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By: Hope Lee

In the first part of this two-part article, I highlighted China’s booming water purification market. In the second part, I will focuses on the strategic reasoning behind Unilever’s Qinyuan acquisition.

Unilever is a household name in China, ranked third in beauty and personal care and home care. The company also has a prominent position in hot drinks and it is present in packaged food. The company has recorded slow sales in ice cream and tea in recent years and is eager to look for new growth opportunities in China. Its acquisition of local water purification company Qinyuan came as a surprise to some local companies as this market is far beyond Unilever’s traditional FMCG heartland. While this move might have created excitement among international investors, it also confused some local players. That said, the psychological impact is significant. Some Chinese companies will be wondering which will be the next multinational to involve itself in similar Chinese operations, and which local companies are likely to be its focus. Ambitious companies such as Haier Strauss Water, Meidi and Angel may start feeling under pressure from Unilever’s Qinyuan acquisition, and considering a counter strategy.

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Qinyuan’s capability

Employing around 2,500 people, Qinyuan generated sales approaching EUR140 million for the 12-month period ending 31 December 2013. The company has an innovation-driven corporate identity, producing a range of safe water solutions including purifiers, drinking water equipment and water treatment membrances. Qinyuan has two research and development centres and two manufacturing facilities. The company’s products are mainly distributed by third party distributors, to cover all retail channels, including online sales.

The tie-up with Unilever is likely to help Qinyuan to further expand in China and expose it to the international market, as Unilever builds Qinyuan into a world class hub for water purification technology. All signs show that this is a win-win deal.

A complement to Pureit

On a global scale, the Qinyuan acquisition reflects Unilever’s latest growth strategy; it has been reducing its low-growth food businesses in mature markets in favour of greater exposure to emerging markets. The company sold its Peperami meat snacks and Skippy peanut butter, for example, using the proceeds to invest in growth categories. Unilever also increasingly emphasises sustainable growth in its public presentations and speeches. Its sustainability plan and corporate objectives include producing safe and affordable drinking water.

Indeed, Unilever has a water purification brand Pureit (in-home purifier), launched in 2005 and now it is present in major emerging markets. In Unilever’s 2013 annual report, Pureit was reported to be a rising star, expanding in Southeast Asia, South Asia, Latin America and Africa.

Qinyuan uses different technology compared to Pureit. In the Qinyuan acquisition press release, Unilever stated that this deal would more than double the size of its water purification business and would bring together complementary technology from Pureit and Qinyuan, and leverage Qinyuan’s local marketing insight, manufacturing and distribution strength – all under the Unilever umbrella. This statement shows Unilever’s optimism for the global market and its determination to make a big splash in global expansion of its purification business.

In the global market, main competitors in water purification include Neviot, Aquanova, Brita and Electra. Although Qinyuan’s scale of operation is still small, Unilever’s heavy presence in emerging markets could make Pureit and Qinyuan a good pairing to compete against these established players. Moreover, this plan could make traditional bottled water players such as Nestlé and Danone feel uncomfortable, and may prompt their own disruptive growth strategy. Finally, the emergence of portable water filter bottles such as BRITA Fill&Go Water Filter Bottle is likely to have an impact on impulse bottled water sales. Therefore, needless to say that everyone needs to continue to innovate to catch up with the game in case they are replaced by new products one day.

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