How Tmall Became a Midwife for Overseas Chinese M&A

Over the past year, Taobao, Tmall and other online shopping sites have created a new way for Chinese consumers to buy foreign goods. This new sales channel, commonly known as haitao, has, unsurprisingly, produced a surge in purchases of vitamins, milk powder and other products Chinese have been buying on trips overseas.

What is surprising is that this new online channel also appears to be catalyzing Chinese merger and acquisition activity overseas. Small and medium-sized foreign companies that show strong online sales to Chinese consumers are becoming ideal acquisition targets for Chinese companies. Suddenly, being ranked among the top sellers on Tmall International is raising the likelihood that a Chinese company will come calling.

Consider the recent sale of Swisse Wellness Group, one of Australia’s leading vitamin and supplement companies. Founded in 1969, Swisse has traditionally sold vitamins, health products, minerals and supplements through local pharmacies, health food stores, supermarkets and clinics. It has a market share of about 18% in Australia.

During the first half of 2015, something strange happened. Swisse abruptly found its sales into China growing very rapidly, both via tourists and through the emerging haitao channel. Revenues for the year that ended in June climbed to 313.1 million Australian dollars ($227.8 million) from A$125.6 million a year earlier.

But Swisse had not actually launched any initiatives to tap into the Chinese market. In fact its China success was probably a surprise to management. The company was simply doing what it had always done: selling in Australia through its normal local distributors and channels.

What was happening was that Chinese distributors and other haitao intermediaries had begun buying Swisse products in bulk and were putting them up for sale on Tmall and Taobao. Swisse Vitamin was suddenly the No. 1 brand by transaction volume on both Tmall and Taobao for the 6 months through March, leapfrogging over global brands such as Amway and General Nutrition’s GNC.

When 1.3 billion Chinese consumers get interested in a small company it can really move the needle financially. Swisse’s online sales in China and to Chinese tourists in Australia jumped to about 30% of its revenue and 50% of its earnings before interest, taxes, depreciation and amortization.

And that brings us to Tmall’s strange emerging role as the midwife of Chinese M&A. Swisse’s cross-border buying surge quickly caught the interest of major Chinese private equity firms and strategic buyers. Suddenly, Swisse appeared to be an ideal acquisition target. Not only was it a small foreign company with a trusted brand — vital in health products — it also now had proven China sales and the potential for much greater growth in the country.

By mid-year, privately-held Swisse was in play. And in September, Biostime International Holdings, a Hong Kong-listed producer of infant formula and baby care products, bought an 83% stake for A$1.39 billion. Biostime has said it will distribute Swisse’s products across China and through more e-commerce channels.

Haitao-driven acquisitions seem particularly well suited to South Korea and Australia. In Australia, there are already lots of Chinese nationals; word-of-mouth is critical for online sales in China. Additionally, Australian brands are widely trusted, not a small thing in the Chinese market for food and supplements. For Australian companies, this also works quite well. Most have limited growth opportunities at home and lack the ability to expand to China directly on their own.

We are also starting to see this show up in the U.S. Natural Health Trends, a Texas-based multi-level marketing company for health and wellness products, is now generating approximately 80% of its revenue through e-commerce channels into China. Its annual revenues soared from $52.5 million in 2013 to $124.6 million in 2014.

Ultimately, this Tmall midwife phenomenon is about Chinese consumers becoming increasingly numerous and wealthy. And they are going to get what they want, one way or the other. This all augurs well for small foreign companies with good consumer products and brands.

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I write about the fight for rising Chinese consumers. If you would like to read my regular posts, please click ‘Follow‘ or send a connection request.

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About: I am a Professor of Investment at Peking University Guanghua School of Management. I am also an investor and former executive / slave to Prince Alwaleed. My newest books are “The 1 Hour China Book” and “The 1 Hour China Consumer Book“. Read a sample chapter here.

Top photo by Jim Renaud, Creative Commons license with link here.

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