Chinese companies look to outbound investment for a lift in branding

Looking to woo China's cash-rich consumers and fatten their margins, Chinese consumer goods players are busy snapping up international brands abroad.

There has been a flurry of deals since the beginning of the year, especially in the fashion and luxury goods segment. Chinese conglomerate Fosun International Ltd. has bought a majority stake in French fashion house Lanvin. Meanwhile, textile major Shandong Ruyi Group has agreed to purchase a majority stake in Swiss luxury shoe brand Bally International. Also, Shenzhen Ellassay Fashion Co. Ltd. said it plans to acquire the mainland China brand rights to the French fashion label Iro, after taking indirect control of the group in 2017.

In the food and staples space, Chinese dietary supplements giant By-health Co. Ltd. said it was buying Australian probiotics maker Life-Space Group for about A$690 million. Meanwhile, Beijing Sanyuan Foods Co., Ltd. and Fosun completed their €625 million acquisition of French margarine maker St Hubert in January.

China's outbound M&A activity in the consumer goods sector is likely to accelerate — even at a time when Beijing is tightening control over capital outflows — according to Yang Qing, an M&A lawyer and partner at Zhonghao Law Firm.

"Government policies are steering the direction of foreign investment by Chinese companies," said Yang. "Right now, the rules restrict acquisitions of trophy assets abroad that cannot bring real value to the domestic economy, but encourage strategic deal-makings that enhance China's core capabilities.

"High technology, industrial and consumer products are likely to be the most active areas for outbound investment in the next few years," he added.

Chinese groups spent more than US$4 billion on foreign consumer brands in about 25 noteworthy deals in 2017, an amount on par with 2016, according to a recent report by Chinese cross-border M&A data platform Morning Whistle. Outbound foreign direct investment in the wholesale and retail trade also reached US$21 billion in 2016, more than triple the US$6.7 billion recorded in 2010, according to the most recent data from China's Ministry of Commerce.

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By picking up foreign brands, Chinese companies may not only court domestic consumers but also aim at expansion in overseas markets, Northeast Securities analyst Li Qiang said in an interview.

"If you look at Haier Electronics Group Co. Ltd., it faced difficulties in navigating the U.S. market, despite having operated there for more than 10 years," Li said. "But through the acquisition of General Electric Co.'s appliance business in 2016, it has boosted market share by getting GE's existing relationships with retail and distribution partners."

In the case of Ellassay, acquisitions serve as a quick and necessary means for the company to realize its strategic goal of becoming an influential multibrand, high-end fashion group, the company's deputy general manager Lan Di said in an interview.

"Consumers are becoming much more brand-conscious amid a consumption upgrade, and are provided with more choices in today's digitalized society," Lan said. "We must elevate our own brand image and expand our product portfolio in such competitive environment." He explained that organic growth requires a longer cycle, higher risk and bigger capital investment than acquisitions.

The Shenzhen-based company, which started out in 1999 with its namesake premium label Ellassay, has been on a shopping spree since 2015 with purchases including the China operations of American cool casualwear brand Ed Hardy, German premium womenswear brand Laurèl and designer brand Vivienne Tam.

The acquisitions did give a boost to the brands' market penetration in China and the group's earnings. Ed Hardy, for example, saw store numbers increase to about 140 in 2017 from about 20 in the previous year, while Ellassay plans to expand Vivienne Tam to 15 locations in 2018 after opening the brand's first flagship store in China at the end of 2017.

The deals are expected to elevate Ellassay's bottom line. Ellassay said it expects group net profit for the year ended Dec. 31, 2017, to jump between 40% and 60% year over year, thanks to "synergies" among its multibrand portfolio. If achieved, the growth would be a continuation of a trend the company saw in fiscal 2016, when its net profit grew 24% year over year to 198 million yuan, while sales jumped 36% to 1.13 billion yuan. Ellasay is due to report its full-year results in April.

The recent deal to expand affordable designer brand Iro to mainland China will set Ellassay up to pursue deals with accessible luxury brands that can further complement its current portfolio and cater to wider demographics, Lan said.

Controlling the exclusive China rights to Iro, an edgy brand known for its skinny jackets and motorcycle jackets, can help the group target younger consumers. Lan noted that the company will adjust Iro's products in accordance with Chinese consumers' complexion, body figures and style preferences to make the brand more appealing in the China market. So far, Ellassay has helped Iro open three directly managed stores on the mainland — in Shanghai, Beijing and Nanjing — and its expansion is expected to accelerate soon in the future with franchise stores, Lan said.

"We are looking at opportunities both at home and abroad," he said. "Before we make an acquisition, we will look at whether the target has strong design and operation teams. … We want to keep the brand's original style and let it run independently with its existing management, but will provide support for its long-term development."

As of Feb. 22, US$1 was equivalent to 6.34 Chinese yuan.