Petah Marian

Category crunch: Infant formula in China - part 2

By Petah Marian | 30 June 2011

There have been a number of food safety scares around infant formula in China

There have been a number of food safety scares around infant formula in China

In part two of just-food's category crunch on China's infant formula sector, Petah Marian reports on how product development has reacted to fears over product safety.

Infant formula manufacturers have quickly seized on consumer fears over food safety, with companies focusing their development on premium and imported products. 

International players have convinced consumers of their products' safety by importing products, while a number of local companies have entered into joint ventures with international operators. 

Heinz, which entered the China's infant nutrition sector in April 2010, has already attained a “strong brand value” in the country, the company's CFO Art Winkleblack said in November last year. Heinz imports its infant range from the UK, as, the Heinz finance chief said there is a "greater trust in imported formula".

The strategy seems to be paying off. Heinz said at a recent analyst day that it reported some 41% organic growth in its infant nutrition business in China during the 2011 financial year. The company said that innovation has driven sales growth in the division, with the company launching products like baby food pouches and SuperGold infant formula over the past 18 months. 

Late last year, Chi-Med launched a joint venture with US organic food manufacturer Hain Celestial to produce a co-branded Earth's Best and Zhi Ling Tong organic infant formula, produced under agreement with an independent Swiss supplier.

According to Euromonitor, organic infant formula debuted in late 2009, developing after the melamine scandal when consumers in China were more willing to pay a premium for safe products. 

However, organic baby food remains relatively nascent in the country with "consumer awareness of the organic concept still relatively low in China", says Euromonitor. Indeed, Perille emphasises that the impact of organic formula on the industry has been minimal to date. 

"The prime focus remains on the overall quality and safety of ingredients and products, where consumer sensitivity remains very high," says Perille.

Synutra, which was at the centre of the allegations of premature breast development, also launched an imported product, called Super Series, in March this year. It is produced and packed in Denmark and was developed as part of moves to "rebuild trust" in its products, the company said on a recent conference call. 

More recently, Chinese infant formula manufacturer Ausnutria Dairy announced plans to take a majority stake in Dutch dairy group Hyproca. Ausnutria said it plans to integrate Hyproca's global fine resources and develop its global competitive R&D capability. It also plans to build Hyproca's processing capacity to provide the Chinese market with "safer and higher standard infant food".

While the focus seems firmly on imports, Mead Johnson, the country's largest infant formula manufacturer by market share, told just-food that it plans to open its next Paediatric Nutrition Institute (PNI) in Guangzhou. Perille says that the move marks a strategic shift for the company from "Made in China" to "Researched, Developed and Made in China". 

"With this new facility, Mead Johnson will be in an even stronger position to meet the fast-growing needs of the local marketplace by collaborating with top Chinese research and academic institutes to bring superior and tailored nutritional care to infants and children in China," says Perille.

Nevertheless, despite the company manufacturing most of its products in China, the company is clearly aware of consumer concerns over the safety of local milk, with Perille emphasising that all of its product ingredients, including dairy, are sourced outside the country.

Online retail has been another beneficiary of concerns over the safety of local products, developing as consumers have lost confidence in local milk powder following the spate of milk contamination incidents in recent years. According to Euromonitor, milk powder was the second most popular category for overseas online purchase in the first half of 2010, with a 17%, behind cosmetics with 28%. 

Euromonitor found that young mothers are turning to the Internet to buy infant milk powder to take advantage of the lower prices and wider selection offered by these sites. The research firm says that retailers are ahead of the game in online dairy sales, as most manufacturers tend not to sell directly to consumers. Bright Dairy are some of the few dairy companies in China that are actively selling online through dedicated sites, or through stores on Taobao Mall – a Chinese website similar to eBay.

Consumers are turning to other non-traditional channels to buy baby formula. According to Euromonitor, sales of infant-formula through non-grocery retailers like mother and baby stores became "rather signficant" in China during 2010, taking over 20% of total baby milk formula sales.

Synutra is is one manufacturer to take advantage of this emerging trend. It said that it launched My Angel in December last year under a new business model, where it sells directly to mom-and-pop stores and speciality baby stores. Synutra said that because it distributes the products directly, it can sell to them at a much lower cost, providing them with a higher incentive to sell the product. Between the launch and the company's financial results announcement earlier this month, the company said that it had gained distribution in some 3,000 stores.

Sectors: Baby food, Dairy, Emerging markets, Food safety, Multichannel, NPD & innovation

Companies: Mead Johnson, Synutra, Hain Celestial, Bright Dairy

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