Danone strikes deals to meet Chinese taste for yogurt

French food industry group Danone said Monday it is ramping up its presence in the growing Chinese market for dairy products with two deals to tap sales of yogurt and health foods.

Danone said it was investing about 325 million euros ($418 million) to strengthen its place in the potentially vast Chinese market, via two joint ventures in distribution and production.

The intention is to build on a joint market share of about one fifth of the Chinese market for dairy products.

The two ventures are with dairy company Mengniu and its majority-owner COFCO, which says it is "the largest supplier of diversified products and services in the agricultural products and food industry in China".

A joint statement said that the strategy targeted "the production and sales of chilled yogurt products in China, combining their respective assets in this category."

The statement said: "Danone's BIO (Activia) brand will put the new fresh dairy business in a solid position to build its strong leadership in the active health sector."

Danone chief executive Franck Riboud said that the deals "will create the winning combination to unlock the potential of the fresh dairy products category in China."

With the support of COFCO's expertise in the Chinese food industry "our brands will benefit from significantly wider reach to the largest number of Chinese consumers," he said.

COFCO said that it was "devoted to utilising renewable natural resources to provide healthy and nutritious food."

Under the agreements, Danone is to create a venture with COFCO opening the way for a strategic partnership with Mengniu, a leading Chinese dairy product company with an extensive distribution network in which COFCO holds a majority stake.

Initially, Danone will hold 4.0 percent of Mengniu.

"But we have the intention to go above 4 percent up to 10 percent in the coming months," said a Danone spokeswoman. "We believe in the future of this company and want to participate in its decision making processes."

The second venture will be directly with Mengniu, a Hong Kong-listed firm established in 1999, and will group assets from both companies which had total sales in China last year of 500 million euros.

--COFCO to develop Chinese dairy market --

Danone said this activity would account for an estimated 21.0 percent of the Chinese market and would comprise 13 factories in China.

It would benefit from the two brands, Danone and Mengniu.

The second venture would also develop synergies by using expertise from Danone in terms of quality and innovation and would benefit from the market leadership and "vast" distribution network operated by Mengniu which would hold 80.0 percent of the new business.

Danone is a world leader in the sectors of dairy and health foods, baby food and medical nutrition and the supply of bottled water, the statement said.

The company has more than 190 production facilities around the world and employs 102,000 people. Last year it achieved sales of more than 20 billion euros, more than half of which were made in emerging economies.

Last year Danone generated some 6 percent of its sales in China, or 1.3 billion euros out of a total of more than 20 billion.

Tapping into growth in emerging countries such as China has become critical for Danone as sales in Europe stall and where it is cutting 10 percent of its staff.

The deal will also benefit Mengniu as sales of foreign brand dairy products have been growing following a 2008 scandal in which at least six babies died after drinking tainted milk products.

The chairman of COFCO, Frank Ning, said that as the biggest Chinese state-owned company in the food sector, "COFCO has the responsibility to further develop dairy products in China."

Mengniu already has an agreement on international cooperation with Aria Foods, a dairy group owned by 12,000 farmers in Denmark, Sweden, Britain, Germany, Belgium and Luxembourg.

The deals are subject to regulatory approvals.

The agreement is not affected by the deal with Danone, the statement said.

Aria Foods has annual sales of 10.0 billion euros and is the biggest manufacturer in the world or organic products, the statement noted.

Danone's shares rose 1.22 percent to 58.82 euros in late afternoon trading while the Paris exchange was up 0.2 percent overall.