In the spotlight: Hard work ahead for new Weetabix owner Bright Food
The market for breakfast cereal in China is in its early days
Ambitious Bright Food, the Chinese state-backed food group, missed out on previous Western targets like United Biscuits and Yoplait but it has planted a flag in Europe with the acquisition of a majority stake in UK cereal manufacturer Weetabix. The deal could give Bright Food some Western expertise to apply to its domestic business but, as Dean Best reports, its faces a challenge in building the brand in China, where it remains early days for breakfast cereal.
After failing to land United Biscuits and Yoplait, Bright Food, the state-backed Chinese food maker, has secured its first major acquisition in Europe.
Bright Food announced today (3 May) it had bought a 60% stake in Weetabix in a deal that valued the UK cereal manufacturer at GBP1.2bn.
The company, which has a chairman who is also secretary of China's Communist Party, said the transaction was a "landmark acquisition", which signalled its entry into "the UK and global food markets" through the "iconic" Weetabix brand.
One could forgive Bright Food if some of the language overdid it a touch. The group has been looking to expand in Western markets for some time and, although it had some success, it had yet to strike a deal that would make industry watchers truly sit up and take notice.
In the last two years, Bright Food has acquired a majority stake in New Zealand dairy firm Synlait Milk and 75% of Australian food producer and importer Manassen Foods. However, as well as missing out on United Biscuits and Yoplait, it was defeated in the race to buy Australian sugar refiner Sucrogen and its reported interest in US vitamin retailer GNC came to nothing.
Nevertheless, as Torsten Stocker, partner at management consulting firm Monitor Group's Shanghai office, argued at the time of the Manassen deal, Bright Food sees itself more competing with Nestle rather than being a Chinese company focusing only on its domestic market. And perhaps those deals for Manassen and Synlait gave Bright Food the confidence it would one day strike a deal in Europe or the US.
Speculation over Bright Food's interest in Weetabix emerged last month, with reports the Chinese company had been in talks with the cereal maker's owner, the private-equity firm Lion Capital, for weeks.
There was, however, no talk of rival bidders for an asset that Lion Capital had owned since 2004. An assessment of other potential suitors suggested interest from elsewhere could be thin on the ground. Kellogg would run into anti-trust concerns, particularly in the UK, where it is market leader and Weetabix, which also owns the Alpen and Ready Brek brand, is number two. Nestle was said to be likely to be more interested in international brands and Weetabix, for all its presence in markets like North America, was deemed not to be international enough for the world's largest food manufacturer. PepsiCo, the owner of Quaker cereals, would more likely be interested in building its hot cereals business only. Ready Brek alone would not attract the US food giant.
And so it transpired that just ten days after reports of talks between Bright Food and Lion Capital, an agreement was announced.
The deal puts Bright Food firmly in a category in which Nestle is one of the largest players. According to data from Euromonitor, Weetabix was the sixth-largest maker of breakfast cereals worldwide in 2010. However, its market share of 1.8% puts it far behind Nestle's venture with General Mills, Cereal Partners Worldwide, which accounted for 9.7% of sales. Kellogg was number one, with a market share of over 33%.
One of the attractions of the deal for Bright Food is the opportunity for growth it sees for Weetabix internationally and, as chairman Zongnan Wang noted today, "in Asia in particular". Lion Capital, which will retain a 40% stake in Weetabix alongside the company's management, today said how it was "excited" about extending the business into China.
In China itself, Cereal Partners Worldwide leads the breakfast cereal market, with 28.2% of sales in 2010, according to Euromonitor.
M&A watchers, debating whether the large domestic players in emerging markets like China would become more active buyers of companies in the West, have speculated that firms in countries like China and India would look to bring Western brands back to their home markets. Bright Food will likely hope to use its distribution muscle in China to push the Weetabix brand stable in its domestic market, where demand for breakfast cereals are growing, although the market remains in its very early stages.
Last year, US$176.3m of breakfast cereals were sold in China. However, worldwide, over $29.35bn of breakfast cereals were sold in 2011, indicating just how fledgling the market is in China. Nevertheless, sales in China rose by more than 15% last year. Euromonitor predicts that rate of growth will slow. Between 2015 and 2016, the research firm forecasts sales will increase by 6.9%, solid growth but not the rapid rate seen in other categories in emerging markets. Euromonitor predicts sales will hit $256.7m in 2015 in China. Worldwide breakfast cereal sales are forecast to be $35.74bn.
Moreover, Weetabix does not rank among China's top ten manufacturers of breakfast cereal and, for all Bright Food's strength domestically, it will be tough to break into that list of leading domestic players. The investment in Weetabix could give Bright Food knowledge of how to build brands, a skill that some watchers of the FMCG sector in China believe few domestic companies possess. That said, for Bright Food to make serious inroads in the sector, it would probably have to acquire a local business and use that to drive Weetabix as a significant player in China's breakfast cereals sector.
Ready Brek could in fact be the brand that Bright Food chooses to push in China. According to Euromonitor, there are indications that Chinese consumers prefer hot cereals. "Trade sources indicate that hot cereals are slightly more popular than ready-to-eat cereals in China at the time of writing, mainly because Chinese people prefer hot food to cold food. As a result, ready-to-eat cereals, which need be consumed with cold milk, are still not widely accepted by consumers," the analysts wrote in a report published in October.
The way the deal is structured means the current Weetabix management team will remain not just on board but shareholders in the business, which is consistent with the way Bright Food has invested in overseas companies in the past.
Last year, Wang told The Financial Times he would look to keep the existing management teams of any companies Bright Food acquires in place.
"Any company I am going to acquire must have an outstanding management team and I want that team to continue working for us because Bright has insufficient knowledge of international markets," he said.
The fact the current team, including Weetabix CEO Giles Turrell, will remain at the company will help Bright Food not just in its quest to build the business in China but also provide the Chinese firm with brand-building, technical and marketing knowledge that it could apply to other businesses back home.
Turrell and the rest of the Weetabix team will also be on hand to manage the company's operations in the UK. Weetabix saw company retail sales in the UK increase by over 3% in 2011, according to data from SymphonyIRI. Sales of Weetabix cereals and Alpen museli were up year-on-year, although Ready Brek sales fell.
The Weetabix management will also oversee the expansion of the business in developed markets where the company already has a presence but where it could now benefit from Bright Food's resources.
Turrell said today there were "substantial opportunities" to grow the company overseas, highlighting North America, as well as Asia. In February, Weetabix announced plans to spend GBP20m on its facilities in the UK and North America but the ready-to-eat cereal market across the Atlantic, particularly in the US, remains tough.
Hoever, Bright Food, which reported revenue of $12.2bn in 2011, in theory has the resources to put behind Weetabix in the company's existing markets and help it withstand competition in developed markets.
Bright Food's investment in Weetabix, then, gives industry watchers plenty to chew over. The Chinese company now has a European business it can use to improve its domestic operations. It could use its own resources to bolster Weetabix in the UK and other Western markets.
However, while Bright Food believes it has a brand it could leverage in emerging markets like China, the market for breakfast cereals there remains relatively small. Its investment in Weetabix, its first in Europe, offers potential but with a lot of hard work ahead.
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