After a recent week spent traveling through China, we continue to be impressed by the energy and focus on the growing role of health and wellness in the attractive and increasingly wealthy Chinese consumer market.
According to the Economist, China’s middle class is 220 million people today and will be larger than the entire population of the U.S. by 2020. These consumers, particularly urban dwellers and millennials, are driving new consumer preferences and the time lapse between U.S. and Chinese adoption of new health and wellness trends is shrinking by the day.
With its heritage in traditional Chinese medicine (“TCM”) and natural remedies, China is an attractive market for vitamins, minerals and supplements. While the TCM market continues to be fragmented with many local brands, both local and import brands of vitamins and supplements are driving overall category growth. However, the big story is the growth of leading Western import brands like Blackmores, Swisse, Nature’s Bounty and Jamieson, which collectively are growing at twice the rate of the local brand category.
We are also amazed at the speed of evolution of the food and beverage category. From Greek style yogurt to duck snacks and fresh milk tea, China’s consumers are splurging on innovative food trends, with both start-ups and large established local and foreign players racing to offer up new products that feed this demand. New brands are being created overnight and multi-billion dollar food and beverage categories are being created in a matter of years.
Like any sustainable growth story, China’s growing and evolving consumer market is attracting the attention of equity investors and corporations at home and in the West. In vitamins, minerals and supplements specifically, the trend has resulted in significant outbound M&A activity.
Chinese corporations and private equity firms are seeking to acquire leading Western brands for their potential in China. In 2015, Australian brand Swisse was acquired by Biostime and Nature’s Bounty formed a joint venture with By-Health. In 2016, Iovate (Muscletech and Six Star) was acquired by Xiwang and in 2017, Vitaco was acquired by Shanghai Pharma.
Leading Chinese private equity firm Primavera participated in at least two of those transactions and other Western brands like Jamieson and Nature’s Care are rumored to have attracted significant attention from China over the past few years. We expect to see similar interest in select areas of the food and beverage market as well, with companies like China Resources and COFCO showing interest in global food and beverage opportunities.
Outbound M&A from China does have its challenges. The regulatory process to complete a transaction is more cumbersome than in the U.S. and the government has imposed capital controls from time to time limiting the ability of Chinese companies to get enough money offshore to do a deal. However, we did observe on this most recent trip that the government is making progress on a more streamlined approval process, as well as an easing of the capital controls which bodes well for more outbound M&A activity.