discovered the challenge this can pose when its effort to buy the Huiyuan Juice Group for $2.4bn was blocked by the Chinese authorities in 2009.

Ben Cavender, an analyst at the China Market Research Group, predicted Nestlé should avoid the same fate, and that the deal would pay off for the European company.

"There is more disposable income to go around in China today and people have less free time," he said.

"That's leading to growing demand for packaged foods like cakes and cookies and crackers."

Earlier this year, Nestlé took a 60% share in Yinlu, which makes items including rice products and dairy drinks.

Elsewhere, spirits giant Diageo was recently granted regulatory approval to take a majority stake in the Sichuan Chengdu Quanxng Group, which itself has a major share in Shui Jing Fang, the highly popular brand of baiju, a rice wine.

Diageo had previously held a substantial minority stake in Sichuan Chengdu Quanxng Group, but now controls 53%, a rare occasion of a foreign firm assuming such a role.

"We are fully committed to build Shui Jing Fang into an internationally successful iconic Chinese brand," said Gilbert Ghostine, president of Diageo Asia Pacific.

Data sourced from Financial Times, BBC, Bloomberg; additional content by Warc staff