Danone CEO Emmanuel Faber has defended the French group's investment in Yashili International Holdings in the wake of the Chinese infant formula group's recent profit warning.
In January, Yashili, in which Danone owns a 25% stake, said it expected its profits to have tumbled 40% in 2014.
Yashili blamed a slowdown in the paediatric milk powder industry in China and rising competition. It also invested in alterations to its distribution and marketing model and raised its advertising spending. The company also conceded new products were "not launched at a pace expected".
Speaking at the Consumer Analyst Group of Europe conference today, Faber was asked if the expectation of lower profits had been seen in Danone's due diligence. Societe Generale analyst Warren Ackerman also asked Faber to explain why Danone had invested in Yashili last autumn.
Faber said Yashili's results in 2014 were "no surprise" for Danone. He indicated Yashili's performance last year had been a reason why the infant formula's majority shareholder, Mengniu Dairy, as well as Mengniu's backer, the state-controlled Cofco, had approached Danone.
"I think the profit warning was the reason why Mengniu and Cofco were in discussions with us over how we could help and support the Yashili team with some early life nutrition international experience. The fact Yashili was having some difficulties was one of the key reasons for their interest in us, partnering wth them on this."
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Faber said Danone had invested in Yashili because the business had been earmarked by the Chinese government as one of a selected number of companies to help consolidate the local infant formula industry. In 2013, Beijing announced plans to back a process of consolidation in what is a highly fragmented sector in order to improve food safety and form larger domestic businesses to compete with international competitors.
"There will be in China basically 20 years from now two large segments in the early life nutrition business. One will be a few very large international brands and companies. And a number – much lower than the current 500 Chinese local brands, probably ten, among which probably five will be significant – that will consolidate the overall market. Yashili has been elected as one of the top ten domestic champions by the Chinese government where they said this list of domestic champions will be the consolidators of the industry. They will receive government support in many ways, including financial support to clean the market and make sure the food safety environment is even better than what it is today in China – where it has made a lot of progress obviously but can still do a lot more.
"This is the context in which we believe partnering with Cofco – the largest state-owned enterprise active in the food and agricultural business in China – is a long-term investment for us, by having a stake in one of the leading Chinese companies in that business. Today, Yashili is managed by a Danone exec that has been appointed by the board of Yashili to run Yashili and think about how this company could do better."