CJ’s road to dominance in Vietnamese food sector

South Korean CJ has been growing at a tremendous rate, thanks to its aggressive M&A strategy

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On a roll with M&A

On May 21, the shareholders of Cau Tre Export Goods Processing Joint Stock Company ratified the decision to change the company’s name to CJ Cau Tre.

Only a month earlier, then-second biggest shareholder of the company, Saigon Trading Group (SATRA) announced the public auction of a 20 per cent stake in the company. Two subsidiaries of CJ, CJ Foods Vietnam Ltd. and CJ CheilJedang Corporation, have bought the stake and raised CJ’s total holding in Cau Tre to 71 per cent.

CJ’s journey to become the controlling majority shareholder at Cau Tre has been swift. At the end of 2016, it increased its holdings to 47.33 per cent by buying stakes from three big shareholders in the form of private placement, surpassing the then-biggest shareholder Satra, which was holding 45 per cent. Then Cau Tre’s extraordinary shareholders’ meeting ratified to put four CJ personnel into management roles. At the end of March, CJ’s holding was already a bit over 51 per cent.

CJ produces ready meals and frozen food, such as spring rolls, tea, raw meat and sausages. As its products, such as BBQ sauce, started appearing more aggressively on supermarket shelves in Vietnam, CJ has also been on a roll with its M&As. In early 2016, it bought the Ong Kim kimchi brand.

Recently, another Vietnamese company also changed name to bear the CJ mark. At the end of April, CJ finished transacting $13.4 million to acquire 64.9 per cent of food processing company Minh Dat and changing its name to Minh Dat CJ. Minh Dat has been holding the largest market share for meatballs and fishballs in Vietnam.

Completing the supply chain

With CJ’s involvement, Cau Tre is ramping up its food processing capacity and upgrading its technology. Besides changing its name, the company will add operations, such as processing and preserving vegetables, producing cakes and other processed foods, and whole-selling food. The new food processing plant in Hiep Phuoc Industrial Park in Nha Be district of Ho Chi Minh City also saw its investment raise to VND1.2 trillion ($53 million) from the earlier planned VND600 billion ($26.5 million).

Cau Tre has been maintaining losses for the past two years, and this year, it also expects a VND25 billion ($1.1 million) before-tax loss this year. However, in the long-term, the management commits a higher profit margin in its main business area and higher dividend.

However, what investor CJ is mainly after is the distribution network Cau Tre possesses. Though it only has a market share of less than 3 per cent, Cau Tre has a large distribution network in Vietnam and has been steadily exporting its products to global markets that have very high quality and safety demands. Having Cau Tre under its belt is thus going to help CJ strengthen its position in the frozen food market.

CJ has also struck a deal with the second-biggest shareholder of Cau Tre, Satra. In September 2016, a Memorandum of Understanding (MoU) was signed between the two parties in Seoul during a diplomatic visit by a Ho Chi Minh City government delegation.

As reported by Vietnam Economic Times, under the agreement, CJ CheilJedang, CJ’s food subsidiary, will work with Satra to develop new products based on a combination of their existing product lineup. On the same day, CJ Freshway, CJ’s food and food service distributor, also inked an agreement to become Satra’s exclusive distributor of South Korean fruit.

Last November, the company launched the CJ Feed Ingredient Vietnam factory in the southern province of Ba Ria-Vung Tau, adding to its portfolio of plants in Long An, Dong Nai, Vinh Long, and Hung Yen.

All in all, CJ’s investment approach in Vietnam has been comprehensive, focusing not only on production, but also distribution.

One crucial setback

CJ’s expansionary ambition was only checked by a highly-publicised failure in the race to acquire VISSAN Joint Stock Company (Vissan) earlier last year.

In March 2016, Vissan held the auction for a 14 per cent stake reserved for a strategic investor. International Agriculture Nutrition JSC (ANCO), a subsidiary of Masan, ended up the winner, after buying the whole offering at the price of VND126,000 ($5.6) a share. The price was a little bit higher than the CJ’s offer of VND120,600 ($5.32) a share. After the sale, Masan and its subsidiaries hold 24 per cent, while CJ holds 4 per cent.

Similar to CJ, Vissan (freshly acquired by ANCO) is also completing its supply chain. At its April 5 shareholders’ meeting, Vissan’s management said that as the company is building a complete feed-farm-food value chain, the strategic investor ANCO is going to provide feed, one of the three pieces of the puzzle that Vissan is lacking. The company expects a revenue of VND4.54 trillion ($200 million) in 2017, up 23 per cent, and pre-tax profit of VND156 billion ($6.9 million), up 5 per cent on-year.

Being unable to acquire Vissan was a disappointment to CJ, because Vissan reportedly holds 65 per cent of the market for sausages, 75 per cent for Chinese sausage, 40 per cent for frozen food products, 30 per cent for Vietnamese ham, and 20 per cent for canned food. The company’s products are distributed at 130,000 sales venues all over the country.

As reported by newswire dantri.vn, after two decades in Vietnam, CJ has reached a revenue of VND17 trillion ($750 million) in 2016, up 30 per cent on-year, and an operating profit of VND834 billion ($36.8 million). The food operation has had the highest growth of 86 per cent between 2011 to 2015.

Market research firm StoxPlus estimates that the Vietnamese processed food market is valued at about $4 billion, of which processed meat and seafood accounts for 45.1 per cent. As cited by cafef.vn, market research firm Euromonitor estimated the processed meat and seafood market to have been growing for the past five years. Last year, the growth rate was 6 per cent in value and 5 per cent in volume.

It remains to see how the battle for dominance is going to play out in this highly potential market.