Commercial Due Diligence Case Study

A leading Chinese organic food brand in the making?

Strategic due diligence is about understanding whether or not a target is positioned to win. It is a strategic exercise that not only requires an understanding of the target company, but also of the external decision makers that will shape its future, including customers and competitors. Strategic due diligence is the foundation for post-investment value creation.

In this case, our client needed to decide how to proceed with an investment into an organic food company in Northeast China.

Situation
  • China-based private equity investor evaluating an investment in a private Chinese company producing, processing and marketing organic grains and beans (the ‘Target’)
  • Target was seeking funds to secure long-term supply of organic produce, develop its two brands, and enter new markets across China
  • Client needed to understand if the Target had an appropriate strategy and the capability to execute it
Approach
Stenvall Skoeld’s approach included determining:
  • Industry and market segment attractiveness
  • Suitability and achievability of the Target’s strategy
  • Strength of the Target’s brands
 Our research and analysis included:
  • In-depth management interviews, production and processing site visits
  • Interviews along the Target’s value chain (e.g. distributors, R&D partners)
  • Brand assessment and benchmarking of organic foods brands in three Chinese cities, including in-store analysis at leading supermarkets and interviews with store attendants and customers
  • Analysis of financial and commercial information provided by the Target

Result

  • While industry analysis showed strong future growth prospects for organic food in China, the due diligence revealed that the Target’s brands were weaker than our client had expected:
    • Only a small proportion of sales came from products sold in supermarkets; a large share of sales was in the form of gift boxes sold to corporate buyers, for which relationship, not brand, was a key driver of sales.
    • The brand assessment showed that awareness of the Target’s brands was low.
  • Since the scalability of the Target’s business model depended on its products winning on supermarket shelves across China, this realization was troubling.
  • Management due diligence also showed a lack of team members with experience building consumer brands.
  • Armed with a more realistic view of the Target’s strengths and weaknesses, the Client revised its valuation and also changed the structure of its investment. The Client also decided it would have to play a more active role post-investment.