Beijing moved to strengthen safety standards in infant formula production earlier this year

Beijing moved to strengthen safety standards in infant formula production earlier this year

Nestle has expressed confidence new directives implemented by the Chinese government to regulate the country's infant nutrition market will help restore consumer confidence.

John Cheung, regional president for Nestle's Wyeth Nutrition business in Greater China, said the rules, announced by the Beijing in May, have "a very broad scope" and a "very far reaching impact".

Beijing moved to strengthen safety standards in infant formula production earlier this year when nine government bodies - including the country's Food and Drug Administration - united in an attempt to standardise and reorganise the domestic infant formula sector.

The regulations, aimed at raising the quality and safety standards of the entire infant formula category, include source control, manufacturing standard requirements, import registration, channel distribution requirements, as well as an intention to encourage consolidation in the industry.

"Various government departments are still reviewing this new policy ... we expect it will be published in the next few months with the necessary details and then we will commit to comply to all these new requirements," Cheung told Nestle's investor conference in Switzerland yesterday (30 September).

"Generally speaking we see these upcoming changes, as a positive for the industry and the category, as they will help reinstall the consumer confidence."

Chinese dairy manufacturers were rocked by the 2008 melamine contamination scandal that sickened around 300,000 babies and resulted in the deaths of six infants. Further high-profile safety scares have hit domestic dairy manufactures, resulting in a drop in consumer confidence in Chinese-made infant formula.

Cheung said once the regulations are fully in place, there may be more consolidation in the industry.

"Over time, we expect many smaller or weaker players will likely be eliminated or be merged into the bigger companies and these stronger companies, these stronger players, will remain in the market and likely to gain share.

"We are confident that the Wyeth nutrition business and also Nestle Nutrition are well positioned to capture market opportunities. Cheung said both businesses first have to adhere to "strict" compliance standards and have "strong" commitments to a marketing code and food safety requirements.

Cheung emphasised Nestle's commitment to food safety and the increasing need to offer a product to a growing class of consumers are seeking quality infant nutrition products.

"Quality is really the backbone of the brands of our business. The consumer has radars very highly placed in the quality perception area. We have been practising [food safety] throughout our history, which in many ways has been inspired by our heritage in pharmaceutical operations."

Premium and super premium have been the two fastest growing products in the infant formula category, with premium sales growing at a 18% compound rate over the last five years, making up 70% of the total category value, according to Nestle. Super premium has grown from a much smaller base but has almost doubled in size every year in the last five years. Both make up 88% of the total category.

"We are seeing going in the future these two segments will remain very important in the years to come," Cheung said, adding the driver of this premiumisation being the attitude of the Chinese parent.

"Generally speaking they are more cautious and feeling insecure about what nutrition, food, or brand they are feeding their babies. The series of food safety issues didn't help and has made families very selective in terms of what they feed their babies."

However, he added: "Between the two businesses, we have one of the most comprehensive portfolio offerings in the marketplace. With a strong brand image, centering on advanced science and quality, and both businesses strong share positions."

In August, Nestle's Wyeth Nutrition business was among eight infant formula manufacturers operating in China found guilty of price fixing.

Beijing said the investigation was prompted by escalating infant formula prices. According to government statistics, Chinese infant formula prices have increased by 30% since the melamine contamination scandal of 2008. Chinese consumers pay significantly more for infant formula products than consumers elsewhere and the price differential is more pronounced at the premium end of the market.

The Chinese government imposed fines totalling CNY669m, the largest anti-trust penalty in the country's history.

Nestle was spared a fine. The Chinese government said the company was exempt because it took the "initiative to report the situation on monopoly agreement, provided important evidence and carried out rectification".