Deal focus: DCP, KKR milk new dairy opportunity

Xiaobo Xu is an unlikely dairy entrepreneur. Having made his fortune in property, Xu embarked on an unorthodox career change in 2012 after being detained by Hong Kong customs for exceeding the two-cans-per-person limit on infant formula carried into mainland China. He didn’t see why China couldn’t produce its own safe and affordable milk and decided to participate in the effort himself.

Two years later, Xu completed a dairy farm in Hebei province, shipping in 10,000 Holstein cows from Australia to meet exacting quality standards. The milking equipment and forage grass were imported as well. On top of this, Xu built a consumer dairy brand, eschewing traditional marketing and distribution channels in favor of social media campaigns and direct-to-consumer (DTC) deliveries.

His company, Adopt A Cow, now sells ultra-high-temperature (UHT) milk, yogurt, cheese sticks, and milk powder to more than 10 million customers, with an emphasis on the millennial and generation Z populations. Sales are said to have topped $200 million in 2020, having doubled every year for each of the last three years.

“[Xu] started doing this out of passion and love. He’d already made his money in real estate. No one in their right mind would try to start a new business by doing something that hadn’t been done before. But that’s what he’s done and that’s why I liked him,” says Julian Wolhardt, CEO of DCP Capital Partners.

DCP and KKR recently made a minority growth investment – of approximately $100 million, according to a source close to the situation – in Adopt A Cow to help the business scale. The farm currently has about 50,000 head of cattle and recently built a processing facility in Shandong province. There are plans to expand the footprint much further, with the company targeting RMB10 billion ($1.5 billion) in sales within five years.

China dairy 2.0

Dairy is familiar territory for DCP and KKR. Prior to establishing DCP in 2017, Wolhardt and his co-founder, David Liu, led KKR’s China private equity team. Their tenure coincided with a period in which building vertically integrated farming operations was a prevalent investment theme.

The firm invested in China Modern Dairy in 2008, took the company public in Hong Kong, and then sold most of its stake to China Mengniu Dairy, the company’s offtake partner. An exit came in 2014, but by then KKR had embarked on a separate cattle farming venture with Modern Dairy. The GP’s interest was acquired by Modern Dairy via a share swap in 2015.

Adopt A Cow is also a vertically integrated business. The company’s name was not selected by chance – it emphasizes the connection between producer and consumer, underpinned by a farm-to-table supply chain transparency. What’s changed is the downstream consumer engagement. Rising smart phone penetration and the proliferation of short videos and social media as a marketing tool have contributed to this evolution, but they are not the only factors.

“An increasing number of local brands are not just taking advantage of the e-commerce channel, it’s their primary channel as they take a DTC approach,” says Chris Sun, a managing director at KKR. “Gen Z has increasing consumption power and they are an internet native generation. At the same time, they have no preconception that international brands are superior. They would pay a premium for a local brand if they thought it was cool or met some of their emotional needs. But it has to be of high quality.”

From soft drinks brand Genki Forest to oatmeal specialist Wangbaobao, this trend is apparent across China’s consumer sector. There is often a preexisting internet or venture capital connection. The founder of Genki Forest is an online games developer-turned-serial entrepreneur; his counterpart at Wangbaobao previously ran a cosmetics store on Alibaba Group’s Taobao platform.

Xu’s achievement with Adopt A Cow is arguably more nuanced. “He is one of few to combine agriculture and consumer branding – creating one of the best-run farms in China and getting into the marketing side,” says Wolhardt. “He hired some guys who knew consumer branding, but that’s not too hard. What’s hard is turning guys into farmers who have not been farmers before.”

Adopt A Cow learned the farming side from AustAsia, which is generally acknowledged as China’s most sophisticated dairy operation. One individual spent nine months on secondment at AustAsia before returning to share his newfound wisdom. Wolhardt claims the Hebei farm now ranks number two in China by milk production per head of cattle.

Finding a niche

Mengniu and Yili Group remain the runaway leaders in China’s dairy industry with combined sales of approximately RMB170 billion in 2020. Yet Adopt A Cow proved its digital smarts in the country’s 2020 November 11 Single’s Day shopping festival, clearing more than RMB100 million to become the top-selling dairy brand at the event. Sun puts the company’s recent success down to an ability to hire e-commerce talent and helpful COVID-19-related tailwinds.

“The pandemic has driven consumption of liquid milk, there was high double-digit growth last year, which is unprecedented in almost a decade. Before that, liquid milk consumption had been slowing,” he says. “At the same time, e-commerce penetration for liquid milk is increasing quickly. Online sales of UHT milk have been growing at more than 30% for the last couple of years.”

Adopt A Cow’s DTC strategy allows nationwide coverage without the cost of traditional distribution infrastructure. The minimum order size is three liters, or one box of six 250-milileter packets. Customers can also subscribe to receive, on a quarterly or annual basis, two boxes on the same day each month. The core product is UHT milk with a shelf life of several months – not an ultra-premium fresh offering, but one that is convenient and popular among consumers who are accustomed to the taste.

There are plans to offer more fresh products, with demand expected to grow over time. Wolhardt believes the companies that cater to much of this market, especially the more discerning younger generations, could well be China’s emerging consumer brands. DCP has also invested in Honest Dairy, which produces high-quality natural yogurt with no additives under the Simple Love brand. The company plans to build its own modern dairy farm.

“I think the days of investing in brands that try to serve everyone are gone. With the current generation – and that ‘for me only’ mentality – you are going to have a lot of small brands targeting specific desires,” he says. “We want to invest in DTC brands that have clear segmentation, high-end products, and promote a healthy living concept.”

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Greater China
• Consumer
• Expansion
• Technology
• China
• Agriculture
• DCP Capital Partners
• KKR
• TMT