Retailers are rationing the amount of infant formula consumers can buy in markets including Hong Kong, Australia and now the UK. The move has been prompted by the huge demand for infant formula in China, with consumers buying products overseas and shipping them home. While you might think rationing comes in response to supply shortages, in actual fact it is more likely an attempt to protect the power to price the same product differently in different markets. Katy Askew reports.
The strong Chinese demand for infant formula manufactured overseas has taken a global dimension. The story hit the headlines this week, with news the UK’s largest multiples – Tesco, Asda, Sainsbury’s and Morrisons – have moved to limit the number of baby milk cans that can be purchased to two cans per consumer per day.
Aptamil and Cow and Gate maker Danone confirmed the restrictions were being put in place to prevent some consumers bulk-buying for “unofficial exports”. According to reports, restrictions have also been placed on Nestle-manufactured baby milk. However, a spokesperson for Nestle emphasised it has not “asked retailers” to “place limits on the amount of infant formula consumers can purchase”.
Frequently, Chinese people living, travelling or studying abroad will buy formula and send it to friends and relatives on the Chinese mainland. There has also been a sharp increase in formula sales on websites such as Alibaba, which handled transactions totalling CNY1.1trn (US$170bn) last year – more than eBay and Amazon combined.
And the UK is not alone: rationing of baby milk was first imposed in Hong Kong in an attempt to limit the amount of formula being shipped back to the mainland. Retailers in other markets – as far afield as Australia and the Netherlands – have followed suit.
Why are Chinese consumers going to such extraordinary lengths to purchase infant formula overseas?
Following the melamine contamination scandal of 2008, Chinese consumers lost faith in the safety of domestic brands.
Infant formula tainted with melamine killed six babies and sickened around 300,000 more. The scandal uncovered a relatively widespread practice, where Chinese milk was mixed with melamine to boost its protein content and hide the fact it had been watered down.
Thousands of tonnes of infant formula was recalled. The majority of companies that became embroiled in the scare were Chinese firms. Starting with Sanlu – which was part owned by Fonterra – the scandal drew in more than 20 firms, including Beijing Olympics sponsor Yili and leading dairy Mengniu.
As a result, consumers also increasingly looked for other, safer, sources of supply. In 2008 sales of baby formula in Hong Kong jumped 36% on 2007 levels as consumers on the mainland purchased formula on the island.
Since 2008 domestic infant manufactures have been plagued by further safety scares. In December 2011 and July 2012 Mengniu and Ava Dairy recalled baby formula containing high amounts of aflatoxin, a carcinogen produced by fungus in cows’ feed. Meanwhile, in June 2012 Yili Group recalled its baby formula after “unusually high” levels of mercury were detected.
Domestic infant formula manufacturers are clearly facing some considerable challenges, as consumer trust in domestic Chinese brands has largely been undermined. Indeed, data from MarketResearchReports.Biz suggests the baby milk output from Chinese companies fell 12% to 550,000 tonnes in 2010, while international companies increased their share of the market to almost half of sales.
Even as sales from domestic companies remain under pressure, the overall market for infant formula is witnessing strong growth. The market for infant products – led by baby formula – boasted a growth rate of around 20% in 2010, rising to a value of CNY154bn.
Projections from Chinese analysts Research in China suggest this expansion is expected to continue with a growth rate of “over 15%” anticipated into 2015, when the sector is expected to reach a total value of around CNY370bn.
China’s population growth is slowing: in 2000-2010, the population increased by 0.57% in 2000-10, half the rate of 1.07% in the previous decade. According to figures released by the World Bank, the Chinese population grew at just 0.5% in 2011.
On first inspection, it might seem that this low birth rate does not bode well for the health of the infant formula market. But, when this growth is coming from the world’s largest population of 1.34bn, even this low growth rate represented a not inconsiderable 6.72m more mouths to feed in 2011. In addition to this, 2012 was the prestigious year of the dragon – when Chinese families believe it is lucky for a child to be born – which is said to have resulted in a short-term jump in the birth rate.
While China’s population growth is limited by the state’s one-child policy, the government is working to balance the need to restrict population growth against the looming threat of a rapidly ageing population. People above the age of 60 now represent 13.3% of the total population, up from 10.3% in 2000. In the same period, those under the age of 14 declined from 23% to 17%. A continuation of these trends will place greater burdens on those of working age and government schemes such as pensions and healthcare.
Responding to these concerns, there are signs the Chinese authorities could ease the one-child policy. Already, rural Chinese and ethnic minorities are allowed more children and – significantly – families where both parents are only children are exempt.
Although it slows population growth, it is worth noting that the one-child-policy is not necessarily “bad news” for international infant formula manufacturers. In a society where many families are confined to having just one child – in the “4-2-1” model – Chinese families are willing and able to spend more to secure supplies of foreign-made formula, which is perceived as being safer. Rising incomes and fewer dependents mean Chinese consumers are increasingly able to to purchase more expensive brands manufactured overseas.
Another factor driving growth of the infant formula market is that an increasing number of Chinese women have entered the workforce. According to academic Wang Yanqiu’s 2011 report, Women’s Rights Protected and Gender Awareness Enhanced, 72% of women between the ages of 25 and 34 with children under six work – only 10% below the figure for childless women of the same age group.
All these factors mean that the total value of Chinese infant formula sales is on the rise. However, according to Eurominitor International’s head of packaged food research, Lamine Lahouasnia, value sales growth is outstripping volume expansion. Euromonitor figures reveal in 2012 volume sales were up by 19%, while value sales increased by 25.7%. This divide is significant, Lahouasnia argues, because it demonstrates that unit prices are increasing by a “substantial amount”.
“A lot of the international brands – led by Mead Johnson who are at the premium end of the market – are pricing higher and higher to benefit from this demand. To the point where it is becoming preferable for Chinese consumers to buy products abroad and take them home. They are shelf-stable goods, so consumers are stocking up,” Lahouasnia tells just-food.
In mainland China, the average unit price in 2012 totalled US$24.60. This compares to the average unit price of $20.40 in western Europe and just $16.30 in the UK, Euromonitor figures reveal. However, this comparison is somewhat skewed, with cheaper domestic brands in China drawing down the average price. When comparing brand-for-brand the price difference is greater still.
“This is a classic example of price discrimination,” Lahouasnia suggests. “All the big infant formula companies want to be able to set prices in different parts of the world that maximise their profits.”
Unsurprisingly perhaps, food manufacturers do not share this assessment.
Nestle has distanced itself from the suggestion it is trying to control supply into China in order to milk the local infant formula market. “Nestlé has not asked retailers to place limits on the amount of infant formula consumers can purchase,” a spokesperson for the baby food giant emphasises.
The spokesperson says Nestle is working to meet China’s demand for dairy products through “various initiatives”, such as the group’s dairy institute in Shuangcheng.
“The Nestle baby products marketed in China are manufactured in China, using both local and imported milk. All Nestle baby milk products are produced according to the highest safety and quality standards, irrespective of the place of manufacturing. We have strict quality controls for our raw materials in place.”
The company was unable to comment further on the price differential between China and other markets. When contacted by just-food, both Mead Johnson and Danone declined to comment on pricing policies in China.
However, Mead Johnson has indicated it expects pricing in China to remain stable. Speaking after the release of the group’s full-year results in February, Mead Johnson president and CEO Stephen Golsby hinted the company was not planning to lower prices in China, noting the company “is not seeing a significant worsening of that promotional environment between the last couple of quarters”. He added: “We are certainly not driving it.”