Nestlé recently announced its decision to increase its stake in Hsu Fu Chi from 60% to full ownership (100%). This move immediately reminds me of Nestlé’s acquisition of Yinlu years ago—a deal that ultimately failed, leading to Nestlé’s exit from the brand. Now, with Hsu Fu Chi fully under Nestlé’s control, will history repeat itself? I believe it will.
1. China’s Confectionery Market: A Tough Place for International Brands
The Chinese confectionery market is fundamentally different from Western markets—it is a low-unit-price, high-volume, and distribution-driven sector. Several key characteristics make it difficult for multinational corporations (MNCs) to succeed:
- Price Sensitivity: Chinese consumers are extremely price-conscious, especially when it comes to low-cost products. Even minor price differences can impact purchasing decisions.
- Low Brand Loyalty: Unlike premium chocolate or high-end confectionery in the West, Chinese consumers switch brands easily based on discounts, promotions, and availability.
- Localized Product Preferences: Western markets focus more on premiumization, unique flavors, and health-conscious confectionery. In contrast, China’s market thrives on localized flavors and affordability, such as yogurt-flavored candies, herbal sweets, and milk-based confections. Hsu Fu Chi success has largely been built on its deep understanding of local consumer tastes. If Nestlé imposes a standardized global strategy, it risks losing the localized edge that made Hsu Fu Chi successful.
2. The Power of Distributors: Can Nestlé Meet Their Needs?
China’s fast-moving consumer goods (FMCG) market is dominated by distributors, who hold significant power over product placement and retail availability. The key challenge for Nestlé is whether it can offer better profit margins to distributors than local brands.
- Nestlé follows a global pricing and profit-sharing model, which may not be flexible enough for Chinese distributors.
- Local brands offer higher distributor incentives and greater flexibility, making them a preferred choice in retail channels.
- Nestlé may prioritize brand-building over short-term profitability for distributors, leading to reduced motivation for them to push Hsu Fu Chi’s products.
If distributors do not see a financial advantage in prioritizing Hsu Fu Chi, they may shift their focus to competing local brands, significantly impacting sales. This was one of the major reasons Yinlu struggled under Nestlé’s ownership—it failed to maintain strong relationships with its distribution partners.
3. Local Competitors Have the Upper Hand
Although Western markets may lead in product innovation and premiumization, China’s confectionery market is dominated by local brands that have an edge in:
- Lower supply chain costs: Domestic brands can manufacture at a lower cost and adapt quickly to market changes.
- More effective marketing strategies: Chinese brands leverage social media, live streaming, and private traffic marketing better than MNCs.
- Faster product innovation: Local brands can quickly develop and launch new flavors tailored to Chinese consumers, while Nestlé’s global R&D process tends to be slower and less flexible.
Nestlé tried to leverage its global resources to elevate Yinlu’s brand value, but ultimately failed to compete with more agile, cost-effective domestic competitors. The same risks apply to Hsu Fu Chi.
4. Lessons from Yinlu: A Failed Acquisition
Nestlé’s failure with Yinlu provides critical lessons that could apply to Hsu Fu Chi:
- MNCs struggle to integrate local brands without disrupting their existing market positioning. Nestlé attempted to standardize Yinlu’s operations, which reduced its competitive edge.
- The brand lost its local appeal. Nestlé focused on making Yinlu more “international,” but Chinese consumers never wanted an international version of Yinlu—they valued it for its affordability and familiarity.
- Misalignment in product innovation. Nestlé pushed Yinlu towards healthier, premium-positioned products, but the Chinese market still prioritized affordability, taste, and distribution power.
Xu Fu Ji may face the same fate if Nestlé applies a Western-style strategy that ignores the realities of China’s confectionery market.
Conclusion: A Story That May Repeat Itself
Given these factors, we believe Nestlé’s full acquisition of Xu Fu Ji will likely encounter similar challenges to its failed Yinlu deal:
✅ China’s low-cost, price-sensitive market leaves little room for premiumization.
✅ Powerful distributors may not prioritize Hsu Fu Chi under Nestlé’s global system.
✅ Local competitors are stronger in cost efficiency, marketing, and product localization.
✅ MNCs have a poor track record of successfully integrating Chinese FMCG brands.
In the next few years, we may see Hsu Fu Chi struggle under Nestlé’s control, following the same downward trajectory as Yinlu.
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