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Synutra Planned Expansion Spotlighting China’s Dairy Development Strategy

Meisuli may become the fifth infant formula enterprise acquired by Synutra in the last two years. Up until now, Synutra owns forty-five registered infant formula recipes, eighteen of which were obtained through acquisitions. From 2018 to 2019, nineteen of the top twenty dairy giants engaged in seventy-five cases of mergers, acquisitions, strategic alliances, or asset disposal. In the following years, China’s infant formula industry is expected to undergo further consolidation and upheaval driven primarily by mergers and acquisitions.

Synutra is currently in the process of acquiring Guangzhou Meisuli (美素力) Nutrition Co., Ltd. Established in 2005, Meisuli was registered with a capital of 20 million yuan and registered nine infant formula products in 2017, three stages each for three production lines, “宝素力," "喜素力” and “康素力." If the acquisition is successful, Meisuli will become the fifth infant formula enterprise acquired by Synutra within two years.

Radical Expansion of Synutra’s Business Territory

The infant formula registration policy [1] was implemented in 2016. Under this regulation starting from Jan 1, 2018, every domestic and GAC/CNCA approved overseas infant formula manufacturing facility is only able to produce and market “three product lines (three stages per product line)” for the Chinese market. After the implementation of this regulation Synutra stepped up the rate of its acquisitions:

  • On May 12, 2018, Shengda Yak Dairy was acquired by Synutra.

  • On May 28, 2018, Synutra announced the complete acquisition of Jinyuan, including all nine registered infant formula products.

  • In May 2018, Synutra finished the purchase of Brendan (Fujian Province) Infant Nutrition, which also had nine registered IF products.

  • In June 2019, Synutra acquired Alfbeta, which had nine registered products.

The acquisition of Brendan and Alfbeta has made Synutra the group with the second-highest number of registered infant formula recipes (45), joined in second place by Mengniu (45) and behind Beingmate in pole position (60). Senior dairy industry analyst Song Liang noted, “Synutra's acquisitions of major industry players are part of a broader business strategy. Unlike other dairy giants like Mengniu and Yili, Synutra is still recognized as a second-tier brand with a relatively small market share.”

Groups with the most registered IF recipes (up until May 12, 2020)

groups with the most registered IF recipes.png

Expect a Surge in Merger and Acquisition Activity

Synutra is not the only enterprise engaged in acquisitions in the past years. For instance, in 2018, Friesland Campina acquired all remaining shares in Friesland Huishan Dairy, a joint venture it set up to sell infant formula in China. In 2019, Mengniu purchased Bellamy’s [2] at the cost of USD 1 billion. On Feb 28, Beingmate bought Yujia Dairy, allowing it to take advantage of Yujia’s good performance in lower-tier cities.

Why have there been so many acquisitions these years? Regulations impose major constraints on manufacturers looking to adopt various brand positions within the market. The “3 product line per manufacturer” rule has meant that brands looking to launch multiple products are forced to either establish and register a new manufacturing facility or acquire existing registered manufacturing facilities from other brands. 

Smaller enterprises must contend with factors like:

·       China's declining birth rate

·       saturated 1st and 2nd tier city markets

·       homogeneity/lack of product differentiation

·       the increasing stranglehold large companies have on the market.

In the context of these two major issues, selling their company (and by extension the quota of registered product lines) is a good option for many SMEs, and purchasing these smaller companies is a good option for the larger dairy enterprise.

This type of merger and acquisition also aligns perfectly with the government’s sector development blueprint. Early in 2014, China issued a Plan to Promote Mergers and Acquisitions of Infant Formula Enterprises [3]. The plan was to foster the development of 3 to 5 giant infant formula companies whose annual sales income would surpass five billion yuan by the end of 2018.

In 2019, the National Development and Reform Commission of China further released the Promotion Action Plan of Domestic Infant Formula Milk Powder [4]. Under this plan, technical innovation throughout the supply chain is the major goal, as to is the removal of lower capacity enterprises through merger and acquisition, etc.

International infant formula companies are also encouraged to set up foreign-invested enterprises in China. These policies have all shown China’s determination to build an optimized infant formula industry and restore trust in domestic products. If we look back at the data [5] from 2018 to 2019, nineteen of the top 20 dairy giant engaged in 75 cases of mergers, acquisitions, strategic alliances, or asset disposal. The industry has developed rapidly in recent years, and the technical capacity of its major players has improved steadily. Going forward, we expect this strategy of strategic regulations coupled with mergers and acquisitions to continue.

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