New Zealand dairy giant Fonterra and Chinese baby food maker Beingmate are to form a joint venture to try to capitalise on the exponential growth of the Chinese infant formula sector. With each partner bringing something very different to the table, Katy Askew suggests the new entity is well-placed to leverage the strengths of both companies.
Fonterra has entered into a “global partnership” with Chinese baby food firm Beingmate. As part of the agreement, Fonterra will take a stake of “up to” 20% in Beingmate. Following regulatory clearance, Fonterra and Beingmate will then establish a joint venture to buy Fonterra’s Darnum plant in Australia. The venture will also establish a distribution agreement to sell Fonterra’s Anmum brand in China.
The two companies plan to work together to capitalise on increasing demand for infant formula in China. According to Research and Markets, a research provider, China’s market for infant formula milk powder is valued at almost CNY62bn (US$10bn).
Growth is expected to continue apace as the birth rate looks set to rise in the country.
The Chinese government has relaxed its one child policy as it works to balance the need to restrict population growth against the looming threat of a rapidly ageing population. Chinese regulators have moved to allow couples where one person comes from a single child family to have two children. These couples will join the ranks of other consumers allowed more than one child – rural Chinese, ethnic minorities and families where both parents are only children.
Shares in some infant formula makers in China have come under pressure this year, with some industry watchers suggesting the relaxation of the one-child policy has not had the expected rise in births. However, in the main, analysts believe births are set to rise, with other demographic trends coming into play and contributing to an increase in demand for infant formula.
“China is expected to see its fourth baby boom, since more and more… Chinese born between 1980 and 1989 have married,” Euromonitor International says in a report. “This upcoming baby boom will have a significant impact on baby food, especially on standard milk formula, which is intended for newborn babies.”
According to Euromonitor, the Chinese infant formula sector is expected to generate a CAGR of 14% in constant value terms over the next five years.
And Beingmate’s distribution infrastructure in China seems likely to have been one of the key factors attracting Fonterra to set up a venture, Torsten Stocker, a partner at A.T. Kearney’s Asian consumer goods practice, tells just-food.
“My sense is that for Fonterra, this is mostly about distribution which would take a lot of time and money to build on their own. Beingmate, as the leading domestic infant powder brand, is a good partner,” he suggests.
Beingmate also benefits from strong quality credentials, a significant plus in a country where safety is the single biggest issue shaping the discourse around infant formula.
China’s dairy sector has been plagued by safety scares including the notorious 2008 melamine contamination scandal, when contaminated infant formula killed six babies and sickened around 300,000 more.
The melamine crisis prompted high-profile recalls, drawing in around 20 domestic dairy companies. It also undermined consumer confidence in the safety of domestic infant formula and dairy products in general.
Further scandals and recalls have done little to encourage consumers. In 2009 and 2010 fresh incidents of milk formula contaminated with melamine were also uncovered and more recently unusual levels of mercury content was found infant milk formula powder.
While confidence in domestic brands remains weak, Beingmate boasts an impeccable safety record. The company remains free from the stigma of past recalls and its safety and quality perception among Chinese consumers is high as a result. It also offers products at more affordable price points than major international manufacturers such as Mead Johnson or Nestle.
More recently, international firms have found themselves in the spotlight over their position in the infant formula sector.
In the last year, international formula manufacturers made headlines in China when anti-trust authorities handed out the biggest ticket in the country’s history after the competition watchdog found a number of companies – including Nestle, Mead Johnson, Danone, FreislandCampina, Abbott Laboratories and Meiji – guilty of price collusion.
The reputation of international brands was dealt a further blow when Danone’s Dumex brand was charged with bribing hospital employees to promote its products to the parents of newborn babies. Meanwhile, earlier this month, Heinz was forced to recall baby cereal products found to contain excess levels of lead.
Most damaging of all for the reputation of international baby food makers was Fonterra’s own recall of concentrated whey powder, an ingredient used in infant formula production. While the recall turned out to be a false alarm and Fonterra acted quickly to contain the situation, it nevertheless prompted a number of consumer-facing recalls in the region – notably Danone’s Dumex brand – and dented consumer trust.
As a result, Fonterra has struggled to gain traction for its own recently-launched formula brands.
James Roy, associate principal at China Market Research Group, observes: “Fonterra’s own formula brand has not performed well so far. Fonterra’s reputation in China has really suffered in the last year from its role in the botulism scare and even though the Fonterra milk was safe (the bacteria found in samples was shown to not be botulism-causing), most consumers’ instinctive reaction has been to distance themselves from Fonterra or any brands associated with them, like Danone’s Dumex brand for example.”
Roy suggests associating itself in consumers minds with Fonterra may not be beneficial for Beingmate. “A brand like Beingmate may want to keep the relationship low-profile, because even the hint of a safety scandal can stay with a brand for a long time in China, especially with formula.”
What Fonterra lacks in distribution and consumer reputation it makes up for in spades when it comes to raw milk supply and back-end expertise.
Chinese agricultural dairy production has traditionally consisted of small-scale farms, who sell raw milk to middle men, who in turn supply Chinese dairies. The complexity of the chain provides room for poor standards or – as it transpired – unscrupulous behaviour, fraud and adulteration. It also limits production levels. Last year, raw milk production in China increased by just 2%, significantly trailing growth in demand.
The Chinese government has urged the domestic sector to play an active role in modernising on-farm dairy production and promoting large scale farming techniques.
According to Beingmate chairman Wang Zhentai the tie-up with Fonterra will strengthen Beingmate’s ability to source raw milk internationally, while also augmenting its work to strengthen China’s domestic milk production capabilities.
“Fonterra has built a rich experience in supply chain management and dairy farm technology… and farm development,” the chairman said at yesterday’s signing ceremony. “The partnership will support Beingmate to align with government requests to improve farm construction…At the same time Beingmate will open distribution networks in China and recommend appropriate products to Chinese consumers.”
Fonterra CEO Theo Spierings added: “We will look for future possibilities when it comes to farming in China… It is about the future: developing the Chinese dairy industry, Chinese farms… We should be willing together to look at the Chinese milk pool and Chinese milk development.”
The venture brings together the highly complementary qualities of each group. The combination of Fonterra’s experience in supply chain management and milk production, together with Beingmate’s brand strength and distribution, leaves the new entity well positioned to expand in China’s high-growth infant formula sector.