Nowadays Chi- na’s population is seeing an increase of over 10 million newborn infants every year, which in turn has created high demand for milk powder. According to the Investment Analysis and Outlook of China’s Dairy Market in 2010-2015 by CIC Industry Research Center, the dairy industry in China has great potential.
The market is still on a steady rise, but the financial crisis has caused a big drop in the global need for milk powder, however domestic demand in China’s market has been maintaining healthy growth.
Over the next 3 years, China’s infant formula market will overtake Japan in terms of scale, making China the second biggest milk consumer in the world. Every year at least 800,000 tons of infant formula are needed, generating output over RMB 30 billion.
Viewing the large market and business opportunities in China, foreign brands are sparing no effort to speed up their march into China.
Imported milk powder on the rise
A report shows that from January to Novem- ber 2010, overall imported milk powder has risen to 370,600 tons, setting a new record high. Yearly volume is estimated to reach 400,000 tons. In 2011, the milk imported to China will hit 500,000 tons, according to a recent prediction by the U.S. Department of Agriculture.
Before 2008, when the notorious melamine-tainted milk powder scandal was exposed, domestic milk powder accounted for 60% of the market, while foreign brands had 40%. However, in 2010, domestic and foreign brands split the market fifty-fifty. It is likely that foreign brands will occupy over half of the market in 2011.
Statistics from China’s Dairy Industry Association indicates that last year, imported milk powder in small packaging totaled 63,000 tons, while in 2008, that number was less than 10, 000 tons.
The output of domestic infant formula decreased by 12% to 13% last year, while in the past the output was rising. In 2010, the national supply of infant formula reached approximately 560,000 tons, with foreign brands holding nearly half of that share. The rise of foreign brands in this industry is clear.
In 2009 just after the outbreak of the melamine scandal, imported dairy products surged to 597,000 tons from 120,600 tons, and high-end infant formula even held 90% of the market share for a short time, said Liu Peizhi, a member of the National Committee of the Chinese People’s Political Consultative Conference (CPPCC), who is also deputy head of the executive office of the State Council Food Safety Commission.
Consumer demand for imported milk powder is on the rise. Additionally, some domestic brands’ reliance on imported milk sources has contributed to this rise.
Foreign brands dominate the middle and highend markets
The market is mainly dominated by infant formula, with adult milk powder accounting for only a small share. When looking at adult milk powder, especially for the elderly, there are only a few brands, with domestic and foreign brands holding roughly an equal share, therefore baby formula will be the focus of analysis.
Recently our reporter visited several supermarkets and department stores in Beijing. Astonishingly, the milk powder section was mainly dominated by foreign brands. As for infant formula at Chang’an Department Store, foreign brands take up most of the shelf space while only one domestic brand, Yili, was present. It was almost the same at the Wal-mart Supermarket on Zhichun Road. At the Carrefour Supermarket in Zhongguancun, there were more domestic brands seen, however foreign brands still accounted for 60% of the space.
“Foreign brands are performing better in the market as consumers tend to trust them more,” said Meng Jun, a manager of Department 9 at Chang’an Department Store in Beijing.
“Foreign brands are really developing rapidly in China. Moreover, the safety incidents regarding domestic milk powder has propelled the growth of foreign brands. Imported milk powder is on a constant rise,” said Zhou Siran, the food industry researcher from CIC Industry Research Center.
Foreign brands mainly focus on middle and high-end markets, of which they hold over 70%. Many well-known international brands have loyal consumers in China. As of the first half 2010, Dumex, Mead Johnson, Nestle, Abbott and Wyeth accounted for 16%, 12%, 10%, 7% and 5% of the China market, respectively.
Recently, Dumex launched its liquid infant formula, and Abbott introduced dairy products for premature infants. This suggests that foreign brands are keeping a close eye on this super-prime market.
Consumer confidence in foreign brands
Ms. Tu was buying infant food for her baby when the reporter met her at Parkson Shopping Center. When asked which infant formula she usually chooses for her baby, she replied that foreign brands are her first choice. After trying a few brands, her baby seemed to prefer Meiji, a Japanese brand. “I tend to trust foreign brands. The baby’s dad sometimes buys the Meiji baby formula in Japan during his business trips.”
Ms. Yang, who was buying infant formula at Carrefour, told the reporter her baby, just over one-year old, was addicted to the U.S. brand, Abbott. “The melamine scandal has had such a deep influence on me that I would like to choose foreign brands, and the baby only likes this brand.”
Ms. Guo said she also prefers foreign brands and her friends are fans of foreign brands like Abbott, Dumex, and others. “The dairy giants in China like Sanlu Group could be producing contaminated milk powder. That possibility makes me so sad that I have lost all confidence in domestic milk powder.”
Most of the interviewees said they preferred foreign brands and expressed concern over domestic milk powder after the melamine scandal. Their babies usually have a preference for only one specific foreign brand. Abbott, Dumex, and Mead Johnson were the most frequent brands the reporter heard at the supermarkets, as consumers seem to be losing their confidence in domestic milk powder.
“Consumers relatively favor foreign brands if they have more disposable income, and some come to our store for certain brands,” said Ms. Jiang, who is in charge of the food section at Chang’an Department Store.
The decline of domestic infant formula output and market share is a reflection of Chinese consumers’ distrust in the quality and safety of domestic milk powder.
Although domestic and foreign milk powder are under both the food safety supervision system and the medical su- pervision system, foreign milk powder’s high automaticity in milk source construction and processing has led consumers to trust foreign brands more.
In addition, incidents like melamine tainted milk, hormone-free milk, etc. have resulted in lost confidence among consumers and fostered consumer belief in foreign brands.
Due to distrust in domestic products, recently, many mainlanders have rushed to Hong Kong and Macao for milk powder, which has caused some shops to be out of stock or implement sales restrictions.
Still others buy foreign-branded infant formula directly online through purchasing agents. In recent years, Taobao, an online store run by Alibaba, has seen a rise in the number of purchasing agents. It is also becoming more common for consumers to buy infant formula in Europe and take it back home.
Foreign brands’ competitive edge
Compared with domestic brands, foreign brands enjoy the following competitive advantages:
First, foreign brands have strong financial strength and rich experience in operations & management, with more advantages in brand promotion.
Second, foreign brands are strong in research & development, thus enjoying priority in product differentiation.
Foreign brands are increasing their R&D in China. In June 2010, Mead Johnson Nutrition Company invested over RMB 140 million to set up the first wholly-owned research center in Guangzhou, capital of South China’s Guangdong Province. The aim was to change its products from “Made in China”to “Developed in China”, said Stephen Golsby, CEO of the company.
The international profit of the four largest foreign dairy brands — Abbott, Dumex, Mead Johnson and Wyeth, in the first quarter of 2010 shows that China’s performance is very eye-catching. China could be the largest market for Mead Johnson as Chinese parents are likely to spend more on their children’s growth, he added.
Abbott Laboratories Inc. also established its R&D center in Shanghai last year, and built its 12th factory for localization of production in Guanghzhou. Nestle’s R&D center in Beijing has been in operation for years.
Last but not least, foreign brands have pricing power as they hold a larger share of the market, leaving domestic brands in a more passive position.
Despite the competitive edge, foreign brands still have room for improvement. After import tariffs, transportation expenses, and other costs the prices of foreign-branded dairy products are generally higher than those of home grown brands. However, there are some price-sensitive consumers who cannot afford foreign-branded products. They would welcome foreign brands to lower their prices and set up milk sourcing and processing factories in China.
Moreover, the formula produced by foreign brands is usually based on the needs of local infants in the respective manufacturing countries, and may not be the most suitable for Chinese infants. Foreign brands should enhance research into the nutritional needs of Chinese infants, and develop infant formula that is tailored for their growth, said Zhou Siran.
Home brands need to restore confidence of consumers
Even though a survey by CCTV indicated that almost 70% of respondents in Beijing had a low confidence in domestic milk powder and would choose foreign brands, analysts felt that since the survey was carried out only at supermarkets it could not accurately reflect the current status of the whole market across the country. Another survey covering cities in 20 provinces shows that sales volume of domestic brands actually accounts for 53.3% of the market.
Foreign brands grab most of the market in first and second-tier cities, while in the vast majority of third or fourthtier cities and the countryside, domestic brands are the active players since consumers there are more price sensitive.
Ms. Zheng was buying homemade infant formula at Carrefour for her baby, she has been using a leading domestic brand — Yili, since his birth. When asked why she didn’t choose foreign brands, she said it was due to her limited consumption level. “Luckily, this domestic brand has no problem and the baby grows well with it.”
A father was also buying baby formula and chose another domestic brand — Yashili. “The baby’s mother chose this brand last time, so I just came here for this brand again,”he said.
Their words express another group’s voices, that along with those pursuing foreign brands, there are consumers loyal to domestic brands, whose products are usually costeffective.
Seeing the potential opportunities, foreign brands are tapping into the low-end market and trying to grab a larger share. Since 2009, foreign brands have increased their operation in the market with several giants like Dumex, Mead Johnson and Wheth all launching low-end milk powder, let alone Nestle, which has always offered low-end products.
Compared with foreign brands, domestic brands’ biggest advantage lies in their affordable price. Foreign brands moving into the low-end market may hit domestic companies hard. When facing this challenge, domestic brands should first join hands and avoid unfair competition, according to Zhou Siran.
Moreover, they should actively plunge themselves into the construction of an industry chain, increase construction of their milk source base, and ensure the safety of milk source and dairy products, thereby gradually eliminating consumers loss of confidence.
Furthermore, domestic brands should develop differentiated products based on local characteristics and nutritional demand, as well as try to explore new opportunities in the competitive market.
But how to restore consumer confidence in domestic brands? The problem in the dairy industry has already happened and there is no use crying over spilt milk for domestic brands. Still, remolding this confidence will not be an easy task.
First, dairy firms should intensify their efforts to ensure product quality. If appropriate, firms can invite consumers to see the production process first hand or bring increased media attention, allowing consumers to have a better understanding of their painstaking efforts and sincerity in turning over a new leaf. Moreover, firms should avoid struggling with one another as unfair competition will not only hurt themselves, but the industry as a whole. In addition, China should enhance supervision in purifying the milk powder industry environment, to ensure openness and transparency of information, Zhou Siran told the reporter.
“It is sure that we will introduce more domestic brands to our store once consumers have more confidence of them,”said Meng Jun.
The government’s enhancing supervision of the dairy industry
It is gratifying that actions have already been taken throughout the country. Ever since the melamine scandal in 2008, the supervision departments have enhanced supervision in the dairy industry, especially for infant formula.
The central government has introduced a slew of measures to tighten oversight of the dairy industry. The latest policy came in November 2010, when the General Administration of Quality Supervision, Inspection and Quarantine(AQSIQ), the country’s food-quality watchdog, released a new regulation requiring dairy manufacturers to reapply for their production licenses or face being shut down this year, China Daily reported.
The China Dairy Industry Association estimates by that the regulation will eliminate more than 20 percent of the country’s dairy companies.
Beginning March 2, China’s State Administration for Industry & Commerce has ruled that dairy products are different from other food products, and must be examined thoroughly before a potential operator is verified to open business, said Bai Jinghua, deputy director of the administration’s Regulation Department for the Market Circulation of Food.
The reassurances and measures taken by authorities to promote the safety of Chinese-made dairy products are beneficial for customers and have helped restore confidence. Now China’s dairy industry is on the mend.
The output of dairy products in the last quarter of 2010 totaled 5.834 million, a 14.6% increase year-on-year. Sales volume reached RMB 52.5 billion, up 19.9% year-on-year, according to a report released by the China Economic Prosperity Monitoring Center of the National Bureau of Statistics(NBS).
The report also indicated that the steady rise in the dairy industry was the result of the government’s support policies and dairy companies’ enhanced efforts in source milk quality and safety.
Judging from test data on the vitamin content, mineral substances and other nutrients, there are no clear differences between Chinese-made milk powder and imported products, or between domestic brands and foreign brands, Liu Yanqin, deputy director of the National Food Quality Supervision and Inspection Center, said recently.
Quality control authorities also said that no leatherhydrolyzed protein or other prohibited materials had been detected in their tests on milk sold in the Chinese market last year.
Are foreign-branded dairy products really safe?
Consumers are inclined to believe that foreign-branded dairy products are safer. Meanwhile, experts warned Chinese customers to guard against blind faith towards imported dairy. From March to August 2010, the amount of imported infant formula which failed inspection totaled 459.49 tons, with Ausnutria, Nutribio and Tatura brands accounting for 98.7%. Ausnutria failed to meet Chinese quality requirements on zinc and phosphorus contents last year.
In 2009, two Mead Johnson Nutrition products for infants were found to lack protein, as required.
Moreover, last June, it was found that 150 tons of milk powder imported from Singapore was rejected due to contamination with Enterobacter sakazakii.
Still, foreign brands are likely to occupy the middle and high-end markets in China for a long time. With consumers rising income levels and purchasing power, foreign brands are tapping into this super-prime market. This trend, blended with their focus on increasing localization, will pose a great challenge for home brands.