Nestlé and Danone to suspend Chinese production

Swiss food giant Nestlé has announced plans to shut down its ice cream factory in Shanghai and French dairy company Danone is suspending production at its yoghurt plant in the city, in order to revaluate their business strategies and overcome tough local competition in China.

Danone has halted production at its Shanghai facility as part of its strategy to produce premium products for Chinese consumers; however, it plans to continue yoghurt production at its Beijing factory.

According to Danone, the review does not include other business segments such as water, beverages and baby nutrition.

Danone Dairy China spokesperson Xu Jie said the company plans to focus more on major Chinese cities such as Shanghai and Guangzhou by developing Bio into a major value-added yoghurt brand.

Nestlé, on the other hand, plans to shut down its ice cream factory in Shanghai and cut back retail sales to focus on the more profitable regions of the north and the south.

Nestlé’s ice cream business head Hervé Cathelin said that the Shanghai plant had failed to meet internal expectations and that its closure would mean changes – both in sourcing and the business model itself.

"We might focus on a few particular brands and products because we don’t have to support local production in Shanghai," Cathelin added.

Multinational companies have failed to compete with domestic brands in terms of prices and network system, and China’s ice cream industry is dominated by local players.

According to Euromonitor International research, the market shares of Inner Mongolia Yili Industrial Group and China Mengniu Dairy have grown sharply to 17% and 15% respectively in the last five years, while Nestlé has only 3%.

Consequently, in the recent past, both Nestlé’ and Danone have launched new flavours as well as new upmarket products to attract consumers.

Multinational dairy companies are also overcoming competition through local acquisitions as Nestlé recently entered into agreements to acquire majority stakes in food companies Yinlu Foods and Hsu Fu.