Earlier this month, Mead Johnson, the US infant formula group, issued a profit warning due in part to waning sales in Asia and, most notably, in China, one of the company's most important markets.
Low dairy costs and downbeat consumer sentiment, combined with ongoing efforts by domestic companies to sharpen up their acts, have sparked fierce discounting in China's infant formula sector. And Mead Johnson's sales have suffered as it weighed up when and how to enter the fray and decided to fight on price in a more limited fashion than some of its competitors
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When the Enfamil maker announced its second-quarter and half-year results yesterday (23 July), the bulk of the questions from analysts were, unsurprisingly, on Mead Johnson's performance in China, on how long the company saw the competitive conditions persisting and on its recent investments in areas such as baby stores and e-commerce.
Among Mead Johnson's management, there was some uncertainty about how long the heightened competitive activity will last but the company's senior team insisted it was investing for the long term in what president and CEO Kasper Jakobsen described as "still a fantastic opportunity".
"Even a slowing China, even a China that will grow between five and five percentage points in 2022 would still add more economic activity on an annual basis than the rest of Asia Pacific and Latin America added together," Jakobsen insisted.
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Mead Johnson's sales in Asia fell 10% in the second quarter, leading to a 5% decline across the first six months of the year.
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By GlobalDataThe company endured a fall in its market share in Thailand, pointing to "very low" consumer confidence in the country and "pricing pressure" from competitors.
Mead Johnson also saw a reduction in cross-border trade from Hong Kong, an effect of the civil disturbance in the market this spring.
However, it was China that was the key Mead Johnson's performance in Asia, with Jakobsen saying competition increased "across all price segments and channels".
"It is clear to us that a combination of a slowing China economy, a proliferation of brand offerings, and the lower dairy costs have created a competitive environment where both wholesalers and consumers are being tempted with special deals," Jakobsen said.
Mead Johnson's revised earnings per share guidance has given some indication of how difficult the company believes it is to forecast when the intense promotional activity could ease, discounts the group avoided until the last weeks of the quarter when it made some moves on its locally-made products.
"As we find it difficult to determine how long the current price discounting in China will last, the wider-than-usual earnings per share range contained within our recently revised guidance reflects this level of uncertainty," Jakobsen said.
It did not stop analysts asking Jakobsen to weigh up when conditions could improve.
"I do think that as people begin to lap these extraordinary windfalls that they've had from depressed dairy costs, we expect that most businesses, or at least most of our large competitors, will again begin to run the businesses in a more normal fashion where both sales and profit growth becomes sort of an objective. I think at the moment there is a lot of spare gross margin kind of slushing around in the system that people are choosing to spend in different ways, and some people are clearly choosing to spend it on price discounting, both at the consumer and at the wholesale kind of level," Jakobsen said.
However, JP Morgan analyst Ken Goldman pointed out there had been another recent slide in global dairy costs. "The global milk this month just dropped another 20% sequentially or so. So, when do you think that lap actually takes place? Why will we not see continued irrationality and prices drop even more for the next six months or so?" Goldman asked, noting the slowing Chinese economy is also having an impact on consumer confidence and therefore on company behaviour.
"We can't say how long that will last. And you're right, I don't want to set any expectation of a sudden kind of reversal of that trend from one quarter to the next, but I do think – or our perspective is that dairy prices are either at or near their natural lows, and you are probably going to begin to see some culling of herds around the world if dairy prices do not rebound. So, one way or another, we believe there's more risk associated with dairy prices looking forward than there is opportunity. So, sometimes, depending on how companies recognize costs, sometimes over the next few quarters people will begin to substantially lap these low dairy costs," Jakobsen said.
In effect, all Mead Johnson can do is make efforts to position its Chinese business for longer-term growth. Jakobsen said the shift seen in recent quarters towards imported products at the expense of China-made lines and towards baby stores and e-commerce continues.
He pointed to recent launch of Mead Johnson's imported line of Enfa-branded products. The sales of the new range failed to offset the pressure on the company's local formula but Jakobsen said: "By the end of the just completed quarter, this line represented approximately 20% of our total sales in mainland China."
The Mead Johnson chief also noted the growth in the company's e-commerce sales, which he said had outstripped the growth of the category. "According to external sources, our e-commerce sales are up by nearly 70% on the year prior. Admittedly, this is still off a relatively small base, but it shows we are figuring things out and moving in the right direction," he said. "Our progress with priority partners like Tmall and JD.com was also satisfactory with year-to-date growth ranging between 40% and 90%. Enfagrow, our growing-up milk, for instance, is the fourth most searched-for line item on Tmall."
Jakobsen said it is "very difficult" to give figures for the performance of the category in bricks-and-mortar stores but suggested sales had fallen. "I have only a moderate level of confidence in the numbers that you get by the different monitoring services in China. But if you will like accept that hedge, I don't want to appear not to answer the question. We think that the supermarket channel, the sort of FMCG channel likely declined somewhere in the mid-single digits."
China's growing population – and the increasing wealth of its citizens – has made the country an attractive market for international infant formula makers.
The market should remain front-of-mind for those companies – and others in the food industry.
However, it is becoming increasingly clear growth is becoming harder to come by and businesses like Mead Johnson are having to adapt – rapidly.
