Danone is to make another attempt to tap into the booming demand for fresh dairy products in China. The French food group is teaming up with Chinese dairy giant Mengniu, the largest yoghurt producer in the country. However, the two companies’ previous attempt as a venture ended after just a year. Can Danone succeed this time? Dean Best reports.

Danone will be hoping its latest move to crack China’s fresh dairy sector will be a case of third time lucky.

In a bid to tap into rapidly-increasing demand for yoghurt in China, the Activia maker is to form a venture with one of the country’s largest dairy companies, Mengniu Dairy.

In a two-part agreement, Danone and Mengniu will combine their yoghurt assets in the country into a production and distrbution venture. Danone will take a 20% stake in the business. 

The French food giant will also set up a second venture with Mengniu’s largest shareholder, state-backed Chinese food and drink group COFCO. Danone will hold 49% of this venture and will end up with an indirect 4% interest in Mengniu. Danine, incidentally, joins another European dairy giant, Arla Foods, as an investor in Mengniu. The dairy co-operative insisted Mengniu’s deal would not affect its own partnership with Arla.

Danone chairman and CEO Franck Riboud hailed the new agreement with Mengniu. “Joining the strengths of Danone, COFCO and Mengniu will create the winning combination to unlock the potential of the fresh dairy products category in China,” Riboud said on Monday (20 May).

Danone has yet to find that winning combination in China’s dairy market. And, more pertinently, this is Danone’s second attempt at working with Mengniu. The two sides set up a similar venture in 2006 – which marked Danone’s entry into China’s dairy sector – but that was disbanded after just 12 months. Since then, Danone, which has a buoyant infant formula business in China, has gone it alone in the country’s fresh dairy sector – but even that has not been without its ups and downs. In 2011, Danone suspended production at its Shanghai yoghurt plant – one of two in the country – and announced it was evaluating its strategy for the sector.

That review has led it back to Mengniu and its largest investor, COFCO. The combined Danone-Mengniu yoghurt business will have 13 plants in China and, the French firm said, have a market share of 21%. The two-part transaction will see Danone invest EUR325m in the country. It sees Mengniu benefiting from its “leading product innovation and management” in fresh dairy and believes the Chinese firm’s network can boost the presence of its own brands. “Backed by COFCO’s extensive expertise in the Chinese food industry and by Mengniu’s nation-wide leading platform in the Dairy sector, our brands will benefit from significantly wider reach to the largest number of Chinese consumers,” Riboud said.

And China’s consumers are gobbling up yoghurt. Euromonitor estimates sales jumped more than 17% last year to CNY45.66bn and the analyst firm has forecast sales will have almost doubled by 2017 to CNY90.42bn.

However, given Danone’s patchy record with partnerships in emerging markets – its history in China also includes a spat with food and drink giant Wahaha that ended up in court – one could forgive shareholders if they were a little concerned about the prospects for the company’s latest foray into China.

Nonetheless, shares in Danone increased on Monday – not massively, they were up 1.8% at the end of the day – but it was a signal the market was cautiously optimistic about the new venture.

“We view the deal as positive as it should help Danone with its efforts to expand the Chinese chilled dairy market,” Kepler Cheuvreux analyst Jon Cox said. “However, we note the company has a somewhat chequered history with JVs, although we do believe that its past experience should help it avoid any potential banana skins.”

Perhaps that past experience has made Danone more pragmatic. The make-up of the latest venture in China seems more cautious, taking a 20% stake in the venture with Mengniu.

But that pragmatism has not meant Danone has steered clear of Mengniu. Despite the abrupt end to the two companies’ previous venture – and, let’s not forget, the food safety issues that have involved the Chinese firm in recent years – Danone has again opted to join forces with the company that is, after all, the largest player in the country’s yoghurt sector.

Torsten Stocker, partner at Monitor Deloitte’s Greater China office, believes Danone made a realistic judgement of the prospects for its yoghurt business in China.

“My sense is that the choice for Danone was between accelerated market access through a partner – and if you go that way, you might as well pick someone strong rather than a smaller regional firm – or grinding away on their own, building both cold-chain infrastructure city-by-city or cluster-by-cluster and the chilled yoghurt category itself – and all the while seeing local and other international players expand on their own in both chilled and ambient yoghurt,” he says.

“The tie up makes sense. Danone gets access to Mengniu’s cold/chilled-chain distribution network instead of having to build it themselves, which would require a lot of time and investment. From what I have heard, Danone’s yogurt business’ footprint is still quite limited in terms of city-penetration, and the business has undergone considerable SKU rationalisation in the last few years.”

And, as with many consumer goods categories in China, the potential rewards mean businesses, even if they fail at the first attempt, return to the market and try again. Some investors could have concerns Danone does not control the business. However, take Danone’s past record in China and combine the appeal of doing business in the country’s yoghurt sector (especially when yoghurt markets in Europe have proved so challenging) and the company’s latest attempt looks a considered one.