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Foreign suitors swoon over easy market gains

By Wang Lan (China Daily)
Updated: 2008-09-24 09:30

Huiyuan Juice sits beside Coca-Cola on a supermarket shelf. [China Daily]

The surprisingly high premium offered by Coca-Cola for soft drink maker Huiyuan Juice has redefined Chinese brand value and focused the local corporate sector's attention on the question of what it is that's making foreign suitors swoon.

The short answer, analysts agreed, is market share. This is of particular importance to the high-volume soft drink business. In some cases, market share has continued to elude foreign producers in the thousands of small cities and townships in China's vast rural areas.

Acquisitions of this type will not be limited to the food and beverages sector, analysts said. They expect foreign investors will also zero in on catering, retail, logistics and other sectors.

"We are going to see more foreign companies, which have saturated the large cities and coastal region with their goods or services, going after the domestic brands that have penetrated the secondary cities and towns in the relatively less developed central and western parts of the country," Yu Ming-yang, head of the Institute of Branding Research at Shanghai Jiaotong University, said. "Coca-Cola's offer represents an increased recognition of the value of Chinese brand names by foreign companies," he said.

The proposed transaction has stirred up a storm of protest from Huiyuan's domestic competitors, who have expressed fears of potential market domination by the Coca-Cola/Huiyuan combination, which is under review by the commerce ministry.

Beijing-based Huiyuan is the largest juice beverage company on the mainland with a 46 percent market share in 2007, according to market research firm ACNielsen. The company's sales totaled 2.7 billion yuan ($396.18 million) in 2007.

In fact, Huiyuan was targeted by foreign investors long before Coca-Cola made its offer. The Chinese company is 21 percent owned by French food and beverage producer Danone, with 6.37 percent held by US investment bank Warburg Pincus.

"There is room on the stage for foreign investors to acquire Huiyuan's rivals, such as Uni-president and Master Kong, which are producing more healthy beverages, including sugar-free tea, pure fruit juice and bottled water to meet growing demand from customers," Hu Chunxia, a beverage industry analyst at Guotai &Junan Securities in Shanghai, said.

Huiyuan, of course, is not the only Chinese brand that has caught the eye of foreign investors. Some of the world's largest investment funds have been quietly building up equity interests in choice Chinese brand assets for years.

For some foreign investors, mainly banks, they acquire equity interests in Chinese brands as an investment to be resold later at a profit. Others are seeing their investments in established Chinese brands as a quick and effective way of expanding share or penetrating new markets.

Foreign investment banks had shown particular interest in leading Chinese companies in the dairy industry. For example, Morgan Stanley, together with two other foreign investors, in 2002 bought a 32 percent stake in Mengniu Dairy for 216 million yuan. A year later, Morgan Stanley topped up its commitment, buying $35 million worth of Mengniu's convertible bonds.

The capital injection by Morgan Stanley and others has turned Mengniu from an insignificant dairy producer to one of the three leading players in the domestic dairy market over the past six years. Shortly after introducing a strategic investor, Mengniu's annual sales in 2002 and 2003 jumped 131 percent and 144 percent respectively. Mengniu's market share has also been largely improved since then and the company went public in Hong Kong in 2004.

Since then, the growing value of Chinese brands has caught the fancy of foreign investors, whose interests have been widened from food and beverage to cafes, restaurants, cosmetics and home electronic appliances.

In August 2006, well-known Chinese kitchenware brand Supor based in Hangzhou of Zhejiang province, was acquired by French firm SEB, the world's leading producer of small home electronic appliances.

In April, Goldman Sachs bought a 20 percent stake in Hangzhou-based C.straits Caf. Other well-known restaurant chains that have been targeted by foreign investors include Diocoffee, Chamate and Christine Bread House.

Other Chinese brands that have wooed foreign investors include Zhonghua toothpaste, Huoli 28 shampoo, Robust beverage, Maxam and Mini Nurse skincare products.

As in the case of Huiyuan, the sale of well-known domestic brands almost always touches a raw nerve.

Many household names have disappeared from the marketplace, substituted with foreign owners' own brands.

A case in point is the beverage brand Robust, popular in Guangdong province in the 1990s.

As one of the two best known non-alcoholic beverage brands in China at that time, Robust used to enjoy an overwhelming market share.

But after it was bought by Danone in 2000, the brand simply faded away from the public eye.

Maxam, a cosmetics brand first established in 1962 by Shanghai Jahwa, one of the nation's largest cosmetics producers at that time, accounted for more than 20 percent of the domestic market in the 1990s.

Other Chinese brands that shared the same fate after an ownership change include Nanfu Battery, Mini Nurse skincare products and Dabao cosmetics products. Nanfu Battery was purchased by US Gillette in 2003, while Mini Nurse went to L'Oreal in 2003.