Changing Food Tastes Driving Chinese Private Equity Investment

Changing Food Tastes Driving Chinese Private Equity Investment

Shenzhen, A!hina - August 25, 2012: One man sit and enjoy his food interior of mcdonald's restaurant in dongmen street, Shenzhen city, China

China is today the world’s largest market for food and beverages, its growth having been driven by 20+ years of economic expansion and higher living standards. In 2013, China consumed $781 billion worth of food, or $564 per person, which is a huge increase compared with $149 in 2000. This growth is continuing, with Chinese food consumption forecast to reach $1.2 trillion in 2018, a CAGR of 8.7%.

 

Chinese consumers eating more meat

This growth in the Chinese food market comes from changing consumption patterns – people eating more meat with higher incomes – as well as higher food quality and the introduction of foreign products and tastes (historically Chinese consumed few dairy products). To keep up with this rapidly increasing and changing demand the Chinese food industry has invested heavily, but it is still generally lagging behind the technology, efficiency and quality standards of Western competitors, for example in cold chain logistics. A series of food quality scandals involving milk, meat and other products have shaken consumer confidence in domestic food products.

Domestic production can’t keep up

While domestic production has increased along with increased consumption during these years, demand is now outstripping China’s capabilities in a number of areas. For example, efforts to increase efficiency in the Chinese beef processing sector have actually led to a decrease in beef production, and beef imports tripled between 2012 and 2013.  When it comes to pork, a product that is viewed as a “strategic” raw material given the large domestic consumption, China has had better success, but is now having to import large amounts of corn for animal feed.

Demand for foreign technology and know-how

The need to improve efficiency, technology and quality in the Chinese food sector is creating many opportunities for foreign investors. Initially these were mostly pursued by strategic players (for example Hershey which recently acquired Shanghai Golden, a leading confectionary products company), but increasingly private equity groups are pursuing these opportunities.

International private equity groups investing

The private equity group KKR is one of the most active food industry investors in China and in 2014 has announced two new deals:

  • Fujian Sunner ($400 million investment) – China’s largest breeder, processor and supplier of chicken products.
  • COFCO Meat ($270 million investment) – a leading Chinese pork processing business, KKR invested together with Baring Private Equity Asia.

Previously KKR has also invested in China Modern Dairy, a large milk producer, and achieved a partial exit through a deal with China Mengniu, a dairy group which itself has a partnership with the European dairy company Arla.

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Co-Investments with strategic players

On the Chinese side, food companies are eager to make acquisitions abroad to get access to better technology. One way to accomplish this is to team up with private equity groups. An example of this was the 2013 acquisition of Smithfield Foods for $7.1 billion. The deal was financed by co-investments from several private equity groups, including CDH Investments and New Horizon Capital.

Chinese domestic private equity groups also active

In China the food industry has not been a favorite of private equity investors who typically prefer to target the e-commerce and technology. However, we are seeing more activity here also. A good example is the consumer products focused group ClearVue Partners which in 2013 invested in Fields, a Shanghai based company that is capitalizing on major trends in the Chinese food sector. Fields is an online grocery business similar to FreshDirect in the U.S. that sells high quality imported and Chinese products, such as organic vegetables, and is growing rapidly. Other Chinese private equity players that are pursuing the food industry include Fosun (China’s largest private group), CITIC Capital, and Yunfeng Capital (co-founded by Alibaba Chairman Jack Ma).

Future Private Equity Activity in Food Sector Expected to be High

For the next few years we can expect to see increased investment activity in businesses that can help China improve food production efficiency, safety and quality. International private equity groups with experience in the sector that can bring such added values to the table will find good investment opportunities, but capital alone is not enough in this game. On the other side, Chinese strategic players are eager to make overseas acquisitions but generally do not have the transaction experience and available capital, so they will look to partner with private equity groups either from China or abroad that can provide this.  Market segments that will be of interest include food quality, cold chain logistics, and prepared meals.