China Mengniu Dairy sees bigger things ahead in its partnership with global milk giant Danone

PUBLISHED : Monday, 03 October, 2016, 8:31pm
UPDATED : Monday, 03 October, 2016, 10:03pm

China Mengniu Dairy, the country’s second largest dairy firm, is likely to make a “big breakthrough” in its partnership with the world’s No 1 milk producer Danone, following a high-profile boardroom exodus last month that saw a sudden reshuffle of its chief executive.

Speaking to media for the first time since taking up the role, new chief executive Lu Minfang told the Post that profitability was top of his agenda, while he eyed more cooperation with the dairy giant’s French strategic investor to reinvigorate its ailing infant formula offshoot.

“Mengniu has forged good ties with Danone in R&D and supply chain operation of its baby formula and pasteurised milk businesses, and these collaborations are tipped to be taken further,” said Lu in an email. He is also a high-ranking veteran of France’s Danone, Mengniu’s second largest shareholder after state-owned food conglomerate Cofco.

We are likely to make a big breakthrough in our collaboration with Danone
Lu Minfang, chief executive, Mengniu Dairy

His appointment to replace Sun Yiping took place at a critical time after a 20 per cent decline in first-half earnings had made it harder for the Inner Mongolia-based company to make up ground on its rival Inner Mongolia Yili.

Mengniu’s infant formula unit Yashili International, headed by Lu for more than a year, also suffered a brutal 86 per cent plunge in net profit for the same period.

Lu said he aimed to “turn around” Mengniu’s beleaguered formula business, and achieve “rapid growth” of its UHT (ultra high temperature) and pasteurised milk sales as he outlined the three segments of Mengniu’s strategic focus.

“To improve profitability, we plan to focus our efforts on branding, marketing, as well as on our operating and channel efficiency,” he said. “Cofco and strategic investors Danone and Arla Foods are all offering support, including investment into the three segments.”

He said the dairy firm proposed to set up a world-class research centre with backing from its three biggest shareholders.

Mengniu’s interim net profit tumbled 19.5 per cent to 1.08 billion yuan from a year earlier – far below the 3.2 billion yuan in earnings logged by rival Yili Group for the same period, as sales of its premium milk and yoghurt failed to offset the cost of a bitter marketing battle. Lu also warned of challenges ahead posed by a global milk supply glut and lukewarm consumer demand.

But he noted Mengniu’s marketing and sales expenses would stay steady for the second half as the company tried to introduce marketing strategies to align with Mengniu’s international branding, instead of relying solely on advertising and sponsorships.

Analysts have expressed mixed views on Mengniu’s top management shake-up, with global ratings agency S&P warning the move could dampen the morale of some employees despite satisfactory corporate governance.

After more than a decade with Danone, Lu is also the vice-president of Danone Early Life Nutrition’s greater China business. He previously worked for US medical device multinational Johnson & Johnson and carmaker General Electric.

Mengniu said his knowledge of overseeing a multinational corporation would help Mengniu better use resources from Danone and Denmark’s Arla Foods.

Since being chosen by Beijing as a “role model” for the country’s sweeping reforms, Mengniu’s parent Cofco has undergone a range of structural overhauls such as reducing its layers of management and allowing units more freedom to exercise corporate governance.

Meanwhile, Danone sold its China infant formula brand to Yashili last year and used the proceeds to boost its holding in Mengniu, and Lu hinted at closer business ties between the pair over his term in office.

“Worldwide, we are likely to make a big breakthrough in our collaboration with Danone, which may see a contract manufacturing agreement that will substantially lift our margins and capacity utilisation,” Lu said.