KKR, DCP back China's Adopt A Cow

The company is a combination of two investment themes, one established and one emerging. Adopt A Cow taps into Chinese demand for high-quality, high-transparency dairy products with a vertically integrated supply chain that covers feed cultivation, dairy farming, and milk processing. And it employs online sales and marketing channels, eschewing traditional distribution infrastructure to focus on younger consumers who gravitate towards local brands that are in tune with their needs.

The new capital – the size of the investment has not been disclosed – will be used to build best-in-class dairy farms and processing facilities, add high-grade Australian dairy cows to the existing herd, and upgrade supply chains, digital platforms, and brand positioning.

Established in 2016, Adopt A Cow primarily produces and sells pure milk, yogurt, cheese sticks, and milk power products. It has accumulated more than 10 million customers, and sales have doubled every year in each of the last three years.

Adopt A Cow claims to be one of China’s fastest-growing direct-to-consumer brands, having gained traction with the millennial and generation Z populations through partnerships with e-commerce platforms and key opinion leaders. The company achieved sales of more than RMB100 million ($15.4 million) in the 2020 November 11 Single’s Day shopping festival, becoming the top-selling dairy brand at the event.

The business emerged as a consumer-facing extension of a dairy farm built in Gucheng, Hebei province by Xiaobo Xu in 2014. According to a Xinhua News Agency profile from 2017, Xu was a wealthy property developer who decided to invest all his savings in dairy in 2012. That year, Xu was detained by Hong Kong customs for exceeding the two-cans-per-person limit on infant formula entering mainland China. He asked why China couldn’t produce its own safe and affordable milk.

Xu spent RMB460 million creating a pasture for over 10,000 Holstein cows from Australia. The milking equipment and some forage grass were also imported, to meet quality standards. Xu prioritized social media over traditional TV and outdoor advertising, using his own story as a marketing tool. An “adopt a cow” program was introduced in 2016. Subscribers could pay RMB2,999 a year to have milk from a particular cow – or a box of yogurt – delivered weekly to their homes.

Several years before Xu entered the industry, at a time when China was still dealing with the fallout from a safety scandal that saw six children die after consuming formula tainted with melamine, KKR made its own vertically integrated premium milk play. The PE firm teamed up with CDH Investments to back China Modern Dairy, which went on to list in Hong Kong in 2010.

China Mengniu Dairy entered into an offtake agreement with Modern Dairy and ended up facilitating an exit for KKR and CDH. However, in 2013 the private equity firms partnered with Modern Dairy on a cattle farming venture. They swapped their interests for shares in Modern Dairy in 2015 and then exited the company for the second time in 2017.

David Liu and Julian Wolhardt – who led KKR’s China private equity team at the time of these deals – spun out to form DCP in 2017. They first invested in the country’s dairy industry in 2002, backing Mengniu while at Morgan Stanley Private Equity Asia.

“Adopt A Cow is not only an outstanding new dairy brand, but also an excellent dairy farm operator. The management team has both deep insights into the consumer industry and a diligent approach in operating dairy farms. With the rising new consumption trends and continuous development in e-commerce, China’s dairy industry will witness notable changes, which will present significant opportunities for innovative players like Adopt A Cow,” Wolhardt said in a statement.

KKR drew comparisons between Adopt A Cow and its investments in other Chinese companies that maintain relatively asset-light business models by relying on technology channels for marketing and service delivery. However, Adopt A Cow also fits into a broader trend beyond the KKR portfolio whereby new food and beverage brands are finding markets in China by virtue of products that resonate with the younger demographic and technology removing traditional barriers to entry.

“China’s economic growth is benefitting from the expansive and rapid adoption of digital technologies that are bringing convenience into people’s everyday lives,” said Karen Zhang, who leads KKR’s technology strategy in China, in a separate statement. “This is creating attractive opportunities to support the innovative Chinese companies, like Adopt A Cow, that are transforming their industries for the digital economy.”

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• Topics
• Greater China
• Consumer
• Expansion
• China
• Agriculture
• KKR
• DCP Capital Partners
• Growth capital