Chinese consumers are importing infant formula from Western markets – and prompting limits on what local shoppers can buy – as there is a lack of brands “premium enough” to meet demand, Danone has argued.
Retailers in markets including the UK, Germany and Australia have placed limits on infant formula purchases amid a spike in demand from China. Chinese people living, travelling or studying abroad are buying formula and sending it back to friends and relatives on the Chinese mainland. There has also been an increase in formula sales on websites such as Alibaba.
Danone is one of the largest Western infant formula companies operating in China. Its business there is boosting its performance; yesterday, Danone reported first-quarter sales that came in ahead of analyst expectations and pointed to higher demand for its baby food in emerging markets.
After the results were announced, analysts were keen to hear Danone’s thoughts on the trend for formula on sale in Western markets to be shipped over to China. Danone CFO Pierre-Andre Terisse claimed Chinese consumers, after a spate of safety scares, remained wary of domestic infant formula and he said there was, as yet, an under-supply of “premium” products in China.
“The whole melamine crisis is four years years old but there have regularly been some cases – accurate or inaccurate – reminding consumers that conditions of safety are not standardised in the country. Consumer need for safety remains extremely strong, combined with a need for consumers to trade up and to get the best products they can for their child. This is probably as we talk today testing a lack of capacity for products that will be premium enough for the Chinese consumer, hence what you have been seeing in various markets and in particular in Europe,” Terisse said.
The Danone finance chief was asked why the company did not simply export more infant formula directly from Europe to China. However, Terisse brushed off the suggestion. “I don’t think the answer should be to export to China for several reasons. One, there are capacity constraints. We are constrained by capacity globally. Two, regulation. And three, the only sustainable answer to demand is through a local portfolio,” he said.
“Any other answer could become fragile and difficult. What we are interested in is to build brands, equity and categories for local consumers, not to take advantage of cultural phenomena that may or may not last. That’s why I insist so much on what is important is that demand has increased and that our priority has to be to segment our portfolio locally.”
Last year, Danone relaunched infant formula brand Dumex in China and Terisse said the company would continue to “strengthen” its product range to try to meet increased local demand.
“Our priority remains to segment our portfolio in particular to get stronger in areas we are not sufficiently strong,” he said. “We have Dumex and Dumex Gold. We are strong in the mainstream and super-premium. We had a version of Dumex that was probably not sufficiently high in value and that is why we renovated that a year ago. We have been strengthening our speciality offer this quarter and we will take other initiatives in the coming months and quarters to keep strengthening our portfolio. This is the only reasonable answer to address a market that will keep adding strong dynamics for the years to come.”
In the first quarter of the year, Danone’s like-for-like baby nutrition sales were up 17.1%, helped by “booming” sales in Asia-Pacific and especially China. Danone said a later Chinese New Year helped sales but maintained the underlying performance of its infant formula business in the country was “very good”.
Terisse signalled comparisons with last year could mean growth could be slower in the second quarter. In the second quarter of last year, Danone relaunched Dumex in China.
However, he added: “This market has been extremely strong in terms of value growth for the past three to four years, keeps being extremely strong and perhaps even stronger. The demand is there. There’s no sign of weakness in demand; on the contrary, we see signs of a strengthening of demand. There is no sufficient offer available in this market to meet this demand – hence all the phenomena you have seen in the past few days and weeks.”