WhiteWave Foods and Mengniu Dairy are eyeing growth in the Chinese nutrition sector through a tie-up announced earlier this week. The deal will enable WhiteWave to rapidly build scale in the Chinese market while Mengniu will benefit from a wider product offering. Katy Askew takes a look at the agreement.

US organic dairy-to-soya milk manufacturer WhiteWave Foods has set its sights on China. Like many western food groups, WhiteWave has been lured by the vast potential offered by China's booming dairy sector.

Dairy is a dependable growth consumption item in China. According to figures from Datamonitor, the Chinese dairy market has grown at a compound annual growth rate just north of 7% a year between 2008-13.

Demand is being driven by factors including a growing middle class, rising urbanisation and evolving consumption patterns. And there is still plenty of space for growth. According to a survey conducted by the Ministry of Agriculture earlier this year, China's per capita milk consumption is only 21.7 kilograms, a fifth of the world average and about half that of many other Asian countries.

WhiteWave has struck an agreement to enter the Chinese market through a partnership with local dairy giant Megniu. The companies will cooperate on the production of nutrition products WhiteWave said without providing more detail on the firms intended product roster. WhiteWave will hold a 49% stake in the venture.

WhiteWave chairman and CEO Gregg Engles said the move was consistent with the group's strategy to expand into new geographies. "This... provides a unique opportunity for us to access the Chinese market, one of the world's largest consumer markets with a rapidly growing, multi-billion dollar nutritious products segment."

Engles added that Mengniu is the "ideal partner" for WhiteWave. "It is a leading dairy company in China with a broad product portfolio, strong sales network and manufacturing capabilities, deep consumer expertise and a wide distribution network throughout China," he commented.

Indeed, the newly formed business is certainly well-positioned to benefit from Mengniu's established relationships with retailers, marketers and suppliers, as well as its pre-existing cold chain distribution capabilities and nation-wide reach.

The business is also getting a head-start through its plans to acquire Yashili Zhengzhou, a unit of infant formula producer Yashili, which is itself majority owned by Mengniu. Zhengzhou's principel asset is a dairy manufacturing plant, which is currently under construction. Mengniu and WhiteWave wil each pay their share of the US$85m purchase price.

"We can't help but be excited by the growth potential of this market," Stifel analyst Christopher Growe wrote in a note to investors.

However, without more clarity on the plans for the business, Growe cautioned that it was too early to assess the newly formed unit's full growth potential. "The completion of the production facility, perhaps the use of WhiteWave's brands in China, the development of "nutritious" products (beverages, foods, dairy products?), are all open questions for the JV in order to assess its growth."

For its part, WhiteWave brings competency in a number of product areas that are new to Mengniu and its credentials as a premium international firm to the table.

Safety is the single biggest issue shaping the discourse around the Chinese dairy industry today. The sector has been plagued by safety scares, such as the 2008 melamine contamination scandal when contaminated infant formula killed six babies and sickened around 300,000 more.

The melamine crisis prompted high-profile recalls, drawing in around 20 domestic dairy companies including Mengniu. It served to undermine consumer confidence in the safety of domestic dairy products, uncovering a major issue that Chinese dairy companies - and regulators - are still attempting to grapple with.

Further scares have done little to encourage consumers. In 2009 and 2010 fresh incidents of milk formula contaminated with melamine were uncovered. Other scares have spanned the spectrum of dairy products - from feeds, raw milk, liquid milk and milk powder - and included aflatoxins in cows' feeds and unusual levels of mercury content in infant milk formula powder.

As a result, many Chinese consumers believe food produced by international dairy companies is safer.

Mengniu already operates established partnerships with international dairy giants including Arla and Danone as it has worked to build world-class production. 

"This is different, but complementary, to Mengniu’s collaboration with Arla, not only structurally, with Arla holding a direct stake in Mengniu’s HK listed entity, but also in scope, with Arla involved in enhancing the productivity and quality of Mengniu’s core dairy business," Torsten Stocker of AT Kearney says.

The joint venture with WhiteWave is likely to benefit from a growing number of Chinese consumers who opt for organic dairy products, which are also viewed as safer. With its stable of organic brands and premium nutrition products, WhiteWave offers a proposition that is well-placed to meet this growing need.

James Roy, senior analyst at China Market Research Group, suggests that WhiteWave and Mengniu will benefit from the emergence of an increasingly "discerning" consumer in China - one whose purchase decisions are informed by concerns over health and wellness as well as safety.

"This joint-venture with WhiteWave is a higher-end play. Mengniu gets to round out its portfolio with more nutritious products and organic foods in particular. Chinese consumers in both first and lower-tier cities are not only becoming more concerned about buying healthy foods but are becoming much more sophisticated and discerning about what they buy. As a category organic foods are seeing fast growth as consumers seek products that are they can trust to be safe and healthful," Roy observes.

According to researchers at ResearchMoz, during 2011 China's organic market grew by 14.7%. "Overall, the outlook for the organic food and beverages industry in China seems to be positive. The current scenario in China is very encouraging and conducive to organic farmers," the researchers note.

While it is as yet unclear what products the companies plan to develop, it is likely that the venture will focus on areas where it will benefit from WhiteWave's technical and marketing expertise.