Coca-Cola to Milk China’s Non-Dairy with Full Acquisition of Culiangwang

The Coca-Cola Company (TCCC) is expected to take full control of China’s major multi-grain beverage company Xiamen Culiangwang Beverage Technology Co Ltd (Culiangwang) for an estimated value of US$400 million (including debt) by the end of 2015. This is TCCC’s first major China acquisition after its failed deal for Huiyuan juice in 2009; it is also part of TCCC’s ongoing strategy to diversify its product portfolio in the face of slowdown in carbonates. Upon completion of the deal, TCCC is set to get a presence in non-dairy drinks and assume an 8% market share in China’s HW other non-dairy milk alternatives (tracked under Euromonitor International’s Health and Wellness database) while Nestlé holds a 19% share via the acquisition of Yinlu in 2011. As it is TCCC’s white space, there are no monopoly issues surrounding the deal as far as the authority is concerned. On a side note, Euromonitor International’s Soft Drinks Global Corporate Strategy published in Nov 2014 precisely predicted such movement as showed in figure two.

Under the terms, TCCC will purchase raw material from Culiangwang for at least five years while Culiangwang will be allowed to leverage TCCC’s nationwide distribution for geographical expansion. It is noted that Culiangwang currently has a limited presence and it is mainly sold in the first-and-second tier cities. The stretch to the third and fourth tiers cities will mean potentially significant increases in sales, which will benefit both parties.

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What on Earth is Culiangwang?

Reuters reported that TCCC offered a premium for Culiangwang which was valued at US$230 million. So, what made TCCC pay such a high price? For a Western audience, Culiangwang is not an easy brand name to remember or even pronounce. The Chinese meaning of culiang implies “multi-grains with minimum processing stages”, as compared to refined grain or heavily processed grain; wang means “king”.  So, culiangwang’s direct Chinese meaning is “the king of multi-grains beverages”; in English, it could be translated as “the king of plant-based protein drinks”. The current general perception is that the fewer processing stages involved in making a drink, the healthier it is, as the product will be seen as “natural” or “more natural” than heavily processed variants. In this sense, Culiangwang enjoys a good product image and perfectly fit consumers’ desire for healthy beverages.

These types of drinks reportedly contain zero cholesterol and have a low fat content; they are also rich in calcium and vitamin E. For example, walnut milk is well-known for its positive effects on brain function and development and Chinese people are usually recommended to consume walnut-based products if they over use their brain when studying or working, as this reputedly maintains brain agility and helps relaxation. In addition, other non-dairy milk alternatives free consumers from worries about lactose intolerance. The natural, healthy and nutritious positionings of these products are their main benefits, and this is often highlighted in product promotion.

Euromonitor International’s Health and Wellness database shows that other non-dairy milk alternatives achieved the most dynamic growth among all drinking milk products over the past few years and is forecast to fetch net gains of US$12 billion in 2014-2019 compared to US$915 million for carbonates. Thus, the market potential is pretty obvious.

Who are the rivals?

China has a highly consolidated other non-dairy milk alternative market, with the top five players jointly controlling over 60% of retail value sales in 2014. Hebei Yangyuan Zhihui Beverage Co Ltd was the clear leader with a 25% share. In addition, excellent growth prospects have attracted a growing number of market entrants. Partly due to fierce competition in dairy-based drinking milk categories, China’s key domestic dairy producers are extending their product portfolios into non-dairy milk alternatives. Some consumers’ fear of poor quality of domestic milk products and the high price of imported brands has also made them switch from dairy to non-dairy as alternatives.

Inner Mongolia Yili Industrial Group Co Ltd launched walnut milk during 2013 and its products are available in Central, Northern and Northeastern China, targeting those who give drinking milk products as gifts and students engaged in national college entrance examinations. Another dairy giant, Inner Mongolia Mengniu Dairy Industry (Group) Co Ltd, is cooperating with WhiteWave Foods in the introduction of the Silk non-dairy milk alternatives brand into China in 2014. WhiteWave is an internationally established leading non-dairy milk alternatives brand.

Clearly, TCCC’s entry will give the category a boost and at the same time, it will also mean it has to compete with both other multinationals such as Nestlé and WhiteWave and domestic giants. In light of the slow growth of traditional soft drinks, non-dairy milk drinks offers a great high-growth platform for product diversity and future revenue growth. As Culiangwang already has certain brand awareness in some regions, building national distribution is key and TCCC has the capability to satisfy this in any sense.

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Is TCCC becoming a milkman?

In fact, TCCC has several ventures in the dairy category,several ventures in the dairy category, such as Fairlife Milk (Fair Oak Farms) in the US and the acquisition of (in conjunction with FEMSA and Jugos del Valle, a juice subsidiary) Santa Clara in Mexico. All ventures are still at early stages and experimental. PepsiCo’s Müller brand yoghurt grew by 2% in the North America in 2015, so it is not surprising TCCC will need to make some big deals to catch-up.

In the next few years, TCCC is likely to continue to test drive its “dairy car” and keep an eye on which geographies and dairy categories can show possible potential. Dairy or non-dairy is likely to become an added value non-alcoholic member of TCCC’s family, but, it is unlikely TCCC will eventually take on dairy giants such as Nestlé and Danone on the global arena.