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FMCG, Wellness
July 23, 2012 | 2 Comments

Milking it: Foreign brands and Chinese sucklers

Meiji Mama Milk Powder. Tsunami alert?

Meiji Mama Milk Powder. Tsunami alert?

China is in the midst of a baby boom. Concurrently, Chinese society is aging and will likely suffer from economic malaise unless local families step up baby production. China’s One Child Policy is still the main culprit, but its impact is diminishing as individuals become more affluent and less dependent on government for employment and services. With communism out of the way, Chinese families have a capitalist reason not to have more children: It’s just too expensive, mostly since safety concerns allow foreign brands to corner the market for baby products and charge up to four times what they would in other countries. China, meanwhile, is paying the price. 

China’s milk powder market has been growing at a compounded average rate of nearly 30% since 2004. In 2010, the baby formula market turned over around RMB 40 billion, up from RMB 30.3 billion in 2009. Foreign brands accounted for over 60% of the market, and virtually dominated its the high end. According to recent data form Wyeth, in 2011, the share of western brands such as Mead Johnson, Dumex, Wyeth, Abbott, and Nestle has grown to over 60%.  Unlike with other purchasing decisions, the difference between foreign and domestic baby product is considered a matter of life and death. Over recent years, Chinese companies have been involved in food safety scandals, covering anything from contaminated baby powder to toxic milk tea. As a result, even consumers who otherwise cannot afford imported goods spend large chunks of their income on foreign milk powder.

The brands, in turn, make the most of their captive market and mark up prices up to 4 times their level in the US or Europe. A tin of foreign baby formula ranges from around RMB 200 to RMB 400. Some high end products – such as Wyeth’s Illuma, Nestle’s NAN H.A., and Mead Johnson’s Enfagrow - cost even more. China now levies a 10% tax on imported baby formula in an effort to promote domestic alternatives. But demand driven by safety concerns is inelastic, meaning Chinese consumers absorb the extra costs while foreign brands continue to grow their market share. Similar, if more moderate, dynamics can be seen in the market for other baby products.

Japanese brands such as Meiji previously served as a relatively affordable alternative to western ones: China’s admired-but-hated neighbors to the east are known for the their obsession with cleanliness and safety. But Japanese products are now suspect, following local media reports about potential contamination from the Japan’s damaged nuclear reactors (here, in Chinese). Protected from local and Japanese competition, foreign brands continue to expand aggressively – in two recent examples, Abbott restructured in order to focus its operations on China and Nestle acquired Pfizer nutrition, which previously acquired Wyeth.

China’s booming e-Commerce market is making it easier for foreign brands to reach consumers in China’s interior, without rolling out costly sales and marketing operations. Baby products are a hit on Taobao, and even Suning Electronics is now increasingly interested in the sector. Safety concerns are not likely to dissipate soon, and foreign brands seem poised to continue to make the most of it. The government will likely try to support local brands through new quality standards but these, in turn, will be undermined by the public’s distrust of the government. Meanwhile, economic incentives will continue to support China’s One Child Policy, possibly long after the original decree is abolished.

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