Comment - Nestle's Deal for Yinlu Foods

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Swiss food and beverage giant Nestle has expanded its Chinese footprint with the acquisition of a 60% stake in local food and drinks maker Yinlu Foods. The deal will widen Nestle's product offering in the market, grow distribution and significantly expand the group's Chinese sales. However, the acquisition's greatest upside is perhaps the local know-how that Nestle will gain by working with an experienced and trusted Chinese partner. Katy Humphries reports.


For some time now Nestle has indicated that it is planning to increase its exposure to emerging markets. The group has said that it aims to grow its sales from developing markets to 45% of total revenue by 2020, up from about 38% currently.

Looking at Nestle's first-quarter results, its easy to see why this strategy is imperative if the company is to retain its status as a global powerhouse in the long-term. In the first three months of this fiscal year, Nestle's sales in Asia, Oceania and Africa rose by 11.8% - compared to revenue growth of just 2.3% in Europe and 3.7% in the Americas.

It came as little surprise, then, when Nestle announced the acquisition of a 60% stake in Chinese food and drink maker Yinlu Foods last week. Given Nestle's strong balance sheet and cash reserves, an acquisition of this nature had been on the cards for some time.

Family-owned Yinlu generates annual sales of around CHF750m (US$854.6m) - around a quarter of Nestle's current annual sales in China. The tie-up with Yinlu therefore contributes significantly to Nestle's already rapid sales expansion in the Chinese market. Excluding currency exchange, China was the fastest-growing of Nestle's top 15 markets in 2010 - with sales rising by 15% CHF2.8bn.

Yinlu is also a well-established firm in the country, where it is the tenth-largest soft drinks maker in the market, according to Datamonitor.

In a note to investors, Helvea AG analyst Andreas Von Arx said that the company's product portfolio compliments the range Nestle currently distributes in China. "With a complementary product range in a market where Nestle needed to strengthen its positioning, this looks like a perfect fit," Von Arx said.

The deal is also well-suited to Nestle's focus on health and wellness products, said Jean-Philippe Bertschy, an analyst at Bank Vontobel. "The Yinlu products fit in Nestle's strategy of nutrition, health and wellness," he observes. "Yinlu will significantly increase Nestle's presence in China," he said.

The arrangement is an extension of an already established relationship between the two companies, as Yinlu is currently a co-producer of Nestle's Nescafe coffee in China. According to Kepler Capital Markets analyst Jon Cox, the fact that this venture involves an already trusted partner is a big upside for Nestle, as it reduces the risks associated with a joint venture.

"I think the deal makes sense in terms of it is a partner they have worked with for some time, which makes a joint venture blow less likely," Cox said.

Alongside more tangible benefits - such as Yinlu's brand recognition and distribution network - Nestle said that an important dynamic in the agreement is the Chinese firms knowledge of local consumers.

While Nestle has taken a controlling stake in the firm, the company said that Yinlu chairman Chen Qingyuan will continue to lead the company, demonstrating Nestle's commitment to Yinlu's local management. "We are proud to build this partnership to bring healthy, affordable and tasty products to our consumers in China by combining Yinlu's entrepreneurship, product expertise and consumer understanding with Nestlé's innovation and renovation capabilities," Nestle CEO Paul Bulcke said when the deal was unveiled.

"It demonstrates our long-term investment in China and our commitment to further developing local brands," he added.

Nestle will, no doubt, aim to step up its pace of growth in China through aggressive organic expansion in relation to Yinlu and its other Chinese brands. And, with more than one billion mouths to feed and water, Nestle is well-positioned to capitalise on the opportunities presented in the country.

However, Cox said that Nestle is also likely to be on the look-out for further acquisition opportunities to boost its presence in developing markets. "I expect to see more deals like this given the fact the company's scale in its categories in the developed world means it will prevented from doing too many deals by competition concerns."

The news that Nestle acquired a controlling stake in Yinlu Foods Group originally featured on just-drinks' sister site, just-food.

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