Nestle and Danone reveal they are rethinking their business strategies

SHANGHAI - The global food giant Groupe Danone SA has suspended production at a Shanghai plant and Nestle SA is closing one of its three ice cream factories on the Chinese mainland.

The moves are part of the companies' separate strategies to restructure their business models in the Chinese market.

"We've suspended production at a yogurt factory in Shanghai and we're now making internal adjustments to ensure that we will soon have a more focused market target in order to provide high-quality products for Chinese consumers," said Xu Jie, a spokesperson for Danone Dairy China.

Danone will continue yogurt production at its Beijing factory and is refocusing its efforts to provide more sustainable development of fresh dairy products in China, according to a company statement emailed to China Daily on Friday.

"As the next step, we will focus more on major cities in China like Shanghai and Guangzhou by adopting a more focused approach to building 'Bio', our yogurt brand, as a strong value-added brand," said Xu.

Experts say China's dairy market has been controlled by domestic brands with major shares and the networking resources for market expansion. That has caused a slowdown in the development of foreign dairy brands.

"That foreign brands like Danone have failed to compete with local brands like Yili and Mengniu in China is quite obvious, because the domestic brands have a wider networking system and higher market demand," said Zhang Guonong, a dairy expert and professor from the Institute of Food at Jiangnan University in Wuxi.

The domestic company Inner Mongolia Yili Industrial Group Co has seen its share of China's 30 billion yuan ($4.7 million) ice cream market increase to 17 percent over the past five years. China Mengniu Dairy Co Ltd's share has risen to 15 percent over the same period, while the share held by Nestle has remained at around 3 percent, according to figures from the researcher Euromonitor International, as reported by the Financial Times.

"It's very hard for foreign dairy brands to enter the domestic market in China. Their high-quality products and higher prices have resulted in low demand for their products and failed to generate enough profit," said Yan Qiang, an analyst and co-partner at Adfaith Management Consulting Inc.

As part of its ongoing efforts to develop the ice cream business in China, Nestle will continue to build on its success in the northern and southern regions, maintaining the business in hotels, restaurants and cafes. It will suspend retail sales and cease operations at an ice cream factory in the east of the country at the end of December, according to Nestle's statement.

Herv Cathelin, the global head of Nestle's ice cream business, said that the closure of the Shanghai plant was caused by a failure to meet domestic expectations and that changes will be made to overhaul the business model, the Financial Times reported.

"It's very possible that both Danone and Nestle are trying to upgrade in China to focus on higher-end products to meet the demand from elite consumers instead of competing with local brands," said Yan.

On Tuesday, Nestle received regulatory approval from the Chinese government to buy a 60 percent stake in the Chinese candy maker,Hsu Fu Chi International Ltd.

"Nestle's recent strategy of buying shares in Yinlu Food Group and Hsu Fu Chi International indicates a new trend, where foreign food brands make money directly through successful local companies, as the next step in their investment in the Chinese market," said Yan.