China's Mengniu to supply milk to KFC restaurants

SHANGHAI, Oct 23 (Reuters) - Mengniu Dairy (2319.HK), China's biggest milk producer, will start supplying milk to the country's 2,000 KFC restaurants next year, as it aims to expand sales channels beyond supermarkets and retail outlets.

Mengniu and KFC's parent Yum Brands Inc (YUM.N) have formed a strategic alliance on milk supply, the companies said in a joint statement on Tuesday.

"This means a new market for Mengniu, and will be translated into more sales," said Guo Changsheng, analyst at Shanghai Securities.

"However, milk may be sold to KFC quite cheaply so the profit margins of this business should be thin."

The companies delined to disclose details of the agreement.

Mengniu has been expanding its sales channels amid cut-throat competition with Inner Mongolia Yili Industrial Group Co (600887.SS) and Bright Dairy & Food Co (600597.SS) in the world's fastest-growing dairy market.

Earlier this year, Mengniu replaced Nestle (NESN.VX) to supply milk to Starbucks (SBUX.O) coffee shops in Beijing.

The company, which owns a yoghurt venture with French food group Danone (DANO.PA), posted a 41.3 percent jump in profit in the first half, with sales increasing 33 percent to 10 billion yuan ($1.3 billion).

In addition to KFC, Yum also operates Pizza Hut, Taco Bell and Chinese-style East Dawning restaurants in China, the company's fastest-growing market. (US$1=7.5067 Yuan)