Nestle's acquisition of Xu Fuji: soaring sugar prices behind mergers and acquisitions

Nestle's acquisition of Xu Fuji is the largest acquisition of the Chinese food industry in recent years. If the acquisition is successful, Nestle will not only increase the bargaining chips with Mars, Kraft and Unilever, but will also further reduce the living space of domestic small and medium-sized candy companies, such as Yake, Golden Monkey and White Rabbit. The Chinese candy industry will usher in a new pattern. A shuffle.

On August 3, Dongguan Xufuji factory is recruiting. Xu Fuji's sales focus on the “New Year sales period” around the Spring Festival, when the factory will be fully loaded. As early as August, Xu Fuji will begin to prepare materials and recruit temporary workers. "Usually, the factory staff is maintained at around 6,000, and it will increase by 3,000 to 4,000 people in the peak season," said Hu Jiaxun, general manager of Xu Fuji International Group.

On July 11, Nestlé announced that it had signed an agreement with the founding family of Xu Fuji to acquire 60% of the shares of Xu Fuji for US$1.7 billion (equivalent to approximately RMB 11.1 billion). The Xu family holds the remaining 40%. At present, the acquisition is pending approval from the Ministry of Commerce.

In 2009, the Ministry of Commerce had rejected Coca-Cola’s $2.4 billion purchase of Huiyuan Fruits. In this regard, the industry is still fresh in its memory. In addition to facing the possibility of an unapproved acquisition, Xu Fuji also has to cope with rising labor costs and huge challenges from raw materials.

Labor cost

In the Dongguan factory of Xu Fuji, among the three Shaqima production lines, more than 20 skilled craftsmen were sitting on both sides of the assembly line, and a bag of independently packaged Sha Qima was neatly packed into the bags. "By feeding, stirring, fermenting, frying, pressing, packing, these can all be replaced by machines. We can't find a more suitable machine replacement method than manual processing for this part of the package." Xu Fuji Quality Department Minister Ma Hao said.

In order to reduce the pressure brought about by the increase in labor costs, Xu Fuji has increased the investment in automation production. He cannot use the machines instead to use the manpower.

In the first half of 2011, a total of 18 regions in China have successively raised their minimum wage standards, including 13 provinces, 4 municipalities, and 1 special economic zone. On March 1, Guangdong formulated and began implementing the new minimum wage standard. After adjustment, the minimum wage for full-time employed workers is 1300 yuan/month for the first category and 1,100 yuan/month for the second category, with an average increase of 20.7%. Only 6,000 regular workers in the Dongguan factory of Xu Fuji's factory, after the implementation of the minimum wage, the factory will increase labor costs by 1.2 million yuan per month, not including hiring temporary workers during the peak season. However, even after the minimum wage has increased significantly, coastal manufacturing companies still face difficulties in recruiting workers.

Gu Xinmin, deputy director of the Guangdong Labor Association and governor of the Guangdong Provincial Government’s decision-making consultancy, pointed out that currently the employment situation in the country as a whole is not optimistic. There are persistent shortages in some areas. The representative is the Pearl River Delta region. With the acceleration of the process of urbanization and industrialization in the Mainland, the labor force from the outside of Guangdong has been relatively reduced.

Soaring sugar prices

In addition to labor costs, Xu Fuji also has to face challenges from raw materials. Taking Sha Qima, which currently accounts for one-third of Xu Fuji's revenue, as an example, in order to achieve a soft texture, big brands generally use eggs, imported milk powder, palm oil, and other raw materials to make and manufacture, which is a higher cost than shank manufacturers add borax. Times. “The Shaqima that Henan exposed before had 3 yuan a pound and 6 yuan a pound, and Xu Fuji's price was at least two to three times more,” said one dealer.

The main raw material, white sugar, has hit record highs since May of this year. On July 27, the spot price of Guangxi sugar sugar in the main sugar producing area reached RMB 7,660 per ton. As regards the country’s outsourcing period, only a few sugar industry groups have been allowed to participate. For soaring sugar prices, downstream manufacturers can only eat hard.

On August 5th, the National Development and Reform Commission, the Ministry of Commerce, and the Ministry of Finance decided to put in the seventh batch of national reserve sugar for the 2010/2011 crop season, amounting to 200,000 tons, and the reserve bid price was 4,000 yuan/ton.

Lu Shouyuan believes that according to the current stock situation and 2011/2012 cropping season in Guangxi because of the delay in the growth cycle of sugarcane may postpone the decision of open squeeze, the supply and demand of the end of the crop season will be more tense, sugar prices continue to shock higher.

According to Hu Jiaxun, Xu Fukui’s current gross profit margin is maintained at around 40%. “Companies can only talk to suppliers under limited conditions. We expect the price at this time will be relatively low, and we will increase prices in the future and will follow suppliers. Signing a longer contract, but the supplier will not do the same when the sugar price is high, so it is really difficult."

Trading with Nestle

On July 11, Nestlé announced that it had signed an agreement with the founding family of Xu Fuji to acquire a 60% stake in Xu Fuji for US$1.7 billion (RMB 11.1 billion). The four brothers of the Xu Group hold the remaining 40%.

Where does Xu Fuji go? Hu Jiaxun said that "the company will not change after the acquisition, the brand will not change, the scope of business will not change, even the managers will not change, which we have been limited in the contract."

According to Hu Jiaxun, in recent years, there have been many cases in which multinational companies came to negotiate with Xu Fuji for cooperation. The reason why Nestlé was finally chosen was because Nestlé’s R&D was conducive to Xu Fuji’s entry into the high-end market in the future. For Nestlé, the brand and path that Xu Fuji painstakingly pursued over the years is its value.

In 2010, Xu Fuji had sales of RMB 4.3 billion, pre-tax profit margin of 17.3% and net profit after tax of RMB 600 million. Currently, it has four large-scale production bases in China and 129 direct sales subsidiaries.

“Around 3,300 hypermarkets nationwide, the coverage rate is 100%, but there is still much room for the construction and penetration of traditional channels.” Hu Jiaxun said that in the future, it will focus on training sales personnel and strengthen the company’s traditional path construction in the second and third tier cities.

At present, the industry has two different attitudes towards Nestle’s acquisition of Xu Fuji. One view is that since both are among the top 5 in the industry, there is a lesson from Coca-Cola's acquisition of Huiyuan and it is difficult to obtain approval from the Ministry of Commerce. Another view is that the food industry is very fragmented. Only Hsu Fuji's products have more than 400 varieties, spanning more than a dozen categories, and monopoly is difficult to achieve.

“According to the major areas, Xu Fuji’s market share of candy and cakes is about 6%, and Nestle's share is only a fraction of Xu Fuji. Together, they are still less than 10%, and Nestlé already knows very well in China. The method of doing business, acquisition estimates can be passed.” An analysis of a food industry veteran.