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Why Danone, Nestlé And Other Foreign Food Giants Are Struggling In China

The French and Swiss firms have a longstanding presence in China, but are still outstripped by local competitors. Add to that rising land and labor costs, and foreign food giants must recalibrate their strategies in the world's No. 2 economy.

Nestlé, the world's largest food company, is going to stop making ice cream in eastern China (upton)
Nestlé, the world's largest food company, is going to stop making ice cream in eastern China (upton)
Li Juan

SHANGHAI - Danone has just closed its Shanghai yogurt plant, Nestlé says it's going to shut down its local ice cream factory and Pepsico has sold off 24 bottling plants in China. What is shaking up foreign food and beverage giants inside the world's No. 2 economy?

Danone, the French dairy giant, says it wants to concentrate on developing its Bio brand, where margins are high. But after the failure of its Chinese joint ventures, the company is operating alone, and its sales and marketing channels are far behind the competition. In the Guangzhou yogurt market, for example, Danone has a 12% share, but is forced to ship in products from faraway factories in Shanghai or Beijing. To arrive from the factory to the supermarket can take nearly one week, which is already half of processed yogurt's typical shelf-life.

Just two days after Danone ceased production in Shanghai, Nestlé, an even larger food industry rival, confirmed that it would stop selling ice cream in eastern China, and shut down its Shanghai factory. The company didn't give a specific reason for the closure, but industry analyst Liang Mingxuan of CI Consulting said the Swiss firm was struggling to compete with local peers.

"In the past few years both Nestlé"s ice cream business and Danone's yogurt business have been squeezed by dairy giants Yili and Mengnui," he said.

The Chinese spent 31 billion yuan ($4.9 billion) on ice cream in 2011, according to consultancy Euromonitor, but Nestlé"s share of the market was around 3%, less than half of Unilever's, and far behind Yili and Mengniu, which have 17% and 15% respectively.

With Nestlé"s market share flat, the company has struggled to match its rivals' economies of scale, a problem aggravated by the location of its factories – one up north in Tianjin and the other down south in Guangzhou.

The Shanghai problem

It's significant that, when they chose to make cutbacks in China, Nestlé and Danone both singled out their Shanghai operations.

"There's almost no suitable land", said Gao Jianfeng, a management consultant with BOGO Consultants, who recently advised a foreign client looking for a location to build a factory near Shanghai.

"A lot of the land seems like wasteland, but, when you make enquires, you find that it all belongs to someone," he added. Gao noted that the owners of the leaseholds (Note: businesses are not allowed to actually buy land in China; local governments only sell long-term leases) are often businesses from Zhejiang, Jiangsu and the Yangtze River Delta.

Gao says that the lack of land is the biggest problem for businesses in the area. Those determined to operate there must either settle for one of the tiny plots available or pay for land from another business that already owns the leasehold.

Another problem for businesses eyeing Shanghai is the operating costs, with labor, logistics and raw materials coming at a premium over the Pearl River Delta, central and western regions.

"The lack of land makes it hard for Nestle and Danone to build new plants and expand their production capacity," said Gao.

Many coastal cities, including Shanghai, had previously drawn foreign manufacturers with tax breaks, but changes to the taxation code have put an end to these incentives. "Shanghai is focused on developing the service, high-tech and advanced manufacturing industries," said Chen Yao, of the Chinese Academy of Social Sciences.

The government's fiscal policies are expected to reflect these new priorities, further marginalizing the city's food factories and prompting the owners to shift inland. "Shanghai is no longer suitable for traditional manufacturing," concludes Gao, the management consultant.

But that point of view isn't universally accepted, and market analyst Li Baojun, says that Shanghai factory owners have another option aside from moving inland. Li says that some firms are keeping their higher-cost operations in the east, but upgrading the products produced in those plants.

As an example, he cites Nestlé, which may have shed its ice cream business in Shanghai, but has just bought 60 percent of Xiamen-based food company Yinlu, and 60 percent of candymaker Hsu Fu Chi.

Along with their moves inland and upmarket, foreign food makers are paying much closer attention to their supply chains, in light of recent food scandals in China. "In the past, it was enough to have a lead in production and sales channels," said one investor. "Now they're also very concerned about whether a company has its own sourcing and production base and whether it has a system to trace any quality problems."

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FOCUS: Israel-Palestine War

Israel Is Hunting Down Hamas Leaders, One By One — Are Iranians On The Hit List Too?

Iranian media has long blamed Israelis for targeting military and political officials inside Iran. Will Israel's Mossad teams of intelligence operatives resume these eternally murky strikes as retribution for the Oct 7 attack by the Tehran-backed Hamas?

photo of Ismail Qaani

Iranian Islamic Revolutionary Guard Corps General nd commander of the Quds force Ismail Qaani in Tehran in April 2022

Rouzbeh Fouladi/ZUMA

Updated Dec. 9, 2023 at 1:30 p.m.

Two months after the Hamas terror attack in southern Israel and Israel's massive retaliation in Gaza, Tehran insiders say Israel's threat to eliminate those behind the initial Oct. 7 attack is likely to go beyond just the leaders of Hamas.

Though it was Hamas that carried out the attacks that killed more than 1,000 Israelis, many believe it was done in coordination with the Iranian regime, considered the top regional patrons and financial backers of the Palestinian militant group.

For the latest news & views from every corner of the world, Worldcrunch Today is the only truly international newsletter. Sign up here.

So far Israel has avoided directly threatening Iran, but it is believed in past years to have struck sites inside Iran and even interrogated and possibly shot an unspecified number of Iranian personalities including scientists working on its nuclear program.

Last week, Israel suggested it would not limit its targeted killings to Gaza, and would seek out some of Hamas's top leaders living in exile in different locations in the Middle East.

Hasan Hanizadeh, a regional affairs specialist in Tehran, recently told the ILNA news agency that he believed "Israel will not just focus on the physical elimination of leaders of Hamas and the Islamic Jihad. The Zionist regime's intelligence apparatus aims to remove all the leaders of the resistance," referring to the regional militias that have declared their hostility to Israel and the West.

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