Chinese consumer demand for foreign-branded infant milk formula is continuing to grow, despite the government’s claim that the domestic industry has emerged from a scandal seven years ago that killed at least six babies.
The latest brand survey from FT Confidential Research found consumers overwhelmingly favouring foreign brands over domestic ones. A substantial 61.9 per cent of respondents said their families most regularly purchase foreign-branded formula, up from 58.9 per cent in the fourth quarter of last year (see chart).
Among higher-income respondents — those with annual household incomes exceeding Rmb300,000 ($44,820) — this proportion rose to 73.4 per cent from 66.7 per cent, though an increase was recorded across all income groups surveyed.
Levels of distrust in the domestic dairy industry are so high that a growing number of consumers, across all income tiers, expressed a preference for wholly imported formula: 9.5 per cent of respondents said their family most regularly buys wholly imported infant formula, up from 6.1 per cent in our last survey. Among our wealthiest cohort, this figure was 14.9 per cent.
The Dairy Association of China argues that 99.5 per cent of Chinese dairy products pass muster. It says earlier safety scandals, such as one in 2008 in which thousands of babies were sickened by formula adulterated with melamine, are in the past. But that claim is undermined by news from Shanghai this year of arrests linked to 17,000 faked cans of formula powder.
Infant milk formula is big business in China: Euromonitor estimates the market will grow nearly 15 per cent this year to $14bn.
The abuses in China’s formula market are partly the result of its extreme fragmentation. China’s 103 domestic manufacturers produce more than 2,000 formula variants, according to the China Food and Drug Administration, in some cases producing different packaging for different parts of the country. The five market leaders in China have a combined share of just over 40 per cent, compared with an equivalent share of 80 per cent or more for leading producers in the US, Japanese and South Korean markets.
A new batch of regulations governing infant milk formula is set to address this fragmentation when it goes into effect at the start of October. These “one formula, one brand” rules will require the registration of formula brands and recipes. Companies will be restricted to selling no more than three brands, after proving each brand has its distinct recipe.
We expect larger domestic manufacturers to cut their portfolios — Yashili and Wondersun, for example, each sell formula under 14 different brands — while smaller producers that rely on OEM supplies will be driven out of the industry altogether.
The hit from the trust deficit is being compounded by lower import taxes and cheaper global milk prices. These have helped reduce the price gap between foreign and domestic brands to 28.8 per cent as of August 2016, down from upwards of 40 per cent in 2010 (see chart).
As barriers to entry come down, some domestic firms, including Yili, Yashili and Synutra, have opened overseas production facilities in countries like New Zealand and France to escape the stigma attached to purely domestically manufactured products.
Even if trust is restored, cultural and demographic changes may cap demand for milk formula in future.
The government announced the end of China’s One Child Policy last year, but there is no evidence that this will trigger a baby boom. The fact that the number of new babies delivered last year fell 320,000 despite earlier relaxations of the policy suggests the abandonment of this controversial regime will not radically alter China’s demographic outlook. Furthermore, the number of prospective parents is set to decline: the total number of 20-35-year-olds will peak this year and fall by 9m by the end of the decade.
Breastfeeding rates will also climb in response to increased education and curbs on the marketing activities of formula makers. Our survey of urban parents found that 56.8 per cent of babies from birth through six months — the period recommended by the World Health Organisation — were being fed exclusively breast milk.
Nationwide, breastfeeding rates may be lower, but they will rise as the government steps up its efforts to spread the word about the benefits of breast milk. Although there are significant cultural hurdles to be overcome before breastfeeding becomes as prevalent in China as it is elsewhere, we believe Chinese and foreign manufacturers in the domestic market are in for a tougher time.
|FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.|
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