Tactics change in China

13 December 2011

BEIJING: Companies such as Nestlé, Danone and PepsiCo are modifying their business models in China, reflecting the range of emerging challenges observable in the country.

Nestlé, the Swiss food group, recently put in an offer to buy a 60% stake in Hsu Fu Chi International, a confectionery manufacturer, but is also closing an ice cream plant and reducing its emphasis on driving retail sales in Shanghai.

"We might focus on a few particular brands and products because we don't have to support local production in Shanghai," Hervé Cathelin, Nestlé's global head of ice cream, told the Financial Times.

Danone, the French dairy specialist, has similarly decided to suspend the activity of one of its two factories in China, as part of a wider-ranging shift in the organisation's tactics.

"[We are] working on a new and more centralised strategic plan for our fresh dairy products in the Chinese market," Xu Jie, a spokesman for the company, said.

"As the next step, we will focus more on major cities in China like Shanghai and Guangzhou by adopting a more focused approach to building 'Bio', our yogurt brand, as a strong value-added brand."

According to Shaun Rein, CEO of the China Market Research Group consultancy, the advent of viable Chinese players in segments like the dairy category was now exerting a meaningful influence.

"You really can't underestimate the branding and quality of Chinese companies any more. They are not just winning on sales and distribution, they are winning on branding," he said.

Key indigenous operators in this sector include Mengniu, Sanyuan and Yili, which benefit from greater name recognition among shoppers in various outlets.

"Each place has their own local brands that are more recognised in their own region, for example Shanghai has Sanyuan and in northern China there is Mengniu," said Ma Wenfeng, an analyst at Beijing Orient Agribusiness Consultants, said

PepsiCo, the food and beverage giant, is also in the process of forming a bottling partnership with Tingyi, a Taiwanese firm boasting a significant presence in mainland China.

"With Tingyi's vast distribution network in China, PepsiCo can go deeper across the country and make its products available in more smaller cities, where competitors may find it difficult to reach," Titus Wu, an analyst with DBS Vickers Hong Kong, said.

Data sourced from AFP, Financial Times, Business Week; additional content by Warc staff