KKR backs Adopt a Cow’s approach to China’s changing dairy market

KKR’s investment into Beijing-headquartered direct-to-consumer dairy producer Adopt a Cow is reflective of China’s maturing dairy sector, said a managing director at the firm.

Beijing-based Chris Sun told Agri Investor that after more than 10 years investing in China’s dairy sector that began with a focus on improving food safety, KKR has moved toward companies with technological or branding advantages.

“In China today, food safety concerns with milk have significantly improved. It has to do with the fact that a lot of capital was poured into corporate or large-scale dairy farming and by default these big dairy farms would have better safety controls and inspections,” Sun said after the mid-April announcement of KKR’s investment into Adopt a Cow, which produces and sells milk, yogurt, cheese and milk powder.

“If they are another dairy farming business, without their own brand, even if they are very well-run, we would probably not invest in them at this point.”

Financial details of New York-headquartered KKR’s investment into Adopt a Cow were not disclosed. The round was co-led by Beijing-headquartered DCP Capital, which was founded in 2017 by former KKR executives David Liu and Julian Wolhardt. KKR’s investment was drawn from the third iteration of its Asian Fund, which closed on $9.3 billion in 2017.

A source told affiliate PE Hub that KKR and DCP’s minority investment of $100 million includes a provision that limits the ability of Adopt a Cow’s founder to sell his stake prior to the firms’ exit.

Established in 2016, Adopt a Cow’s monthly and yearly dairy product delivery packages gained a following among consumers by engaging them directly, Sun explained. By offering the ability to inform product development, tune into cow livestreams and in some cases even visit farms, he said, Adopt a Cow differentiated itself from competitors still focused largely on offline sales.

Like many product categories in China, Sun added, dairy demand is increasingly influenced by livestreamed marketing by opinion-leading consumers.

“It’s a little bit like an infomercial and TV shopping, but it’s much more interactive. The consumers are very picky about the products they sell and there are a lot of very good promoters that really become opinion leaders,” he said.  “There were some key opinion leaders that publicly promoted the consumption of milk, so there has been a big growth of demand and a shortage of raw milk supply for downstream processors.”

KKR’s investment into Adopt a Cow builds on experience in China’s dairy industry that has included investments into producers China Modern Dairy and Asia Dairy. Sun said when KKR began investing in China’s dairy sector, alfalfa was largely sourced from the US, while in-country supply is now possible as local farmers have since become much more sophisticated in production of high-protein alfalfa.

Adopt a Cow currently operates its own supply chain that includes alfalfa growing, raising cows and processing milk.

“Nowadays in China, a lot of dairy processors have their proprietary farms, so having their own farm is not necessarily a big differentiation. But being able to tell the story clearly and communicate the benefits of running your own farm – controlling food safety and really paying attention to cow health, controlling, for example, your feed to ensure your milk is nutritious – this knowledge and these features were not [previously] adequately communicated to the consumers,” said Sun.

“Having a vertically-integrated supply chain and model, right now, is more of a choice than a necessity.”