With a trend of surging outbound M&A activities in both pace and deal size over the past two years, China’s food sector is one of the new hot spots for its overseas investment. Over the past five years, China’s overseas food-related M&A reached $20 billion.
What is interesting is that, for most food companies, their motives for M&A are more inward-looking than outward. Buying globally enables greater success domestically. This contrasts with the common belief that cross-border M&A is a tool for global expansion only. What is happening on the demand and supply side behind the phenomenon?
A growing middle class with higher household incomes brings change to people’s dietary habits. Nowadays, many are becoming health-conscious and naturally-oriented by paying more attention to the issue of healthy eating as a new lifestyle (which is expanding from first-tier cities to second-tier cities).
Although the trend of healthy eating habits started relatively late in China in comparison to many Western countries, the customer base is by no means small (given the fast growth rate and large population). It is reported that 73% of the Chinese population are willing to pay a premium for products deemed healthier, which is 12% higher than the world average. Organic food, whole grain food, gluten-free food and calcium-fortified foods are the new darlings of the food world for middle-class Chinese people.
While Chinese customers are willing to back up healthy choices with their wallets, choices are limited in the domestic market. Last year, Xiwang’s acquisition of Canadian nutritious supplement maker Iovate Health Sciences illustrates this point; the acquirer aims to leverage the purchase to capitalise on the trend towards healthy lifestyles in China’s market.
Brands are a powerful thing, and this is especially the case in China. After waves of food safety scandals over the past decade, customers’ trust in domestic brands has suffered. Foreign brands usually give the acquirer a perception of high quality and safety. For many Chinese players, a foreign brand name is a competitive advantage in the domestic market.
Moreover, overseas M&A also gives Chinese buyers the opportunity to bring foreign food into China’s market, which capitalises on the fad for tasting foreign produce. Consider the M&A between China’s Bright Food and Italian olive oil maker Salov. The deal can enhance Bright’s branding as the company “hopes to promote Mediterranean style cooking to Chinese consumers”.
The Issue of Food Security
China is feeding one-fifth of the world population with one-tenth of the world’s land. The worry about a shortage in food supply makes food security one of the top securities for the Chinese authorities. The government encourages state-owned food enterprises to go global to bring back more food to tackle the problem.
China National Chemical Corp (ChemChina) offered $43 billion to buy the Swiss-based Syngenta, the supplier of seeds and pesticides. The potential deal, which is the largest overseas offer announced by a Chinese acquirer, could help ChemChina seize the commanding heights of food demand and secure food resources abroad. A similar logic was behind Shuanghui’s $4.7 billion Smithfield deal in 2013.
Growing Appetite or Fleeting Binge?
By going abroad, Chinese firms in the food sector can leverage M&A as a strategic tool to meet the growing customer demand and fill in product gaps. If strategic synergies between the acquirer and the target can be identified and implemented, acquisitions can make buyers more competitive relative to local rivals in established sectors or help them to develop new, niche markets in China.
With rapid urbanisation and increasing household incomes, it can be expected that the health-conscious trend and the demand for foreign food will grow further in the foreseeable future. But for such deals to create more concrete value, more mature regulatory systems as well as post-M&A efforts for cultural integration from corporates should be considered. With this, the high volume of outbound transactions in China’s food sector could be more like a sustainable, nutritional intake rather than a binge.