clearwater international’s food and beverage sector...
TRANSCRIPT
recipethe
GLOBAL MOVESHow emerging markets are driving consolidation
Clearwater International’s food and beverage sector commentary 2015
Dairy giantsExclusive interviews with Arla and R&R
Pride of SpainOsborne discusses its Far East strategy
Chinese trendsWhat is driving China’s M&A market?
Deal focusClearwater Internationaldeal highlights
the recipe | 2015
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The defining trend of the F&B sector is how major players continue to capitalise on fast-growing opportunities across emerging markets. The potential of these markets is huge and it is driving significant consolidation across the whole industry.
Such moves are not without considerable challenges. For companies to compete in this frenetic global market, they need the scale to effectively utilise their distribution structures and R&D capabilities.
headquartered on the other side of the world. Even when they get the right teams in place, just being on the ground in these markets is absolutely no guarantee of success.
In this issue, we talk to a number of leading companies to find out how they are responding to these challenges and exploiting the opportunities. We profile R&R Ice Cream, whose recent acquisition of Australian ice-cream manufacturer
Meanwhile, as well as the difficulties of accurately predicting market demand, there are also major questions over the type and structure of the distribution models employed in emerging markets.
Likewise, managing a global network of area managers and their teams remains a significant challenge for corporates
Peters Food has heralded its drive into the Far East market. We also take a look at the M&A strategy of dairy giant Arla, which has announced a major push into emerging markets.
We also feature an exclusive interview with the historic Spanish Osborne Group which recently struck a landmark deal with
A warm welcome to this first issue of the recipe, Clearwater International’s guide to M&A activity in the global food and beverage (F&B) industry.
Welcome
“Managing a global network of area managers and their teams remains a significant challenge for corporates headquartered on the other side of the world.”
Chinese investor Fosun. We explore the rationale and background to this transaction.
At over $1tn (€800bn) in value, China is now the largest grocery market in the world with Chinese consumers becoming ever more affluent and discerning, leading to increasing amounts being spent for products which they believe are better or more prestigious. As many Chinese F&B companies lack the premium brands to meet the evolving Chinese consumer, they will continue to seek acquisitions abroad.
Taken together, all these trends have driven a frenetic M&A market over the past 12 months - and 2015 looks set to be equally busy.
James SinclairGlobal Head of Food & Beverage
the recipe is published by Clearwater International Editors: Jim Pendrill & Sarah Fernandez Design: www.creative-bridge.com Subscription: [email protected] No part of this publication may be reproduced or used in any form without prior permission of Clearwater International.
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the recipe | 2015
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Contents
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Meet the teamJames SinclairPartner
+86 6341 [email protected]
Søren NørbjergPartner
+45 40 21 45 [email protected]
David SerraPartner
+34 699 446 [email protected]
Barry ChenPartner
+86 6341 [email protected]
John ClarkeDirector
+44 845 052 [email protected]
Carlos MorgadoDirector
+351 918 213 [email protected]
Lars Rau JacobsenDirector
+45 25 39 45 [email protected]
Toni AlmansaAssociate
+34 620 439 [email protected]
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Chasing growth4in focus
Overview
For a taste of just how rapidly global food and beverage markets are consolidating, you should perhaps start with a beer.
Although 2014 was characterised by a rather surprising weakness in beer markets across emerging markets, continued falling consumption in North America and Europe would have come as little surprise to those in the industry given the long-term dynamics of the market. To give just one example, if you take the German market, 25 years ago annual consumption was almost 150 litres per head. Today, that figure has fallen by a third.
It is facts like these that are forcing the main players in the beer industry - and in a host of other F&B markets too - to think very hard about where their future growth is coming from. Weak, if not falling, growth in Western geographies has become a defining trend of recent years across a range of markets, forcing businesses to look further afield to secure stronger margins.
Looking further afield today means looking at emerging markets where continued increases in population, and especially in the number of middle-income consumers,
is utterly changing the global landscape for F&B operators.
The rewards are potentially great, but so are the challenges as these businesses face the prospect of completely re-engineering their supply chains. There is also the need for ever larger and more efficient farms capable of generating the higher yields necessary to supply this growing demand, alongside the environmental challenges that this poses.
Beer challenges
Back to the beer market, and it is certainly one which encapsulates the challenges that the entire F&B sector faces today.
For instance: SABMiller, the former South African Breweries business which has been transformed by a major acquisition spree to become the world’s second largest beer group, recently said it would focus more on soft drinks - which account for a fifth of sales - to capitalise on growth prospects.
Indeed, in December 2014 the company announced a tie-up with Coca Cola to create Africa’s largest soft drinks bottling operation.
SABMiller, whose brands include Peroni, Grolsch and Miller Lite, was itself at the
Food and beverage markets continue to consolidate as players look towards emerging markets for growth.
centre of much consolidation activity and rumour in 2014 after it made an approach to Heineken, which was rejected. Heineken also makes up to 60% of its operating profits in emerging markets.
SABMiller was linked to a merger with Diageo - which owns Guinness, Johnnie Walker scotch and Smirnoff vodka - and the company has also been the subject of continued speculation about a bid from Anheuser-Busch InBev, the Belgian-Brazilian brewer that owns Budweiser, Stella Artois and Corona.
Beyond the speculation, there were plenty of deals to report in the drinks sector: Scottish distiller William Grant & Sons acquired Drambuie, one of many deals in the spirits space including the £430m (€538m) sale of Whyte & Mackay scotch to Philippines-based brandy group Emperador. The Japanese Suntory Group also paid $16bn (€12.8bn) for Beam, the US maker of Jim Beam whiskey.
Suntory has been a particularly acquisitive player of late, and the deal followed its $2.1bn (€1.68bn) acquisition of GSK’s
Ribena and Lucozade brands in 2013.
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European appeal
European brands remain attractive to overseas buyers, particularly from the US and Asia. Countries such as the UK remain popular too, where buyers are drawn to the heritage of British food brands: it has been estimated that of the 150 biggest grocery brands in the UK, less than a third are now home-owned.
2014 saw a continuation of this trend with the notable sale of United Biscuits (UB) to Yildiz of Turkey for $3.2bn (€2.56bn). UB’s brands include McVitie’s, Penguin, Jacob’s Cream Crackers, BN, Delacre, Verkade and Sultana. Yildiz’s offer valued the business, owned by Private Equity houses Blackstone and PAI Partners, at more than 10x EBITDA.
Yildiz, which owns biscuit and chocolate company Ulker Biskuvi Sanayi, has diversified over the years into beverages, dairy products, frozen food and margarines & liquid oils. It is now the biggest food manufacturing group by revenues in Central and Eastern Europe, Africa and the Middle East, and says the latest deal will double its international sales.
UB has itself in recent years expanded its operations into emerging markets. In 2014, it bought a stake in Nigerian biscuit maker A&P Foods, which followed the acquisition of assets from Rana Confectionery Products in Saudi Arabia.
However, European companies still made notable forays abroad too. For instance: Swiss chocolate maker Lindt acquired US rival Russell Stover for a rumoured $1.4bn (€1.12bn).
Emerging markets
Yildiz says there are now strong growth opportunities in the likes of Africa, which saw a notable uptick in M&A activity in 2014 with deals in total worth well over $1bn (€800m), nearly double the figure for
2013. Other recent African deals include Danone, the yoghurt maker, paying €278m to tighten its control over Morocco’s main dairy company Central Laitiere; and Sanyo Foods, Japan’s third largest maker of instant noodles, paying $233m (€186m) for a 25% stake in the packaged food business of commodities trader Olam in Nigeria.
Chinese outbound investment continues apace too. A notable deal in 2014 saw Hony Capital acquire Pizza Express for
£900m (€1.13bn), the latest in a growing list of Chinese firms taking an interest in British food brands. In 2013, Shuanghui International acquired Smithfield Foods - the largest ever Chinese takeover of a US company.
Meanwhile, Brazil’s Cutrale and Safra families won the battle for banana company Chiquita after sealing the $1.3bn (€1.04bn) acquisition and fending off an approach from Ireland’s Fyffes.
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There are few better examples than R&R Ice Cream of how consolidation can turn a tiny dairy business into a global player within a generation.
Today’s chief executive Ibrahim Najafi, who has been with the UK business since 1998, has seen its transformation from humble beginnings into global powerhouse first-hand.
continent,” adds Najafi. “This may take at least another five years or so but I have every confidence we will get there.”
Given how emerging economies are rapidly waking up to the delights of dairy products, few would bet against R&R. Indeed, just as the UK was R&R’s launch pad into Europe back in the 2000s, so R&R’s acquisition in summer 2014 of Australian ice-cream manufacturer Peters Food heralds its attack on the Far East market.
Europe and every European market is only seeing single digit growth, while the cost of debt remains high. Go outside Europe and the ice cream market may be very undeveloped, yet we know that we can leverage our scale and knowledge into these markets.
“Our USP is that we are a global player that can offer both private label and ice cream brands across all continents. We have feet in both camps, which is a good balance to have.”
Australia
Peters is the leading manufacturer of take-home ice cream in Australia, with brands such as Drumstick cones and Connoisseur tubs. Najafi says that the business had been on R&R’s radar for a number of years, given the strength of the Australian market and the fact that it is the perfect stepping stone into the Far East.
Adds Najafi: “The dynamics of the market are superb. It is the third biggest consumer of ice cream per capita in the world at 13 litres a year, and the figure is still growing. The Australian market has been growing over the last 14 years at a compound annual growth of more than 5%. Significantly, the value per litre is growing too, as premium brands become more and more popular. The premium segment grew by 10% last year.”
Dairy giants R&R Ice Cream and Arla are both capitalising on fast-changing consumer tastes as they expand their businesses across the world.
Emerging tastes
“It has been a remarkable journey,” he says. “I remember how, in my early years here, we always wanted to be number two to Unilever in the UK. We had achieved that by 2005, but that was only the first stepping stone for us. Our goal was then to become number two to Unilever across Europe, and we reached that too by 2011.”
So, what’s the next target? “I see us as a global business that has a fit on every
Like all food and beverage manufacturers, R&R’s advance into emerging markets is driven by both necessity, in terms of subdued market growth across Europe, and opportunity, in terms of the potential growth it can now tap into from emerging markets.
Adds Najafi: “With the Peters deal, we achieved a long-standing ambition in terms of taking the R&R model out of Europe for the first time. Markets remain flat across
“Our USP is that we are a global player that can offer both private label and ice cream brands across all continents. We have feet in both camps, which is a good balance to have.”Ibrahim Najafi
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R&R Ice Cream
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And then there is the added dimension of building a bridge to the Far East. “Asian consumers have a strong trust in Australian brands,” adds Najafi. “We know that our model can work as well over there as it does here in the West. Ice cream is a global language and our global brands can cut across boundaries. But we also see opportunities for private label brands in areas like the Far East.”
Najafi concedes that entering new markets such as Asia certainly isn’t without its risks, and he strikes a cautious tone: “The biggest challenge is that these markets are so immature. It is not just about the products you market and forecasting the demand for them. It is also about the whole distribution model that you employ.
“It would be very easy for us to go into this and that market quite quickly. But it is all
about having the people and skills in place to do that, and always being ahead of the curve. Over the years, a lot of companies have expanded and gone into other continents, but have often gone about it the wrong way. It is all about educating these new markets, capitalising on the opportunities, and having the capacity to go into them with lessons learned from the mistakes and successes of others.
“You learn how each market operates very differently, that it is too easy to go into a market with pre-conceived assumptions. The key thing is to learn about each market and its culture to the nth degree.”
Opportunities
Does Najafi now have particular countries in mind to target? “We will go wherever the opportunities are, and there are plenty of them for us all over the world right now. Yes, there are opportunities in the Far East but the Middle East is growing fast too.
“We are actually very fortunate to be in ice cream because it is such a jewel in the crown of the frozen category market, as it is the only product that cannot be replicated in the chilled market. The dynamics are such that ice cream is actually not a very easy market to be in, you need to be able to leverage your scale for it to work.”
Najafi agrees that there has never been a better time for major players across the food and beverage industry to consolidate and become truly global operators.
“In part, this is because food is seen as such a safe haven given what has happened to financial markets over recent years. That said, I think we are definitely seeing more consolidation activity than ever before, much of it driven by the growth we are seeing in emerging markets.”
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1985: Company founded by farmer Jonathan Ropner and his friend James Lambert, who worked for a cattle breeding company, after they acquired a local ice cream manufacturer
2006: Acquired by Oaktree Capital Management which then merged the business with Roncadin, the German own-brand label ice cream manufacturer
2013: Acquired Fredericks Dairies and control of Cadbury, Del Monte and Britvic ice cream brands. R&R itself bought by French PE firm PAI Partners
2014: Acquired Peters Food Group, the leading manufacturer of take-home ice cream in Australia, from Pacific Equity Partners
Timeline
8in focus Now owned by more than 12,000
co-operative members across Denmark, Sweden, Germany, Belgium, Luxembourg and the UK, Arla’s business model is very different to most of its competitors. However, just like its rivals, it is increasingly looking beyond its European heartland as it explores ever more global opportunities.
Indeed, Thor Hvid Hansen, Arla’s global Head of M&A, has been a rather busy man since he joined the business back in 2011. By the latest count, Hansen says he has completed 27 deals in 13 countries since
milk production is increased, so Arla and other leading European international dairy companies will look to growth markets outside the EU.
Arla has estimated that after quota abolition dairy farmers will produce at least a billion kilos of milk more each year than today. Adds Hansen: “We have a large milk pool in Europe right now and are looking for markets outside Northern Europe where our excess European milk can be utilised.”
Arla has been one of the most public companies on its intention to move its business away from just Europe, announcing an increased focus on markets outside the EU, with Russia, China, the Middle East, South America and Africa all in its sights.
his arrival. “To develop our company, we need to grow and strengthen our model away from our North European base. Although Europe still remains our core market, the real growth of this business in the future will come from outside. At the moment, less than 20% of our business is outside Europe but that figure will increase significantly in the years ahead. For us to compete with the big multinationals, we need to have scale so that we can effectively utilise our distribution structure and R&D capability.”
Part of this trend is driven by regulation, for instance: EU milk quotas will be abolished in 2015, which means that as
China and Brazil
The company’s links with China go back to 2005 when it first formed a partnership with dairy company Mengniu to produce milk powder for the Chinese market. In 2012, Mengniu invited Arla to become a shareholder in the business.
Says Hansen: “This was a very significant deal. We had the partnership for many years, whereby Mengniu acted as our distributor, and converting the JV into a shareholding reaffirmed our relationship. We are now developing lots of products for the Chinese market including milk powder, long-life milk and cheese products. We have also increased sales of value-added child nutrition products.
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“In China, everything is up for negotiation all the time so you have to be there on the ground working with your partner. We do not control the distribution but we have to keep as close to it as we possibly can.”
Arla has adopted a similar approach, both in terms of its operations and M&A strategy, in Brazil. It has been in a JV with Vigor Alimentos for many years and is in the process of exchanging the joint ownership for an 8% share ownership of Vigor, Brazil’s largest dairy company. Adds Hansen: “Vigor has an excellent distribution network and it’s a natural step for us to further build on this partnership to explore the great potential in Brazil.”
Brazil is the world’s fourth largest dairy market and one with significant dairy consumption potential. Arla’s ambition is to accelerate its export of products to get a share of the growing demand for imported brands in the dairy market, especially within branded cheese and butter. It already markets Lurpak in the country.
Hansen says the deals in China and Brazil highlight how Arla can adopt a very flexible M&A approach: “We can take a different angle because we are run as a co-operative and can really think long-term, taking a more flexible approach to transactions than many of our competitors.”
“We have a large milk pool in Europe right now and are looking for markets outside Northern Europe where our excess European milk can be utilised.”Thor Hvid Hansen
Arla
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African moves
Another region on Arla’s radar is Africa, where there are plans for several joint ventures. The company struck its first deal on the continent in 2013, when it formed a partnership with a distribution firm in Ivory Coast to package and sell its Dano brand milk powder, teaming up with the owners of the Mata Holding company. The milk powder is first manufactured in Denmark and then exported to a mobile packaging station set up in giant shipping containers in Ivory Coast.
By moving into the African market, there are naturally more socio-economic concerns to consider for a business like Arla. As Hansen says: “In Sub-Saharan Africa, for example, there is clearly a need for affordable, nutritional products. We have a role to play here and I can see the day when there will be far more affordable dairy products for markets such as these. Until now, the cost of milk-based products has been one of the big barriers.”
In this situation, Hansen says the big challenge is to ensure that your products match your quality standards and this is where continued major investment in Arla’s R&D operations in Denmark has a key role to play.
Meanwhile, he adds that one of the most notable global trends is the increase in demand for cheese-based products in emerging nations. “US-inspired pizza and burger chains are doing well in many of these countries, and these markets will continue to develop further as more consumers become exposed to the various cheese types. There are a lot of markets where we can identify the need for milk-based products because of these trends.”
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High spirits10interview
Tell us about the background to the Fosun deal?
We have been holding conversations with large business groups for many years, searching for the best partners in each market such as our alliances with Tequila Herradura in Mexico and with Compal, one
goals - the company will be instrumental in helping us to understand Chinese consumers and their rapidly changing lifestyles and tastes.
It will also give us access to commercial channels and help us extract value from synergies with other invested companies. It
of the world’s fruit juice leaders, with whom we set up a joint venture. As such, there was nothing new in associating ourselves with the best in other businesses or markets in order to improve our competitive position. Our alliance with Fosun fully supports our strategic plan to become a leading player in the Chinese market.
What made you choose Fosun?
We had been talking to the business for three years and got to know the company very well before tying the knot. We particularly chose Fosun because of their understanding of businesses with long-term growth vision. Fosun has become an expert in helping firms achieve their global
gives us the profile we need to act as a local company in the market, helping us to find new business opportunities or new partners. However, the chemistry and understanding between both management teams was the determining factor of the deal.
Osborne has been in China since 2010. What has been your experience?
Just being in such a huge market is no guarantee of success. With very limited resources, we have reached a reasonably high brand awareness for our ultra-premium ham brand 5J but it is very difficult to find the room and the route to market for wines and spirits, and we haven’t tried with restaurants.
Julio López Castaño, from Spanish ham and wine producer Osborne, explains the background to its landmark deal with the Chinese Fosun Group.
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“The operational side is getting increasingly complex, with the need for better-prepared staff and clear targets so that we don’t lose direction.”
In 2014, Osborne struck one of the most notable deals in its 200-year history when it completed a capital increase transaction with Fosun International of China. Osborne said the investment would enable its business to expand through the acquisition of larger beverage companies and brands globally, while also allowing it to expand into the Chinese market.
In 2013, Osborne achieved €232m in net sales - up 5% from a year earlier. The company exports to more than 50 countries and first entered China in 2010, although distribution of its products was limited to speciality supermarkets and high-end hotels.
Fosun has been a particularly active investor in Western brands in recent years. It has built up stakes in jewellery through Greece’s Folli Follie; in US womenswear through St. John; and in Italian menswear through Caruso. In December 2014 Fosun also won a bidding war for France’s Club Méditerranée following a lengthy takover battle.
Osborne was Fosun’s second overseas food deal, after it invested in Malaysian bakery chain Secret Recipe in early 2014.
Osborne, with its famous logo of a silhouette of a black bull, traces its roots to the late 18th century when Thomas Osborne Mann founded a winery in El Puerto de Santa María in southern Spain and began exporting sherry to the UK.
Chinese deal
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We have closed some deals with some partners in each sector, but these take a very long to mature if you are a relatively small company. We are satisfied with the partners we have and the decisions we have made so far, but we now need to step up our operations to another level.
What would be your advice to anyone looking to expand into China?
Each sector, each company and each segment is different. China is not one single market but a collection of hundreds of smaller markets, so it is very difficult to attack all these markets at the same time or to find the right partner or distributor which can tackle them all.
So, my advice would be don’t listen to those who say they know the market and can deal with everything, and then ask for exclusivity. Building up relationships with Chinese partners takes a lot of time and patience. What’s also important is that you need to have your own people on the ground all the time. Just going two or three times a year to meet with partners is useless.
What other global markets are you focusing on?
Of course, Spain is very important for us. We are clear market leaders in size and prestige in the premium ham business, leaders in the Spanish brandy market and the largest local spirits distribution company after the multinationals. Our second market in relevance for us is Germany, where we are very well known too.
Apart from that, Brazil is our main focus. Last year, we acquired two of the main brands within the growing premium and super-premium cachaça sector, as well as a successful local super-premium vodka. However, the US is our market of reference for all our products - given that it is a market that is continuously
changing and one which is an excellent shop window for our products, especially 5J.
What are the challenges of scaling up your business globally?
From a logistics viewpoint, nowadays you can trust in a number of well experienced specialists than can provide service to your company wherever you go. However, managing a global network of area managers and their teams, and in a highly profitable manner, remains a challenge. It is not easy finding the right team to rely on when working from distance and with limited resources.
In the short term we must make the business as profitable as possible, while in the long run we invest as heavily as we can in developing the current brands, developing new products in new categories and forming new partnerships in new markets. This is no easy task. The operational side is getting increasingly complex, with the need for better-prepared staff and clear targets so that we don’t lose direction.
What are the key M&A trends in the global food market at the moment?
There are three defining trends. Firstly, you have Chinese companies acquiring raw materials and finished products to supply their consumers with Western products. Secondly, you have consolidation as companies look to become sizeable players in order to implement their commercial strategies. And finally, we are seeing consolidation in the distribution chain as both retailers and distribution companies look for operational efficiencies and size to bargain with suppliers.
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Chinese ventures
But since then the tide has turned. News of Chinese F&B companies closing deals all over the world has become commonplace. In 2014, Bright Food acquired or agreed to acquire stakes in Australia’s Mundella (dairy), Israel’s Tnuva Food (dairy), Australia’s Mildura Fruit (citrus exports) and Italy’s Salov (olive oil).
However, Bright Food is far from alone as fellow Chinese giants COFCO, Fosun
Global supply chains
For decades, self-sufficiency has been the cornerstone of China’s food security strategy. Yet China is facing the dual challenges of rapidly growing demand for food at the same time as diminishing levels of land, water and labour resources. As a result, China has to import large quantities of food from other countries, reflected in food imports having grown at a compound
annual growth rate of 32% over the past five years to $45bn (€36bn) in 2013.
China is now building its own global food supply system and is busy investing in overseas agricultural resources, particularly in Southeast and Central Asia, Central and Eastern Europe, as well as in Australia and Latin America.
Large swathes of farmland are being leased while financing, direct investment and technical support are being provided to promote agricultural development. Green channels for trade in agricultural products are also being opened up. Chongqing Grain Group, for instance, has been particularly active over the past few years, forming joint ventures in Brazil, Argentina and Canada for soybean and oilseed farming.
Acquisitions of overseas farming operations are also being made for the higher quality of their produce. One example is China’s Joyvio Group, which established a strategic partnership with Chile’s Subsole in 2013 to begin sourcing fresh fruit for export back to China, starting with the acquisition of five fruit farms the same year. Chile was selected for its counter-seasonal supply of highly desirable fruit, such as table grapes, blueberries and kiwifruit, which are currently
As China’s integration into the global economy shifts from inbound to outbound investment, so the global food and beverage market is set for a significant shake-up.
Turning the tide
It was only relatively recently that Chinese food and beverage (F&B) companies were struggling with overseas acquisitions. For instance: in just one year from 2010 to 2011, China’s Bright Food tried but failed to acquire Australia’s CSR (sugar), the US’s GNC (nutritional products), the UK’s United Biscuits (sweet snacks) and France’s Yoplait (yoghurt).
(Osborne Group) and WH Group have also closed deals over the past 12 months.
The motives behind these outbound acquisitions continue to be domestically oriented, with Chinese F&B companies looking to bolster their positions at home. This is not just a matter of securing access to much needed resources and safer supply chains, but also about moving up the value chain in terms of technical expertise and Western brands.
‘China is facing the dual challenges of rapidly growing demand for food at the same time as diminishing levels of land, water and labour resources.’
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beyond domestic supply. Remarkably, the total cost of growing fruit in Chile and shipping it to China is around the same as growing the crops domestically.
In addition to farming, there has also been deal activity in trading. For instance: China’s largest grain trader COFCO recently took controlling stakes in the Netherlands’ Nidera and Singapore’s Noble Agri, both grain sourcing and trading businesses. These acquisitions allow COFCO to source directly from farmers and thus help it build a global supply chain. Up until this point, COFCO had felt overly reliant on purchasing grain from the Western ‘ABCD’ trading giants (ADM, Bunge, Cargill and Louis Dreyfus).
Tapping technology
On the road to achieving global competitiveness and food security, there is much that Chinese F&B companies can learn from their international peers.
The desire to obtain agricultural technology and know-how was one of the motivators behind Bright Food’s acquisition of Tnuva, Israel’s largest dairy producer. Israel faces similar resource constraints as China, and has become a world leader in agricultural technology. In dairy farming, its cows have yields of up to 10.5 tons of milk per cow per year, significantly ahead of China’s national average of 5 tons. Even China’s leading farms are only working towards yields of 8 to 9 tons per cow.
Technical expertise was also one of the drivers behind the $4.7bn (€3.8bn) acquisition of the US’s Smithfield Foods by WH Group, formerly known as Shuanghui International. Although China has half the global hog population, the country has been a net importer of pork since 2008. A major reason for the shortage in domestic supply is the productivity of China’s hog
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farming industry. In the US, each sow produces an average 22 piglets per year which is much higher than China’s average of just 14. And average hog prices in China are a third higher than they are in the US.
Food safety
An exacerbating factor during this period has been food safety. Since infant formula products were found to be contaminated with the industrial chemical melamine in 2008, China has suffered from one food scandal after another. This has created a deep sense of distrust in local supply chains, from dairy products to animal protein to fresh fruit, and food safety now ranks as one of the top concerns of Chinese consumers.
If a Chinese F&B company can buy a global brand, or overseas supply chain for their domestic brand, it helps improve Chinese consumer trust and confidence.
Following the tainted infant formula scandal, Bright Food restructured its supply chains and acquired numerous dairy farming and processing businesses, including New Zealand’s Synlait Milk and Australia’s Mundella, in addition to Israel’s Tnuva. The backdrop to WH Group’s acquisition of Smithfield was also a series of pork-related scandals, creating a need to rebuild credibility and improve food safety and traceability practices.
Meanwhile, Joyvio expects its newly acquired farms in Chile to benefit from Chinese consumer interest in fruit free of agrichemical residues that remain a common problem back at home.
China opens its doors
Chinese acquirers are bringing more than just cash to the table. In many cases, they are opening up access to the Chinese market to help boost sales and secure jobs.
At over €1tn in value, China is now the largest grocery market in the world. Chinese consumers are becoming increasing affluent and discerning, leading them to spend more for products which they believe are better or more prestigious, and thus creating demand for a wider range of goods.
However, many Chinese F&B companies lack premium brands to meet the desires of the evolving Chinese consumer. Moreover, there has been a big increase in costs in China and so without a premium brand it’s increasingly hard to make a reasonable margin. In the short run, the only way out is to go and buy something from the bigger opportunities overseas.
Businesses are keen to invest in long-established brands with heritage that cannot be copied, which is where Europe is particularly strong. Given the surge in outbound tourism and online browsing, Chinese consumers are increasingly exposed to established European brands. Buying into these brands and bringing them to China isn’t without risk, and it is normally safer to play in those categories with which Chinese consumers are already familiar.
With the acquisition of a stake in the UK’s Weetabix, Bright Food took the opposite tack. It said it wanted to offer a convenient breakfast to Chinese consumers who are short of time in the morning, with the traditional breakfast being a rice-based porridge. The hope was that Bright Food could market the breakfast cereals alongside liquid milk on supermarket shelves. But it wasn’t long before Weetabix started work on a localised product range to increase consumer acceptance.
It is not only Chinese corporates that will be aggressively seeking acquisitions overseas, but also Chinese private equity funds too. For instance: in 2014, Hony
Capital made its largest ever investment by taking a stake in the UK’s Pizza Express. The restaurant chain already had a handful of restaurants in Hong Kong and Shanghai, and there is a strong belief in its future potential as Chinese consumers increasingly dine out and develop a taste for pizza.
Summary
The big growth in cross-border investment will now be coming from the Chinese side, as F&B companies look to ramp up their positions both at home and abroad. Most Chinese companies take their first steps abroad close to home, but F&B buyers are increasingly looking to developed markets such as Europe, the US and Australia. Europe has a particular advantage over the US as its regulatory environment is perceived to present fewer obstacles to doing deals.
By some estimates, Europe might receive from $250bn (€200bn) to as much as $500bn (€400bn) in new Chinese M&A and greenfield investment by 2020, and Europe’s F&B sector is set to be one of the beneficiaries.
the recipe | 2015
Leading producer of high quality smoked and boiled meats
Clearwater International advised the owners of Eberhart on the acquisition by Danika Food Group A/S
Eberhart
World’s largest producer of bread
Clearwater International advised Grupo Bimbo on the acquisition of Beijing Jinhongwei Food Co & Beijing Million Land Fastfood Co
Grupo Bimbo
Major player in the UK top fruit market
Clearwater International advised Empire World Trade on the sale to UNIVEG Group of Belgium
Empire World Trade
Global leader in seasoning products
Clearwater International represented the buyer on an equity acquisition transaction
McCormick & Company
Restaurant business operated under licence from Yum! Brands
Clearwater International advised management on the sale to Rutland Partners
Pizza Hut
Leading sports nutrition products business
Clearwater International advised the company on its cross-border sale to Glanbia
Nutramino
Leading American confectionery manufacturer
Clearwater International advised on the acquisition of Chinese oat company Seamild
The J. M. Smucker Co
Leading Danish food company supplying to retail businesses
Clearwater International advised on the acquisition by A Frost
Mortensen Foods
Agricultural producer of animal feed
Clearwater International advised on the sale of the company to Al Dahra Agriculture of the UAE, which acquired an 80% stake
Fagavi
An overview of recent food and beverage deals completed by Clearwater International
Deal focus
the recipe | 2015
15deals
International reach,Excellent client outcomes
AARHUS • BARCELONA • BEIJING • BIRMINGHAM • COPENHAGEN • LISBONLONDON • MADRID • MANCHESTER • NOTTINGHAM • PORTO • SHANGHAI
W W W . C L E A R W A T E R I N T E R N A T I O N A L . C O M