Category crunch: Infant formula in China - part 1
The infant formula category is growing, driven by the country's emerging middle class
just-food's latest category crunch looks at the infant formula sector in China, an industry often rocked in the last decade by concerns over product safety but one that domestic and international manufacturers believe has the potential for rapid growth. Petah Marian reports.
Despite being hit by a number of food safety crises in recent years, China's growing middle class and short periods of maternity leave has meant the infant formula market remains buoyant and set for further growth.
According to Euromonitor data, the infant formula channel in China is set to almost double in coming years, to GBP8.3bn (US$13.38bn) in 2015, up from GBP4.2bn in 2011.
Industry watchers cite the ongoing growth of the middle class – both in terms of numbers and overall buying power, combined with limited levels of maternity leave for mothers as some of the major drivers of growth in the channel.
"More women in the workforce is a factor, but the main driver of the growth is the increase in middle-class income and the increasing number of families that can afford premium-priced nutritional products," says Christopher Perille, vice president of corporate communications and public affairs at Mead Johnson, the US company that is the largest infant formula manufacturer in China. "And demographers expect that figure to continue to grow in China for many years to come."
The country has seen rapid growth in recent years, with GDP per capita more than doubling between 2000 and 2008. OECD data puts the country's GDP per capita at US$5,970 in 2008, up on the US$2,163 reported in 2000. An indicator of the differing values between China and the developed world is the fact that more than half of the top 20 world's richest self-made women are Chinese, according to the Hurun Report published in October last year.
Carlyle Group, which owns a minority stake in infant-formula manufacturer Yashili, says the country has experienced "fast growth over the past three decades and has emerged as the world's second-largest economy". Carlyle's director of communications in China, Brian Zhou, says the growth has brought the "rising of the middle- and affluent-class", a market where it sees great opportunities for growth.
"Carlyle sees great opportunities in the companies that are well positioned to provide goods and services to China's emerging middle class and improve the quality of life for Chinese citizens. We believe that our investment in Yashili will help modernise China's food industry and create a more efficient food supply, giving more options to the country’s burgeoning middle class," says Zhou.
There are other reasons driving growth behind the category, with some 41.8% of mothers buying infant formula due to a lack of breast milk, according to Access Asia. The research firm also found that 32.3% say bought infant formula due to having a short maternity leave or heavy workload, while some 13.8% bought formula for convenience and "reckoning that it was more nutritious". Meanwhile, Access Asia found 7.4% of respondents said they did not breastfeed because they wanted to maintain their body shape.
While the sector is enjoying rapid growth, it has been marred by a series of food scandals.
In 2004, some 13 babies died in Fuyang city due to malnutrition after taking substandard milk powder. According to Access Asia, 97% of the substandard milk had only 5-6% of protein content, with some as low as 1%, far below the national requirement of more than 10% for infant milk powder.
According to Access Asia, the Fuyang milk scandal highlighted the serious quality problems in the Chinese milk powder industry.
These concerns were compounded by the melamine scandal of 2008, where six babies died, and almost 300,000 became ill after infant milk powder was contaminated with melamine.
The industry was hard-hit by the melamine crisis, with Sanlu, the company at the centre of the scandal, going bankrupt, while the rest of the industry saw their results sour in the wake of the affair. Mengniu Dairy posted a CNY946.8m (US$146.5m) loss for the year covering the crisis, against a profit of CNY935.8m a year earlier. Synutra also posted a $100m net loss for the year ended 31 March 2009 after sales fell 13.7% to $312.5m. Synutra chairman and CEO Liang Zhang admitted that year had been the "most painful and difficult in the company's history".
Additionally, there was a scare last year, which was later found to be false, when Synutra's infant formula was linked to premature development and sexual precocity in girls.
And there have been signs that the industry continues to be challenged by ongoing concerns over the quality of the nation's milk.
Even in recent days China's milk standards have come under criticism after the China Daily newspaper reported that the regulations are the weakest in the world, and suggested they were created as a favour for major dairy producers.
In 2010, the country's dairy regulators adjusted the bacteria count to 2 million per ml of milk, up on the 500,000 per ml allowed previously. The minimum requirement for protein content was also lowered from 2.95g per 100g of raw milk to 2.80g. According to China Daily, the ministry said that it lowered the standard after it found that some 90% of raw milk produced in North China was below the 2.95g standard.
However, the country's standard protein content for pasteurised and sterilised milk can be no lower than 2.90. The China Daily said that the difference in standards between raw and pasteurised milk shows that China permits the adding of material, which may pose dangers to milk security.
"The 2008 melamine-contaminated baby milk scandal was precisely caused by dairy firms adding the chemical into watered-down milk powder to cause it to appear to have a higher protein content," Sang Liwei, a food-safety lawyer and the China representative of the NGO Global Food Safety Forum told the newspaper.
Concerns about the safety of local milk is driving consumers to look abroad for safer options. Earlier this year, the BBC reported that parents in Hong Kong were calling for the country to consider punitive tax on exports as locals were struggling to buy infant-formula due to traders from China crossing the border in search of supplies.
Click here for part two of just-food's Category crunch on China's infant formula market, which looks at NPD.
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