Danone swaps Dumex China unit for deeper ties with dairy giant Mengniu
French firm to sell Dumex infant formula business to part-owned Yashili as international firms face growing challenges in competitive market
France's Danone is pulling the plug on efforts to revive its flagship Dumex infant formula unit in China on its own, swapping a business ravaged by food scares for a bigger stake in a domestic dairy giant as competition heats up in the world's biggest market for formula milk.
The French food supplier said it had struck a "preliminary agreement" to sell its Dumex unit, once its top formula brand in China, to Yashili International Holdings. In return, it will deepen ties with one of the country's biggest dairy firms, raising its 9.9 per cent stake in China Mengniu Dairy, Yashili's indirect parent.
The move reflects a growing challenge for international firms in China's fiercely competitive US$20 billion infant formula market. Dumex saw its sales plunge after a series of scares in the past few years.
"That had a strong impact on consumers' trust in the brand. It really damaged them in terms of reputation and sales. This sort of marks Danone getting out," said James Roy, a Shanghai-based associate principal at China Market Research.
Danone did not disclose a value for the Dumex business or say by how much it would raise its holding in Mengniu, worth nearly US$10 billion by market value.
The French firm spent US$665 million raising its stake in Mengniu last year and paid US$550 million more for a 25 per cent stake in Yashili itself.
While Yashili is its main formula business, Mengniu has operations in yoghurt, liquid milk and ice cream, which could help Danone expand its China business outside infant formula.
In February, Danone's chief executive Emmanuel Faber said the firm was "reshaping the future of Danone in China" around its alliance with Mengniu. Dumex was not likely to contribute much to China growth this year, he said.
Danone is the third-biggest player with an 8.1 per cent share of China's milk formula market, where it has other formula brands including Nutrilon. The overall market was set to double in size by 2020, market research firm Euromonitor said.
Beijing was putting pressure on firms to increase domestic production, creating an incentive to tie up with local partners, one industry executive said recently.
Abbott Laboratories has a new formula plant near Shanghai while New Zealand dairy giant Fonterra has invested in China farms.
The deal will also help Yashili boost its reputation with domestic consumers, who see international ties as a mark of quality and safety.
The company said it would collaborate with Danone on a manufacturing facility in New Zealand.
