Nestlé-Hsu Fu Chi Case:The Beginning of the End?

Nestlé’s acquisition of Chinese local candy maker Hsu Fu Chi is not a simple case of acquisition. It has the concerns about the outlook of Chinese local brands.

At the beginning of July, one piece of news was under especially heavy scrutiny – the Switzerland global food giant, Nestlé, planned to acquire Chinese local candy maker Hsu Fu Chi.

Why was there such drama over this news? Hsu Fu Chi is a very famous candy brand in China and nearly every person has either bought or tasted one of its many products. Chinese people are very proud of this famous brand and, if Nestlé acquired the company, China would lose another elite local brand.

Benefits for Nestlé

On July 11, Nestlé and Hsu Fu Chi announced that the two companies have reached an agreement – Nestlé will spend 1.7 billion U.S. dollars acquiring 60% stakes of Hsu Fu Chi. The Hsu Family, who founded the brand of Hsu Fu Chi in Taiwan, and established Hsu Fu Chi Candy Co., Ltd in Dongguan, Guangdong, will own the remaining 40%.

According to Paul Bulcke, CEO of Nestlé, the Swiss company will initially acquire 43.5% stakes that are held by independent shareholders of Hsu Fu Chi. Then, it will acquire 16.5% stakes of Hsu Fu Chi from the Hsu Family.

Presently, this acquisition plan has already got the approval from Nestlé’s two biggest independent shareholders – Arisaig Partners Holdings and The Baring Asia Private Equity Fund IV L.P.

Nestlé is the world’s largest food company. Last year its sales amounted to 804.7 billion yuan (USD 124.57 billion). However, its candy and chocolate business only contributed to 11% of its total sales. It is in the candy and chocolate business where Nestlé falls behind Kraft and the other competitors. According to the international market survey company Euromonitor, Nestlé is ranked at No. 5 in China’s candy market with 1.6% market share, far behind the winner, Mars, who holds a 12.9% market share. In Comparison, Hsu Fu Chi has 3.9% market share and is ranked in third place in China’s candy market.

If the acquisition can be finalized, Nestlé’s market share in China’s candy market can climb to second. Secondly, Hsu Fu Chi has set up 129 distribution channels in China and has extended into the second- and third-tier Chinese cities. With Hsu Fu Chi’s big distribution networks that are growing by 30% a year, Nestlé has greater development opportunity in China.

Thirdly, the acquisition can add to the candy categories of Nestlé in China. The Swiss company would also be able to expand its coverage in the candy market with the hopeful addition of Hsu Fu Chi’s consumers. And lastly, Nestlé can better understand the market and begin to sell candies with flavors that Chinese people like.

In Paul Bulcke’s plan, the emerging markets should account 45% of Nestlé’s revenue by 2020. Now the market share is 33%. But Nestlé’s market share in the emerging markets has already lagged behind Unilever. That forces Nestlé to increase its market share by acquisition. Candy markets enjoy the highest profit margin in the entire food industry; therefore Nestlé will work hard to increase their hold in this particular market.  

Hsu Fu Chi Happy About Acquisition

The workers of Hsu Fu Chi are not worried about their fate if the acquisition did happen; instead, they are excited about the news.

Wang Yong, a four Hsu Fu Chi employee, called his girlfriend after he heard that Hsu Fu Chi and Nestlé had reached an agreement, to proudly say he would be working for Nestlé. You must understand that she is a huge fan of Nestlé’s coffee.

According to Wang Yong, Hsu Fu Chi began to look for big partners four years ago. At that time, the two major players in the possible partnership were said to be Nestlé or Unilever.

Workers happy about the acquisition are not limited to Wang Yong and other small position employees. The executives of Hsu Fu Chi think that the cooperation with Nestlé can help offset some disadvantages of their company.

Hsu Fu Chi was initially established in Taiwan by four brothers with the surname of Hsu. In 1992, the increasing production cost forced the four brothers to travel to Dongguan for further development. Here they leased land, built plants and then recruited dozens of workers to pack the candies.

In 2010, Hsu Fu Chi became a company with operating revenue of 4.31 billion yuan (USD 667.2 million) and net profits of 602.2 million yuan (USD 93.2 million). It is the third largest candy maker in China by market share.

However, so far Hsu Fu Chi has been limited to within China. 99% of its revenue comes from China and the other 1% comes from Chinese people overseas in the foreign countries. The candy maker seems to only know the flavor of Chinese people. Experts believe that this is related with the shortage of research and development (R&D) personal within the company. This issue obviously hinders the ability of Hsu Fu Chi to further expand.

In addition, though Hsu Fu Chi is the third largest candy maker in China, it has to worry about the competition from other local Chinese companies. Nestlé, who has the largest amount of R&D investment among all food companies, can be sure to help Hsu Fu Chi break the barrier of technology and move to the fields other than candy.

In addition, Hsu Fu Chi has been haunted by management defects for long time. After being acquired by Nestlé, the systems of talent training, compensation and bonus, as well as the corporate culture, are going to be restructured. Many workers and executives of Hsu Fu Chi look forward to these changes, knowing that they will help the company.

Mourn Loss of Local Brands?

Both Nestlé and Hsu Fu Chi can benefit from the acquisition. But some people worry about the acquisition will bring harm to Chinese local brands.

In recent years, foreign companies have acquired many Chinese local brands. This raised public concerns about the security of China’s manufacturing and consumption goods industry. Therefore, some call for a stop of foreign companies’ acquisition of local brands to protect Chinese peoples’ interest.

Other examples of foreign buyouts include the 2009 planned Coca Cola acquisition of Huiyuan Juice. However, this acquisition was not approved by China’s Ministry of Commerce because it was said that it might lead to monopoly in China’s juice market.

Some people hope that the Ministry of Commerce will come out again and stop Hsu Fu Chi from being acquired by Nestlé. On July 15, Yao Jian, spokesman for Ministry of Commerce, said that Nestlé and Hsu Fu Chi had already submitted the relevant documents about acquisition for the examination and approval. The Ministry of Commerce will form a special committee to check the feasibility and influence of this acquisition before giving the approval. The anti-monopoly is an important part of this examination.

Despite the reluctance of many people with “patriotic hearts”, some experts point out that the Nestlé-Hsu Fu Chi acquisition case is just an ordinary acquisition that is based on the self-willingness of two companies and it follows the market rules. It is normal for a company to cooperate with others to offset their disadvantages and to increase its market share.

After announcing the acquisition, Sun Tianzhen, spokesman for Hsu Fu Chi, stated that Hsu Fu Chi would not disappear and would continue to serve the Chinese consumers. Nestlé also stated that Hsu Fu Chi would be a better brand with more products in the Chinese market. In addition, Xu Cheng, current CEO and board chairman of Hsu Fu Chi, will stay with the company as chief executive if the acquisition is closed.

However, people’s concerns about local brands are right. Every developed country in the world has its own brands that could amaze the world. China, which is striving to be one of the top countries in the world, should have some of its own brands that the world can remember. Unfortunately, there are quite a few brands in China reaching that level now. More forces are needed, not only for protecting local brands, but also for improving them.

Extensive Reading: local brands acquired by foreigners

Kitchen Appliance: Philips acquires Povos

On July 11, Philips from the Netherlands announced the plan of acquiring Povos, one of the largest kitchen appliance manufacturers in China. The acquisition is to be finished in the fourth quarter of 2011 and the price is 2.5 billion yuan (USD 387 million).

Catering: Yum! acquired Little Lamp

On May 14, 2011, American fast food giant Yum! and China’s largest hot pot chain restaurant Little Lamp reached an agreement. Yum! acquired Little Lamp with 30% cash premium. The acquisition will bring Yum! 93.2% stakes of Little Lamp as well as a growing hot pot business. From 2008 to 2010, Little Lamp’s net profit successively climbed from 128 million yuan (USD 19.8 million), to 133 million yuan (USD 20.6 million) and 155 million yuan (USD 23.9 million). The acquisition follows the strategy of expanding overseas for Yum! According to the U.S. company’s plan, the international markets will account for 75% of its profits by 2015.

Cosmetics: Loreal acquired Little Nurse

In December 2003, Loreal acquired Chinese skin-care brand Little Nurse, which is one of the three biggest skin-care brands in China. At that time, its brand value was 500 million yuan (USD 77.4 million). Its market share in China reached 5% and had 280 thousand sales locations in the country. In addition, 96% of the people in there twenties and thirties know this brand.

Gasparrini Paolo, president of Loreal (China), once pointed out Little Nurse’s products, which aim at young women, is a good supplement to Loreal’s products.

Battery: Gillette acquired Nanfu

In 2003, U.S.A.’s Gillette bought out China’s largest battery manufacturer. Gillette became the largest shareholder of Nanfu after this acquisition.

Before the acquisition, Nanfu was the largest battery manufacturer in China and the world’s fifth largest. Duracell, under Gillette, was the largest battery maker in the world. However, in China, Duracell only took 3% of the battery market while Nanfu’s market share reached 60%. At that time, Nanfu was trying to expand its overseas business but was forced to quit after coming under Gillette’s control. In addition, half of its production capacity was idled. This acquisition had great influence over China’s battery business.