Shanghai fallout sees Danone suspend ops as Nestlé shuts Chinese site

By Ben Bouckley

- Last updated on GMT

Related tags Ice cream Inner mongolia

Shanghai fallout sees Danone suspend ops as Nestlé shuts Chinese site
French dairy giant Danone says it is refocusing its Chinese dairy operations after suspending operations at a yogurt facility in Shanghai, while Nestlé has closed an ice cream facility in the country.

A spokesman told “Adjustments for our Shanghai factory will take place. At present our Shanghai factory’s operation is suspended. We are making an evaluation now to decide its future operation strategy.”

In future, the spokesman said that Danone would adjust its development strategy to provide a more “focused approach on building BIO as a strong value-added [yogurt] brand, and focusing our efforts and investments on main cities including Shanghai and Guangzhou”.

With this strategy in mind, Danone said it would continue industrial operations at its Beijing factory, where the BIO has always been produced.

Shanghai fallout

Discussing the impact of suspending yogurt operations in Shanghai, the Danone spokesman said: “Danone Dairy understands that this decision will have an impact on some of our employees, vendors and business partners. We are doing our utmost efforts to find most adapted solutions for all parties.

He added: “We will ensure the interests of all affected by this decision are protected according to the requirements of Chinese law and Danone policy.

The spokesman also emphasised the continuing importance of China (where the dairy market was worth $43.37bn or €33.39 in 2010) as a key strategic market for Danone.

“Danone reiterates its commitment to sustainable development in China and its mission to bring health through food to as many people as possible,”​ he said

Nestlé closes ice cream site

Nestlé confirmed to that it had shut one of three Chinese ice cream facilities, and was scaling-back retail sales in Shanghai.

As part of its on-going effort to further develop the ice cream business, the company will reinforce its focus on the South and North regions and will continue to build on the success of the ice cream business in these markets,” ​Nestlé China said in a statement.

“In the meantime, while maintaining the popular ice cream business for hotels, restaurants and cafes, we will suspend retail sales and close the ice cream factory operation in the East region as of the end of December 2011,”​ the firm added.

Discussing Nestlé and Danone’s reverses, Chris Brockman, global food and drink analyst for market research firm Mintel told “Many western food firms have struggled in China, meeting strong local competition who better understand consumer tastes and are quick to adapt.”

Brockman added: “In the retail ice cream sector, both Nestlé and Unilever have struggled to compete with the leading domestic players Inner Mongolia Yili Industrial Group and China Mengniu Dairy.

“According to Mintel's data, the two domestic firms, leaders in the category, control a combined 38% share in value terms of what is a very fragmented market,”​ he said.

“The international brands sell at a significant premium to the local brands. The same two local companies also control around a third of the yoghurt sector which is also fragmented.”

Super-premium proposition?

Both Nestlé and Unilever had tried to compete with at lower price points in ice cream, Brockman said, but “without huge success due to local brands competing with strong distribution networks and a more embedded focus on local tastes”.

He added: “The multinationals have therefore gone back to concentrating on higher added-value products.”

Western brands had seen more success in high-end ice cream parlours where they local players were less able to rival their luxury image, Brockman said.

“Häagen-Dazs cafés for example have been very successful for General Mills. The company now operates over 160 Häagen-Dazs shops in 30 cities.

General Mills had focused on selling Häagen-Dazs in 'trendy' cafés rather than at retail level to reinforce its super-premium image, Brockman said, and was now it extending products “more aggressively” ​into premium retail lines.

Accordingly, Brockman hinted that other Western brands could follow a similar strategy, a viewpoint that Nestlé’s statement certainly seems to support.

He said: “Building up awareness and demand for a premium product through the ice cream parlour channel, and then rolling it into retail but retaining the premium credentials, is likely to be more successful than slogging it out with local players for mass-market share.The other option is of course to acquire one of the said local players.”

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