Since the 2008 melamine scandal, the domestic milk market in China has had a hard time gaining the trust of consumers. This scandal hurt all players, including Mengniu Dairy and Yili Group, which are the leaders of the Chinese dairy industry. The crisis has also influenced milk consumers in China to purchase milk and dairy products from foreign brands, putting domestic milk producers at a disadvantage.

Even though the evolving consumer perception of milk in China has facilitated the growth of import and consumption of foreign milk firms, domestic milk firms in China still have dominated the milk market in China. Moreover, according to MarketLine, regarding the overall performance, from 2015 to 2019, the milk market in China has seen steady growth. Thus the market is anticipated to grow in the future.

Analysis of China’s milk market

Size of China’s milk market is gradually expanding

Chinese consumers are turning on to the nutritional benefits of milk products. It is predicted that sales of milk in China will increase from 11.95 billion RMB  (2018) to 12.83 billion RMB (2022), with a 1.7% annual growth rate. Thus the market size of milk in China has been growing steadily.

Data source: MarketLine, China’s milk market value  

Consumption of milk in China has grown four-fold since 2012

Due to the influence of traditional dietary habits and limits of economic development, in 2012, each person consumed only about 6.39 kilograms of milk per year. That was only about 1/3 of the consumption of an average Indian consumer and 1/10 that of a western consumer. Moreover, the consumption of powder milk in China ranks at the top among all countries in the world.

In 2020, the consumption of milk in China has increased remarkably. The consumption of milk per capita is projected to reach 28 kilograms in 2020 and 41 kilograms in 2030.

Data source: Qianzhan, Sales volume of the milk market in China  

Data source: Qianzhan, Sales value of milk in China 

Domestic brands regain trust, imported milk in China faces fierce competition

According to IBISWorld, due to the preference of milk consumers in China and demand for middle and high-end milk, import volume has increased steadily. With rising import volume and average prices, the import value of milk in China reached $5.47 billion in 2019, with a YOY growth of 7.6%.

Since domestic Chinese milk brands have dedicate to enhancing the quality of milk they are replacing some import products, which has led to a declining proportion of imports in the domestic demand of milk market in China. As a result, in 2019, imported milk represented 7.5% of domestic demand for milk in China, which decreased from 10.1% in 2014.

Data source: IBISWorld, Import partners of milk market in China (2019)

The price of milk in China is gradually increasing

Overall, the price of milk in China has a rising trend. The increasing price attributes to the rapid growth of consumption of milk in China and the condition of upstream supply chains.

Data source: ruzhipincy & chyxx, Price evolution of milk in China  

UHT milk is the most popular milk among Chinese consumers

The product segmentation of milk in China is mainly categorized into liquid milk and powdered milk. They are similar in terms of nutrients while different in terms of taste, form and price. Powdered milk consists of the process of dehydration and evaporation, which helps preserve it. Even though it loses its flavor during the dehydration process, it perfectly matches with smoothies, tea and filtered coffee. On the other hand, fresh milk contains more nutrition than powdered milk does and has a better taste.

Liquid milk is the largest segment. According to MarketLine, UHT milk is more popular with milk consumers in China, in contrast to  western consumers who prefer fresh liquid milk. 

The milk powder segment in China targets both adults and infants. According to Nielsen China, online and offline milk powder sales reached 1.8 billion RMB and 1.5 billion respectively in 2018. Specifically, according to IBISWorld, the infant milk powder segment has been experiencing rapid growth and highly profitable. The market size reached 175.5 billion RMB in 2019 and is expected to reach 216.3 billion RMB by 2024. With the implementation of the two-child policy, demand for infant milk powder is increasing rapidly.

Consumption of milk powder for adults, especially for families, has been rising steadily. Online shopping has facilitated the growth of this segment. The milk powder for adults in China is in the early stage of the product lifecycle by considering its market scale and profitability. Hence the market size of this segment remains stable as milk consumers in China lack product awareness.  

The supermarket is the most important distribution channel in China’s milk market

According to IBISWorld, Supermarkets are the largest suppliers of milk and offer the most extensive product range. Regarding food wholesalers, the majority of milk brands in China sell their products in local regions. They often establish wholesalers in the target province and are in charge of recruiting and managing distributors in tier-two or three cities. Regarding food retailers convenience stores, the revenue generated from these channels has experienced continuous growth. Other markets, including online shopping, have been developing rapidly in recent years. Milk consumers in China purchase milk from online shops due to its convenience and low prices.

Data source: IBISWorld, Distribution Channels of Milk Market in China (2019)

‘Safety’ is the number one concern of Chinese milk consumers. Consumers from different regions and segment groups in China consume milk in different ways.

Regarding Chinese consumers’ attributes of milk, consumers from developed areas value “safety first” while consumers from less developed regions value quality and brand. In general, both of the groups value safety certification, shelf life, nutrition, taste, brand organic, etc.

Families are likely to purchase a large amount of milk on the weekends and prefer fresh milk; office workers and students prefer buying liquid milk with paperboard packaging in the morning.

Milk packaging in China

Regarding the packaging of milk in China, paperboard, plastic and glass are common materials. Domestic milk firms in China mainly outsource both paperboard and plastic packaging to foreign firms such as Tetra Pak, PrePack and SIG Combibloc. Paperboard packaging is normally used in preserving both UHT milk and fresh milk. It helps preserve the quality of the milk. Thus the quality is less likely to go bad easily and can preserve more than six months. Plastic and glass are used in preserving fresh milk. The size of the packaging is mainly standardized as 250 ml.

Photo source: Zhihu, Packaging of milk in China

Chinese prefer to purchase milk in smaller packaging than westerners do. Owing to the habit of some milk consumers in China, it is convenient for students and office workers to carry a single serving size of milk with them. Secondly, the established supply chain and logistics in China cannot support the transportation of fresh milk perfectly. Hence milk with paperboard packaging is more prevalent in the milk market in China as it can preserve for an extended period and does not require a sophisticated logistics system to preserve the quality.

Does being lactose intolerant stop Chinese from consuming milk?   

Even though research shows that Asians, including Chinese, are mostly lactose-intolerant, it does not affect the sales of milk in China significantly. According to Zhihu, their consistent milk consumption can be explained by:

1. Consumers perceive that a small amount of milk would not aggravate the discomfort of lactose-intolerance, and this might is another reason why packaging milk in small portions popular in China.
2. Some people do not even realize they suffer from lactose-intolerance since their symptoms are not obvious.
3. Some of them perceive that the ingredients of Chinese milk are adapted to eliminate the effect caused by lactose-intolerance, that is, ingredients such as water and chemicals are added to dilute the lactose.

Brand analysis of China’s milk market

Domestic Chinese milk brands are making a return after being tarnished by scandals

Among the top 10 dairy milk companies, 9 are local brands. Mengniu, Yili, Guangming, Wangzai, Wandashan, Weita Milk and Chenguang are the top seven Chinese domestic brands with two producers originating from Taiwan and Hong Kong. Founded in 1999, Mengniu is the largest dairy milk company in China. It possesses over 20 branches in 15 provinces and exports its products to the US, Canada, Mongolia and South-East Asia. Although it maintains a good reputation, not even Mengniu can escape from the melamine scandal. As a 2008 Olympic Games sponsor, Yili, the second-largest dairy company, has explored a new way to market its product and overcome the scandal.

In 2020, Mengniu and Yili have further consolidated their leading positions in China’s milk market, with more than 30% of market share. Both firms have developed differentiated milk products to capture market share aggressively.

Data source: Euromonitor, Company Shares of Milk in China (2019)

Yili has focused on high-end milk products   

Regarding milk products of Yili, even though the company has developed a variety of milk products, it aims to focus on its high-end segment. Its representative product, Yili and Satine, according to Euromonitor, earned the third (7.4%) and fourth (6.7%) place respectively, in the brand shares of milk product (2019). Satine is positioned as the high-end brand as Yili has significant investment across different business units. Shuhua is a lactose-free product and targets lactose-intolerant consumers. School milk targets students and solely sells to schools in China while QQ Star targets kids in China. Wei Ke Zi is the flavored milk product.   

Photo source: Yili, Milk Products of Yili

Mengniu has adhered to the product differentiation strategy

Likewise, Mengniu has developed various milk products to tailor to different competing with Yili. According to Euromonitor, Mengniu and Deluxe are the pure milk and earned the first (7.9%) and second (7.4%) place respectively, in the brand shares of milk product (2019). Deluxe is the high-end pure milk product. Future Star targets kid consumers in China while Xin Yang Dao targets lactose-intolerant consumers. Mengniu has also developed flavored milk such as Zhen Guo Li and Nai Te. Zhe Zhi Niu Lai (This cow) is the milk product that targets university students in China. Mengniu has also expanded its product lines to fresh milk (i.e. Shiny Meadow and Green House) which Yili has yet to focus on.

Photo source: Mengniu, Milk Products of Mengniu

Influence of COVID-19 and future trends

The outbreak of COVID-19 has affected lots of industries, including China’s milk market. The pandemic has affected each business unit of the milk’s value chain in China.

The value chain of China’s milk market goes through the process of feed manufacturing, milk production, delivery, processing, packaging, distribution, and lastly, retail. Regarding the upstream business, the pandemic has affected the production of

As the situation is gradually recovering in China, so does the milk market. The government in China has implemented particular policies and subsidized the business involved in the milk’s value chain. These actions have sped up the recovery of the milk market in China.

Fresh liquid milk is the future trend

In 2019, the trend of “freshness” has emerged in the milk market. Key industry players such as Yili and Mengniu have started to invest in fresh milk significantly. The outbreak of Covid-19 may foster the growth of this trend since the National Health Commission of China recommends drinking milk. The government sector has suggested that drinking milk is an effective method to strengthen the immune system. Moreover, milk consumers in China have consistently perceived drinking milk as a means of calcium supplement and skincare. Thus it helps to cure osteoporosis and facilitates growing height. As more and more milk consumers in China value nutrition, taste and freshness, nutrition-added fresh liquid milk is likely to be the future trend in China’s milk market.

Photo source: Sohu, Nutritious and fresh liquid milk sold in small cartons in the Chinese market

Creative product packaging can draw consumers’ attention

In comparison with traditional promotion tools such as advertising and direct selling, creative product packaging is a cost-effective tool to promote products and is popular with young consumers. Hence more and more companies have gradually applied this tool.

Photo source: adquan, Creative product packaging of New Hope Group’s milk 

New Hope Group has applied the creative product packaging successfully on its flavored milk. With this co-creation strategy, New Hope Group has collected a list of mottos via social media in China and printed them on the packaging. Meanwhile, the company has designed cute images that are popular among Chinese consumers. These mottos reflect the current Chinese culture and humor of self-depreciating optimism, or passive acceptance of negativity. They are relatable and effectively tease young people’s lifestyles in a lighthearted way.  

In conclusion, China’s milk market is experiencing a steady growth in market size and revenue. Domestic milk brands have occupied the majority of the market share. Currently, the dominant milk product in this market is long-life liquid milk. Nonetheless, with the changing consumers’ perception and improving logistics, fresh liquid milk is projected to be the future trend in this market. Moreover, creative packaging is a useful promotional tool to appeal to milk consumers in China effectively.

Author: Amelia Han

Listen to 100 China entrepreneur stories on China Paradigms, the China business podcast

Listen to China Paradigm on Apple Podcast

This article The milk market in China: consumers’ perception of nutrition has sustained the growth of this sector is the first one to appear on Daxue Consulting - Market Research China.

Growth of the dairy market in China

It is widely acknowledged that the dairy products in China serve as the pillar in people’s livelihood. It is a highly integrated industry, and at the same time, it extends from the primary industry (agriculture) to the secondary industry (food processing industry) and the third industry (distribution and logistics). China, as one of the world’s largest economies, has witnessed the surge of the dairy industry, prompted by economic, social, and many other factors. Even though the whole development history is not very long, the status of dairy products in people’s dietary structure has been greatly improved.

The dairy market in China has witnessed the steady and substantial growth since the beginning of 1990s and even with the widespread 2008 Melamine scandal which disrupted consumer confidence as well as domestic production, the market only experienced a short period of turbulence after the Chinese government has taken several measures, including cracking down on illegal producers, enforcing new regulations to better ensure the safety and quality of domestic dairy products in China.

At the same time as the restructuring process, China is becoming the most dynamic sector in the global dairy market, and the whole industry has gradually shifted from scale growth to quality upgrading.

How the market overcomes the obstacle of lactose intolerance in China?

It is true that Asian people are genetically predisposed to lactase-deficiency (around 85% of people suffer from lactose intolerance in China). Older generations of Chinese who were not used to consuming dairy products in their diets are also mostly lactose intolerant.

But this lactose intolerance in China will not slow down the market. First, because to create new generations of milk drinkers, society and government have taken several measures. Today Chinese babies are born with the ability to make lactase, which is the enzyme needed to digest the milk vector and which is lost as they grow older. Moreover, children do not stop drinking milk as they grow up and therefore continue to produce this enzyme.

Government support of the dairy industry

Within the health community, new official nutrition guidelines were also issued recommending that more dairy products should be consumed in daily life. Health professionals, hospitals, and clinics have also been trained to explain to parents that their children need a lot of milk.

In 2000 the government also launched a program in all schools to give each child a cup of free milk.

Plant based milks are hugely popular in China

Finally, this problem could easily be overcome with all the alternatives that exist: plant-based milk in China. Indeed, from 2015 to 2017, plant-based milk sales increased by 17%. More and more companies are setting up production lines for plant-based milk in China. For example, the Swedish oat milk brand Oatly has recently opened an office in Shanghai and deployed a new Chinese character for ‘vegan milk,’ that is to say, plant-based milk in China.

Finally, the industry knows that fermenting milk helps break down lactose, so new yogurt products are also marketed to overcome lactose intolerance in China.

The Chinese government is playing an important role in increasing dairy consumption in China

The current party in China has included the consumption of dairy products in its 13th five-year plan. It identifies one of its top priorities the transition from small herds to larger industrial farms to supply its population of 1.4 billion people with milk. Official dietary guidelines recommend consuming three times as much dairy products in China as people do today.

But on the other hand, China imports a lot of dairy products, and it has some impacts on the country’s domestic dairy producers such as the decline in sales revenue and profit margins. In this respect, the government is also taking action to regulate dairy imports, which of course has an impact on the brands and products consumed by Chinese people.

Stricter regulations on infant formula

For example, to restrict the import of infant formula milk powder, in early 2018, the China Food and Drug Administration take measures called ‘‘Measures for Administration of Registration of Formulas of Infant Formula Milk Powder’’ that stipulate that infant formula milk powder that has not been registered in China is not allowed to be sold in China, and the Certificate of Registration of Formulas of Infant Formula Milk Powder must be obtained according to the law for imported infant formula milk powder to be marketed in China.

A bit later in 2018, the Announcement of the State Certification and Accreditation Administration on Renewing the Registration of Overseas Manufacturers of Imported Infant Formula Milk Powder in China specified that the registration of overseas producers of imported infant formula milk powder in China would be valid for four years and should be renewed upon expiration. These policies should curb the entry of more than 80% of the 2,000 brands of powdered infant milk imported into China.

The expanding middle class are consuming more dairy products in China

The national economic strength undoubtedly plays a significant role in the rapid development of the dairy industry in China. The below chart illustrates the change in per capita disposable income of urban and rural residents from 2013-2017, which implies the improvement of living standards. Consumers now have higher purchasing power and are increasingly exposed to international trends, resulting in a shift in lifestyles that towards westerners.

In 2018, among all dairy products, milk powder imports contributed nearly 70% to the import value of dairy products in China. The milk powder imported includes infant formula milk powder in China, raw milk powder, etc. This is, therefore, by far the most consumed by the Chinese.

Growing health awareness accelerates dairy consumption in China

Another main factor that influences dairy consumption in China health consciousness. Dairy products are a useful source of protein, calcium, vitamins, and several minerals. Yogurt in China is one emerging category that has catered to Chinese’s growing health awareness as it is often believed to help digestion and strengthen the immune system.

As a result, yogurt has experienced explosive growth which fueled the general demand for dairy products in China. According to China Daily, the total yogurt sales in 2017 has overtaken the milk sales for the first time in the country. As depicted in the below chart, the total domestic yogurt sales have risen by 108.6 percent from 2013 to 2017, whereas milk sales grew by just 18 percent in the same period.

Top yogurt brands in China

Furthermore, among all yogurt sector, the ambient yogurt maintains the fastest growth. The craze initially started with the Momchilovtsi(莫斯利安) from Brightdairy in 2009 then Yili introduced Ambrosia(安慕希) in 2014, successfully generating buzz in the country.

The ability to store and transport at room temperature is the major characteristic of ambient yogurt, which seems quite exotic to westerners since they consider chilled yogurt as mainstream. Nevertheless, being able to transport at room temperature is important as the chilled chain infrastructure is still underdeveloped in China. This entirely new wave is providing a wider distribution network as well as offering convenience for both retailers and consumers. At present, this sector is soaring not only in the dairy market in China, but also in the food and beverage market. It is mainly targeted at young consumers, both male and female.

One famous example is Yili Ambrosia(安慕希), a brand of yogurt in China, it is endorsed by Chinese popular actress Angelababy and has been the title sponsor of the popular Chinese reality show Running Man(奔跑吧兄弟). It took advantage of the celebrity effect to achieve precision marketing and dramatically increased the total sales and now occupies the first place in that segment.

Since the scale as, as well as the technology of chilled chain, all need to be improved; ambient yogurt will continue to appeal to Chinese consumers. The potential for the total yogurt sector is still huge, and the trend would probably lie in the innovation of flavors and premium products.

Will the emerging cheese market in China be the next leader?

Apart from the outstanding performance of yogurt  in China, cheese also drove the growth of the dairy market in China. We have already carried out research in Cheese market in China in 2013 and 2015 and compared with that time, Chinese consumers are becoming more and more aware of the health benefits of cheese. Cheese and other dairy products in China which are rich in protein and calcium offer a more nutritious, healthy choice over many other food types. This segment is thus receiving attention from dairy players.

The cheese market in China now relies heavily on import, and the import volume boosts steadily throughout the years. In terms of top three cheese exporters to China in 2017, they are New Zealand (55,329 tonnes), Australia (20,012 tonnes), and the United States (12,841 tonnes).

Despite consistent sales growth for cheese led by great interest in the particular category, the per capita consumption is still lagging behind compared with other neighboring Asian countries, let alone with western standards.

In all, the cheese market in China is expected to continue positive retail value growth over the following years. Cheese’s development in China is still in the early stage with low per capita consumption. And most cheese offered in China is processed cheese, such as Anchor(安佳) from the Netherlands, La Vache Qui Rit (乐芝牛) from France. With Chinese, especially Millennials’ lifestyles, moving towards westerners, the demand will keep increasing. The adaptation of the taste of cheese will be crucial, and future improvement would also lie in the spread of relevant knowledge, information, digital marketing campaigns, and health-focused innovations.

Various channels intensified the battle between domestic and import dairy products in China

Since the central government has approved the universal two-child policy, the demand for milk as well as other dairy products in China will still be strong in the following years. China dairy major players have accommodated to diversified needs and implemented innovation constantly, including Mengniu Dairy, Inner Mongolia Yili Group Co Ltd, and Brightdairy for East China. However, fierce competition has been intensified with the appearance of foreign brands. According to Mintel, Chinese consumers still prefer imported products over domestic ones, due to the lack of trust and price advantages.

Traditional supermarkets and hypermarkets

The battle between domestic or imported dairy products in China has been escalated due to the development of e-commerce. Online platforms have played a critical role and facilitated the efficiency of the distribution network. In addition to that, the trend of cross-border commerce or buying dairy products by Daigous (代购) is becoming more popular, especially among younger generations in urban areas.

Against the slow-down in the growth of the overall FMCG, the import dairy market in China still maintained rapid growth. The official import figures of dairy products for the first quarter of 2018 has shown an increase by 15.3 percent year-over-year, with rises for Bulk and Packaged Milk, Whole Milk Powder (WMP), Whey, Skimmed Milk Powder (SMP) and Infant formula. Chinese dairy imports exceeded 750,000 tonnes between January and March 2018. Moreover, China’s growing appetite for high-value-added products resulted from increasing disposable income suggests that consumers are putting more emphasis on quality.

Unequal regional dairy consumption in China implies room for improvement

Regarding Chinese consumers’ consumption structure and occasion, generally different consumers have their preferences. Common consumption occasions include between-meal snacks, at breakfast, as a dessert or beverage. According to a survey by Mintel, 40% of Chinese consumers said that they consume yogurt at least once every day and 17% consume lactobacillus beverage at least once every day while contrarily, those figures were only 15% and 11% in 2013.

Different age groups dairy consumption

The research also found that different age groups of consumers have their preference. For example, young white-collar workers prefer one-time consumption and 1-2 bottles each time and are willing to choose a slightly more expensive product. Family members have a fixed habit of dairy consumption, a dozen or more each time, favoring fruit-flavored or calcium-rich products for children and paying more attention to promotions.

Regional differences in dairy consumption

The acceptance of dairy products in China also varies from region to region. Northwest China is the main raw milk production area in China, so the per capita consumption is higher. In addition, the per capita consumption of Beijing, Tianjin, the Yangtze River Delta region and the Pearl River Delta Region is also higher due to the prosperous economy. But in Northeast China, Southern China, central China, and southwest China, the consumption of dairy products per capita still has room for improvement. Also, it is evident in China that UHT milk is way more popular than pasteurized milk. The market performance of the latter is fairly limited to coastal cities because of its relatively short storage period and costly logistic expenses.

Likewise, more and more urban residents are willing to purchase premium products and therefore generating a lucrative niche market for certain high-end products for instance, organic, low fat, low calorie, since health concern remains the key determinant in consumer purchasing behavior. Whereas, in rural areas, a large proportion of people used to drink soy milk, but now more are inclined to consume milk since the penetration of dairy advertising as well as sales channels.

Distribution is also facing great evolution. First-tier city consumers are more inclined to shop online, and the penetration rate is over 90 percent while the lower-tier city or rural area only got 20 percent as the penetration rate for dairy products in China. Such kind of unequal distribution implies that dairy manufacturers have to extend their sales channels, both offline and online, which is a great challenge for retailers.

Future trends continue to flourish China’s dairy market

In general, the dairy market in China has entered a slow-speed development stage and is shifting from scale growth to product upgrade. The dairy consumption in China has been fluctuating in the past decades, yet the market’s total value and volume are huge. Compared with western countries, China possesses a large amount of fresh milk and milk powder but a lower amount of butter and cheese.

There already exists a great number of domestic and foreign brands in the market and several local brands such as Shengmu(圣牧), Xinxiwang(新希望), Junlebao(君乐宝), Huishan(辉山) are rising quickly. These young brands took share from the largest players and therefore lowered the concentration of the top brands. It is true that low loyalty is a macro trend in FMCG as consumers are provided with even more options. As a result, dairy players need to identify and cater to the diversified yet changing needs of consumers and apply the corresponding marketing strategy.

Pan Gang, chairman of the Yili Group, once said that there are only two kinds of people in his eyes. One is a person who drinks milk; the other is a person who doesn’t drink milk. And his wish is to convert the second kind of people into the first kind – “milk drinking man” – people who enjoy milk nutrition and health. For the time being, it is still domestic dairy companies that are leading China’s dairy market. With the booming economy, accelerated globalization and rising health concern, future product transformation will be mainly focused on the flavors, quality, and variety of the products. Premium product market will thrive under the selling points like organic, health, and nutrition. The ambient products stick to be the mainstream in the following years, while chilled ones are also expected to expand its market share to better foster the growth of China’s dairy market.

Daxue Consulting has a robust background in the dairy industry in China:

Our market research team has already carried out research for the cheese industry and various food and beverage industries in China. If you want to know more about these industries in China do not hesitate to contact us at dx@daxueconsulting.com

Make the new economic China Paradigm positive leverage for your business

This article The dairy market in China will be the world’s largest by 2022 is the first one to appear on Daxue Consulting - Market Research China.

1. Babies from the baby-boom back in the 1980s have become parents themselves in the last decade. They have caused another, bigger baby boom, because of the cancellation of the one-child-policy. In 2016, the universal two-child policy came out, meaning that every couple in China can have 2 children. This is considered as the loosest birth control policy in China since 1980.

2. The Chinese emerging middle class is holding stronger purchasing power. According to a study from McKinsey & Company, 76 percent of China’s urban population will be considered middle class by 2022 and the number was just by 4 percent back in 2000.
   

Chinese consumers trust international brands/products. Western brands are a symbol of high quality and above all safety. When it comes to pregnant women and their unborn babies, Chinese consumers are more than ready to spend a fortune on high-quality products and services. This means huge opportunities for international brands on the Chinese prenatal care market.

Chinese expecting mothers literally wear radiation-protection-clothes in their daily lives

The Chinese maternity clothes market is showing a steady growth trend. Chinese mothers-to-be are searching for maternity clothes which are both good looking and functional. Fabric without noxious chemical substances is especially popular for Chinese pregnant women.

Source: FORWARD THE ECONOMIST

You cannot be too cautious when it comes to babies for Chinese consumers. Due to the high internet and smartphone penetration in China, Chinese people are deeply concerned about the harm that digital devices can do to human bodies, especially for unborn babies. Although modern medicine hasn’t yet proven the harms of radiation caused by moderate use of digital devices like smartphones or PC, many Chinese expecting mothers choose to protect their unborn babies from this potential danger. There are lots of brands for pregnancy clothes claiming to have an anti-radiation function. One of the most popular brands is Joiue Varry from France, which claims to use silver from the Cannington silver mine producing their maternity clothes.

Screenshot: product from Joiue Varry on Tmall achieving over 7.000 sales volume for the last 30 days

Chinese consumers prefer international pregnancy supplements, formulas are not only for babies but also mothers-to-be

On popular social media platforms in China like WeChat and Weibo, pregnancy supplements are one of the most discussed topics among prenatal care posts. Most recommendations are international brands/products, which have a better reputation among Chinese consumers.

Besides vitamin and DHA, supplements like calcium and iron are also common on Chinese prenatal care market. There are also pregnancy supplements which are untypical in many other countries like pregnancy formula. There is a big market of pregnancy formula in China since many Chinese consumers believe that pregnancy costs the expecting mother a lot of nutrition, especially calcium. Thus, taking in lots of dairy products helps mother-to-be to get enough calcium and other nutrition. There is a big market of pregnancy formula in China.

Screenshot: search results for “pregnancy formula” on Tmall

Searching for “pregnancy formula” on Tmall, the majority of the popular brands popping out are international like Anmum from New Zealand and Nestlé from Swiss land. Chinese consumers have been deeply concerned about dairy safety ever since the Chinese milk scandal in 2008 which was a widespread food safety incident and sickened nearly 300,000 infants according to CNN China. Besides New Zealand and Switzerland, other popular places of origin for pregnancy formula are Australia, Holland, Ireland, French and Denmark.

High-end maternity and infant hospitals show huge opportunities for international investors on the Chinese market

Although most pregnant Chinese women do their prenatal check-ups in local public hospitals, more and more Chinese consumers are turning to high-end private clinics because of the better consultation and all-around services. In the recent years, Chinese public hospitals are generally overloaded and have a poor reputation due to several reasons, e.g. ridiculously long waiting time, relatively low level of hygiene etc.. The Chinese emerging middle class is seeking out private medical facilities to take care of the expecting mothers and their unborn babies.

International maternity and infant hospitals/clinics are much more expensive than local Chinese ones. However, an increasing number of Chinese patients are having private medical insurance/maternity insurance, which can cover a good amount of hospital costs. There are also other reasons for expecting mothers in China to choose private hospital over a public one, for example, Chinese public maternity and infant hospitals are not allowed to reveal the gender of an unborn baby by law.

From all this, it follows that high-end maternity and infant hospitals show the great lucky chance for international investors on the Chinese market.

E-reputation plays a crucial role in the brands’ development in China: Using Chinese social media and e-commerce platforms to engage with consumers

Chinese consumers are becoming more conscious of health and beauty, naturally, expecting mothers care about both their appearance and health during their pregnancy. Therefore, the demands of organic skincare and cosmetic products (specialized for pregnant women) have been consistently increasing on the Chinese market.

Source: chyxx.com

The other peculiarity of Chinese cosmetic and skin-care products market is the extremely strong impact of brand reputation on Chinese consumers’ purchasing behaviors. “The word-of-mouth and e-reputation play crucial roles in the development of a brand.” Says Thibaud Andre, project leader of Daxue Consulting. As we can see from the related terms of “pregnancy skin care” on Baidu Index, almost all highly related terms are about brands or brand recommendation. The term “international” and “top international brands” are also among them, the only brand can be seen on Baidu Index is Clarins from France.

Source: Baidu Index, related terms by searching “Pregnancy skin care products”

Clarins’ Chinese brand name “娇韵诗” (jiao-yun-shi) sounds slightly similar to the original name, in which “娇” means tender, delicate and dainty, “韵” means rhyme or charm and “诗” means poetry. These three Chinese characters build a romantic and beautiful aura for the Chinese consumers and indicate the products can provide them with graceful body and skin. Taking Clarins as a successful example of an international brand on the Chinese prenatal skincare market, they are active on the Chinese social media, cooperating closed with celebrities and KOLs. Clarins has over 680,000 followers and 27 posts in October 2018 on China’s No. 1 micro-blogging social media platform Weibo. The brand Clarins has also its own official website and is present on almost all important Chinese e-commerce platforms. Which is a crucial factor as online stores have been the most important distribution channel for Chinese consumers to purchase pregnancy cosmetic products.

Clarins’ presence on Chinese e-commerce platforms

In 2016, the sales volume of online retail has exceeded offline stores for pregnancy cosmetic products in China

Although Clarins is selling a wide range of skin care products, because of its clear and trustworthy brand image, Clarins’ product is famous for its safety and effectiveness. Its pregnancy care product like stretch-mark-reducing lotion is especially popular on the Chinese market. On China’s first and biggest Q&A platform Zhihu, when coming to questions like “How to prevent stretch marks?” Products from Clarins are being mentioned frequently.

Screenshots from Zhihu: this answer got 1.1K “agreed” and 271 comments in the last 3 months

Chinese families spend a tremendous amount of resources on education: starting with fetal/prenatal education

Chinese parents are willing to invest more financial resources on the well-being and development of a child than an average western parent. That starts long before the baby gets born, Chinese consumers are purchasing products which they think can accelerate the intellectual development of their unborn babies. There is a saying in China which has been used very often in the marketing campaign of many children/baby-related products: Winning at the starting line(赢在起跑线). Given the high concerns of Chinese parents over the academic performance of their children, products claiming to have educational function always capture Chinese parents’ attention, especially which from an international brand.

One of the most popular brands for fetal/prenatal education product on the Chinese market is a brand called BabyPlus from the USA. Its prenatal education system claims to create proprietary and age-appropriate rhythms for fetuses, which deliver many benefits, for example, ability to build consistent sleeping habits and reaching developmental milestones well.

Screenshot: BabyPlus official Tmall shop sold 369 pcs of this prenatal education device (costs around USD 200) in the last 30 days

 Chinese consumers are looking for international high-quality prenatal products

In 2016, the Chinese government carried out the universal two-child policy, which is considered as the loosest birth control policy in China since 1980. Along with the Chinese emerging middle class’ increasing purchasing power, China’s prenatal care market shows a high-speed growth. No matter if it is a prenatal supplement or cosmetic product specialized for pregnant women, “Chinese consumers obviously prefer international brands.” Says Xiaonan Hua, Project manager of Daxue Consulting: “Part of the international niche brands are popular among Chinese consumers, but their products generally unavailable in China.” E-commerce platforms have been an extremely important distribution channel for international brands to engage with Chinese consumers and market different kinds of prenatal products. Since e-reputation plays a crucial role in the brands’ development in China, leveraging Chinese social media and cooperating with celebrities/KOLs are important for international companies, who want to enter the Chinese market.

Author: Chencen Zhu

Daxue Consulting regularly helps clients optimize their China business development by offering database building assistance, market research, simple distribution analysis, and SEO.

Our staff has strong experience in business development in Shanghai, Beijing, and other tops 50 China’s cities.

This article International brands are in demand on China’s prenatal care market | Daxue Consulting is the first one to appear on Daxue Consulting - Market Research China.

The size of the baby care industry in China growing with a high speed, with its compound annual growth rate expected to reach 14.5% by 2023, according to Mintel China. Considering China’s recent easing of the One Child Policy in 2016, accompanied by the growing household income of Chinese families, the baby care market has seen consistent growth through both online and offline distribution channels. While foreign brands are still favored, especially when considering baby milk formula, domestic competition in China’s baby care market has tightened in the recent years, including sales of other child care related products such as strollers, bottles, baby seats, cribs, and baby clothing.  Although offline channels such as supermarkets and dedicated baby care stores are still the main distributors, the growing online presence of the industry both in e-commerce and social media seems to point to a promising future for the baby care market in China.

[Source: qianzhan statistics “Market size of the age 0-3 baby care market”]

E-commerce enables more foreign baby care product purchases

Purchases of baby care products through e-commerce are a big source of growth for its market in China. Cross-border baby care related sales online are some of the most popular for Chinese consumers, in addition to beauty and food products. Consumer reports record a higher frequency in the usage of baby products, especially those relating to baby personal care, such as body powder, lotions and creams, baby insect repellent, and shower gels. The preference for baby care is still imported products, and the huge e-commerce platform in China enables consumers to purchase foreign brands through cross-border e-commerce.

Half of the baby-related products are being purchased through e-commerce

Online channels now represent 50% of mother and baby retail market value, increasingly competing with physical stores for consumer attention in the baby care distribution market in China. As of 2017, this half of the market is dominated by Tmall, with 47% of the gross online merchandise volume, followed by JD at 27%. Combined, JD and TMall held 37% of the total online sales of baby-related products.

There is a growing market for baby durables, such as a stroller and baby seats in China. Online sales of strollers have reached 2.6 billion RMB on Taobao/Tmall in 2017. During the same period, China produced 16.41 million safety seats for cars, a 10.97% rise compared to 2016 to meet the increasing demand. In the baby bed, cribs, and basket sectors, the total online sales of baby beds have reached 1.16 billion RMB on Taobao/Tmall in 2017. According to a consumer report study by Mintel, 41% of consumers have purchased baby durables (strollers, car seats, beds) through online websites such as TMall and JD. While the unit price of international brands in the baby safety seat and stroller segment is 2500-4000 RMB, nearly three times the price of domestic brands 800-2000 RMB,  foreign international brands are still favored over domestic, with 47% of consumers preferring imported brands for safety reasons.

Over half of consumers report to using general e-commerce websites for baby clothing, followed closely by malls/department stores, specialized mother and baby stores, and supermarkets. Consumer reports of increased frequency in online shopping indicate the growing potential and competition of online markets versus physical offline stores. Among all kinds of baby care products consumption on e-commerce platforms, baby toys sales lead with 55% bought through online sales, diapers at 52%, clothing at 50%, and durable goods at 41%.

Mother and baby dedicated stores dominate the distribution of baby care products, such as lotions, creams, and shampoos, while in general stores such as supermarkets, consumption mainly consists of baby diapers and other toiletries. Yet the online distribution of all products has steadily increased, especially in the sectors of baby toys and clothing, where they are already taking over physical stores as the main channel of distribution.

Therefore, online channels are essential to foreign brands

“For the baby food processors, foreign brands are still better perceived. For 10 to 20% of the customers, the country of origin is a crucial criterion (especially for offline customers). As a result, many brands label themselves as International brands but are manufactured in China.” – Tim Favre, Daxue consulting project leader

Due to consumer sensitivities regarding the safety of domestic baby products, the baby care industry is a highly competitive category for imported goods. Online distribution through websites like TMall and JD offer convenient access to foreign product brands. An insight into the growing e-commerce market for baby products, Daxue project leader Tim Favre offers that: “For the baby food processors, foreign brands are still better perceived. For 10 to 20% of the customers, the country of origin is a crucial criterion (especially for offline customers). As a result, many brands label themselves as International brands but are manufactured in China.”

On Zhihu, a Chinese community question-and-answer site, the most concerned questions relating to baby care is regarding the brand of baby care products. Two foreign dominate the baby care market competition. Johnson & Johnson is the leading company in the baby personal care market in China with a market share of 12.8% in 2017, followed by Pidgeon with 7.8%. German brand Sanosan is also in competition for market share with domestic brands Frog Prince, Giving, and Yumeijing. Consumers are willing to pay for baby care products to ensure quality and safety, and brand is one of the most important associated keywords in online baby-related item searches. Foreign companies also participate in strategic branding through name translation to portray a warm, protecting presence to the Chinese consumer.  贝亲beiqin（Pigeon）literally translated to “baby affection,” is strategically translated phonetically to create a semantic element.

帮宝适 bangbaoshi (Pampers) uses the same strategy meaning “help baby feel comfortable.” it displays a direct message of their products’ comfortable advantages and effective functions.

With increasing competition among Chinese companies, there is also a promising future for the growth of the domestic baby care market

Due to a history of national scandals relating to China’s baby care industry, most infamously regarding baby formula, the domestic sector of the baby care market is still under backlash. While foreign companies still dominate the Chinese baby care market, Chinese companies have slowly been climbing its way up in sales. New demands from a population of parents with higher income also pose future opportunities for Chinese companies. As more parents are willing to spend their income on pampering their children, there is a higher demand of child-specific products, thus offering one angle for domestic companies to enter the Chinese market.

[Source: Taobao “Frog Prince shower gel”]

Baby-dedicated stores are prominent in China

“Most of the sales hold that offline store is still the dominant channel for baby care products and half of the sales consider it’s still growing.”—Yixiang Zhang, Daxue Consulting project manager

While online penetration is the main source of distribution for foreign brands and other segments of baby goods such as toys and diapers, offline distribution channels are still the dominant channel for the baby care market. Places such as supermarkets and dedicated baby stores are very attractive to consumers as they are able to set into the store and experience products for their children first hand.

[Source: Daxue Consulting]

Online Presence and Social Media Influence facilitates its popularity

Like many brands hoping to win over the Chinese consumer, companies in the baby care industry are using WeChat as a marketing platform. In addition to allowing product selection and e-commerce to be easily accessible, WeChat allows users to establish a sense of intimacy with its users. Leyou, a popular Chinese baby care company, utilizes interesting and humorous blog articles offering knowledge and advice on taking care of your child. In one section of an article, Leyou discusses the  “四要四不要” or “four wants four don’t want” to help your child get through the “可怕的两岁” or “frightening two years of age.” While the style of the article is rather personable and casual, it regardless offers serious advice, such as “Must be calm, don’t be violent.” In another article, Leyou provides an attention-grabbing headline- “child poops in Kindergarten, because we didn’t teach….” The article also utilizes a humorous subheading using colloquial language: “Speaking of baby pull a stink stink.…” Leyou’s entertaining yet informative strategy to attract consumers demonstrates how one company may utilize WeChat as an effective marketing platform for the baby care market.

[Source: Johnson&Johnson WeChat account]

[Source: Johnson & Johnson WeChat]

Baby-dedicated websites, WeChat Official accounts, Weibo KOL’s

Weibo, China’s most popular microblogging website, has also allowed baby care brands to utilize the Twitter-style blog site through blogging on relevant baby care industry related information, and reblogging posts from its followers. Some of the most popular Weibo accounts by baby care influencers include Stokke China and US Baby.

[Source: Weibo, StokkeChina]

[Source: Daxue Consutling]

[Source: mobile application, muyingzhijia]

[Source: homepage, beibei]

Increasing online searches on questions regarding baby care

Baby related questions have also gained attention on Zhihu, with the most inquiries on the brand of product to buy, as well as baby care and safety of baby care products. Community members have also written extensive articles on certain popular topics, such as “Baby Beds, What is the Safest Way to Buy Them?” Other articles include how to choose baby formula, and informative articles on the baby’s development of their senses during their first few years, amongst many others.

[Source: Zhihu “Baby cribs, how to make the safest purchase”]

Author: Julia Qi

Daxue Consulting is can help get your baby care products into the Chinese market

Daxue Consulting has carried out projects in the baby care industry and has experience with product launches and market entry procedures like brand naming and competitor analysis. To know more about the baby care industry in China, do not hesitate to contact our project managers at dx@daxueconsulting.com.

This article China’s baby care market: Why do Chinese parents love foreign products? | Daxue Consulting is the first one to appear on Daxue Consulting - Market Research China.

A Weibo (China’s biggest microblogging platform) post on Oct. 9 has been reposted 13,000 times and got almost 4,000 comments: Someone found Chinese characters written on the bottom of several Enfamil formula packagings in a Canadian Walmart. Why is this seen as a scandal in China? This article explains how this causes Chinese netizens to lose trust in the popular overseas purchasing model Live Daigou (直播代购zhibo Daigou).

Screenshot of Weibo.com

Chinese characters written on formula packaging in Canadian Walmart

Chinese characters written on formula packaging in Canadian Walmart

What is Daigou?

Daigou, the literal translation of “purchasing on behalf of”, refers to a person living outside of China mainland or living in China mainland but travelling often overseas, who set up an unofficial reselling activity aiming at residents of mainland China. Often used platform by Daigou agents is Taobao, but also WeChat and Weibo are used for more social-oriented e-commerce. Daigou has been extremely popular in China over the last 10 years, the figure from Daigou Hunter shows: almost two hundred million CNY (around 28 million USD) of Daigou sales revenue has been made on Taobao.

Daigou Hunter: Daigou sales revenue on Taobao from last month

Why Is Daigou So Popular in China?

The activities scope of Daigou can be roughly divided into 2 parts: luxury and non-luxury products. While the main reason for purchasing luxury products from Daigou is price attractiveness by avoiding Chinese high tariffs and more buying options, non-luxury products from Daigou means authentic foreign products with better quality. Baby food is one of the most popular product categories of Daigou, e.g. according to Daigou Hunter: Aptamil’s Daigou sales revenue of last month on Taobao has reached over 10 million CNY (around 1.5 million USD) Chinese parents have been deeply concerned about baby food safety ever since the Chinese milk scandal in 2008 which was a widespread food safety incident and sickened nearly 300,000 infants according to CNN China.

What Is Live Daigou?

With the huge economic benefits this business model has brought, Daigou market has become a hotbed for fakes in recent years. High internet and smartphone penetration in China, strong awareness of technology among Chinese consumers as well as the large demand for authentic overseas-products have bred a new Daigou model: Live Daigou. Live Daigou refers to Daigou who makes short videos of the purchasing process and posts on social media or sends directly to the buyer, in which he/she marks the ordered products to prove the authenticity.

Screenshots of Taobao: Canadian Enfamil Daigou with free service of making video clips/marking products

However, Live Daigou can no longer prove authenticity, as a lot of fake Live Daigou come onto the market. Faking shared location on social media and/or making set-upped purchasing videos are common scams for fake Live Daigou. In this Weibo post, Chinese netizens believe that the products with Chinese characters on them are from some Live Daigou, who hasn’t really purchased the formulae, but only marked them and made a fake video of the process. Actually, this is not the first time someone overseas discovered Chinese-character marked formula and posted on social media. With time passing, Chinese consumers have lost their faith in Live Daigou either.

Screenshot: WeChat post of Hipp formula with Chinese characters on packaging in a German drugstore

Screenshot of Taobao: results coming out by searching for “altering WeChat shared location”

Opportunity for International Baby Food Brands

This widely-spread post on Weibo reveals the Chinese consumers’ distrust of Daigou / Live Daigou. On the other hand, the Chinese government has strengthened the customs policy and inspection, which directly leads to a much higher cost for Daigou. Although several international brands such as Aptamil have already built their official online shop on Tmall and have a big sales volume, many Chinese consumers are still searching for safe purchase channels for high-quality baby food from overseas, that provides a huge opportunity for many other international baby food companies.

Screenshot of Aptamil official store on Tmall: 100% original from Germany

Daxue Consulting has taken a special interest in researching the baby food market in China

As seen in our previous baby food market analysis, not only is the baby food market is experiencing rapid growth but due to scandals similar to the Canadian Walmart one, Chinese parents have a proven preference for foreign baby food.

To know more about China Baby Food Market in China, please don’t hesitate to contact us.

This article Chinese Characters Found on Formula Packaging in Canadian Walmart Exposes Shopping Scandal is the first one to appear on Daxue Consulting - Market Research China.

Main Brands and Products of Baby Food owned by Nestle in China

Nestle has made quite a lot of acquisition of other baby nutrition companies so as to ensure its dominance in the global baby nutrition market. The most well-known ones include Wyeth and Gerber. It is also said by some critics that Nestle’s world food empire is established by acquisition.

Wyeth, one of the global top 500 enterprises, was founded in 1926 and headquartered in Collegeville, Pennsylvania, USA. Wyeth is the world’s largest research-based pharmaceutical and health care products companies, having a leading advantage in prescription pharmaceuticals, non-prescription health care products and nutritional fields. Nestle acquired Wyeth in April, 2012.

Gerber, from America, having over 80 years of professional experience, is a brand who has withstood the test of time and people. Its raw materials are from global high-quality farms whose soil has passed strict safety tests, and ensured no harmful pesticide residues. Gerber was acquired with 5.5 billion U.S. dollars by Nestle in 2007.

Recent trouble in Brand image

Recently, some of Nestle’s milk powder was “downsizing”, with the prices remaining the same. Hence a great number of consumers questioned Nestle milk powder “disguised price rise”.

Nestle China official responded by claiming “Nestle downsized in order to put a spoon in the milk powder box to facilitate the consumers.” To justify the cost, the direction added: “The improved milk powder craft and quality had their corresponding cost.”

However, facing the situation of imported milk powder price rises and regarding to the quality and safety perceived of Nestle’s products, we can expect to not see any true consequence on Nestle’s performance. Finally, in order to compete with other international Brands, Nestle announced willing to slighlty reduce its price.

What is the influence of recent year incident for Nestle in China

Before the event of excessive iodine, the company’s performance was very good, especially the middle and low level products. At that time Nestle was one of the most Cost-effective domestic milk powder brands. This scandal could impact this leading position in China. Therefore, Nestle develop relevant product and communication strategy to gain advantage of this situation in the customer’s mind.

Nestle milk powder technology and R & D technology are of great advantage. Nestle promised to not use any genetically modified ingredients in their products in Europe, not in Asia. Nestle now mainly produces in Heilongjiang. Though the company uses domestic milk source, its production management is very stringent hence many consumers still find it trustworthy.

Amy Wang

http://www.bbc.com/news/business-23176085

http://www.scmp.com/news/china/article/1275122/nestle-danone-cut-chinese-infant-milk-prices-amid-probe

This article How Nestle reacts to the events on Baby food market in China is the first one to appear on Daxue Consulting - Market Research China.

Karicare is a leading infant formula brand of the global maternal and child nutrition experts Nutricia.

Karicare has been founded in 1896, developed by Dr. Truby King with the incentive of “Help fatigued mothers, protect cute babies”. After a hundred years of development, Karicare has now become the market leading brand in New Zealand and Australia, and the most preferred brand for mothers in New Zealand and Australia.

After the scandal on infant formula in China, Australia’s and New Zealand’s milk was quite popular in the Middle Kingdom. However, 2013’s scandale let the brand drop to disapear from China’s market. It is a good example of the difficulty to etablish in China when it comes to baby safety.

Why New Zealand and Australia’s milk was popular in China

New Zealand’s climate is pleasant, with enough sunshine and very lush plantation. The forest area accounts for about 29% of the country’s entire area, and consequently the ecological environment is very satisfying. Under the situation of fertile land and the government supported natural protection, New Zealand is a country emphasizing industries like agriculture, animal husbandry, tourism and education. The New Zealand government strictly controls industry, resulting in very little air pollution.

At present, New Zealand is the only country that produces milk where epidemic of avian influenza, foot-and-mouth disease, and mad cow disease has not yet appeared. Moreover, animal husbandry adopt complete stocking way, unlike the United States and other countries feeding with provender, resulting probable containing of hormones or genetically modified particules in the milk. Therefore the undoubted quality of the New Zealand animal husbandry is world-famous, renowned in Europe, the United States and other countries.

In China, as the safety of food industry’s product, in particular baby food, has become such a sensitive topics, this milk is going to be very attractive. Majority of China’s imports came from New Zealand, which counted for 25% of its exports.

Market Research China on Karicare’s development

Karicare is a sub-brand of NUTRICIA under infant formula company Danone, owning an astounding 72% market share in New Zealand. In August, 2011, Karicare officially entered China market, and set up sales channels on Taobao, u1baby, 360buy and other well-known online shopping websites in China, enjoying an average 80% sales growth per month. It was said that, after entering Guangdong, Karicare will soon open stores in Fujian, Guangxi, with an objective of reaching the scale of over 3000 shops in China.

Troubles of Karicare’s brand strategy

The troubles started with a micro blogger recently broke the news that she had bought fake Karicare milk powder. This blogger claimed that she thought that what she had bought was Karicare milk powder with new packaging after it localized in China. But she found it to be completely different with those Karicare ones she had bought before and realized that she was kind of hoodwinked.

Another blogger on the Internet also warned consumers by uploading relative photos, saying that there was some company in Shanghai claiming to be incorporation with Karicare released “Karicare” infant formula, which turned out to be fake ones called similar pronounced name in Chinese. Karicare’s high quality products has always been it greatest advantage and thus it is more likely to be copied. To treasure its precious reputation and to maintain its brand strategy, Karicare probably should consider seriously its strategy in China for anti-counterfeit mission.

However, in 2013, new Zealand milk powder has been banned from the China’s market as a bacteria which can cause serious disease to baby has been found in imported production. Thus, all the effort done by the brand Karicare for many year to build a relevant and efficient brand strategy and commercial development in China has been wasted.

Amy Wang

http://www.abc.net.au/news/2013-08-04/an-china-bans-nz-milk/4863858

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10890692

This article The difficulty of infant formula market in China : the example of Karicare is the first one to appear on Daxue Consulting - Market Research China.

Established in 2001 and based in New Zealand (HQ), Fonterra (恒天然) Co-operative Group was set up by the merge of two largest dairy product co-operatives and New Zealand Dairy Board. As for now, Fonterra is becoming the largest company of New Zealand with annual revenue of more than 8 billion dollars per year. Key brands generated and owned by Fonterra mainly are Anchor (milk), TipTop (ice-cream), Mainland (cheese), and others in New Zealand, and in Australia, the brands are Brownes Calcium Plus, Bega Cheese, Peters and Brownes, and Riverina Fresh.

Strategy & Opportunity Fonterra Is Facing in China:

China is a crucial and important market for Fonterra. Firstly, overall dairy sales rose by 8.5 percent in 2011 to 28 billion dollars from the previous year. Secondly, this world’s dairy giant has always been  keeping its eyes on the Chinese market for a long time, and now China’s market accounts for half of Fonterra’s revenues from emerging markets.

According to the report from Farmer’s Daily, Fonterra recently reached and signed an agreement with Yu Tian County government, a county located in northeast province of Hebei, to invest 557 million rmb to open its second new farm in China. Mr. Spierings, the CEO of Fonterra, said that Fonterra is planning to establish a total of five farms in China in the next five years with a herd size of 15,000 cows, which is able to produce 150 million liters per year. It marks Fonterra’s attempt to re-rise in China after the setback caused by the relationship with Sanlu and its role in the contaminated formula scandal in 2008. After the scandal, China’s market was critical to Fonterra and showed distrust to its damaged image. For Fonterra, the strategy in China for next decades can be summarized into two aspects – quality and quantity. To ensure a safe supply of dairy products, Fonterra set a goal that “From grass to glass, it will be safe” quoted from Mr. Spierings. Secondly, Fonterra’s ultimate goal is to produce up to one billion liters of milk in China every year by 2020, which means that Fonterra will be investing more money to open new farms in the future.

Edited by Amy Wang from Daxue Consultant China

Credit Photo: Hudong

This article Focus on: Fonterra is the first one to appear on Daxue Consulting - Market Research China.

• On August 3th, 2013, Fonterra released to the press that some of its exported whey protein products may contain Clostridium botulinum, a bacteria that can cause botulism. Botulism is a paralytic illness that affects the nervous and respiratory systems and can cause death in some cases.
• Fonterra attributes its contamination problem to a pipe that had not been sufficiently cleaned, adding that the company destroyed the pipe. Fonterra plans to ensure that within the next 48 hours the public is aware of the problem and that all questionable products are recalled.
• China has banned only whey protein products and base powder formula used to manufacture infant formula. Fonterra said China has also increased inspection and supervision at the border for New Zealand dairy products, and indicated extra testing may be required.

Chinese government’s anti-trust punishment on six foreign brands

• According to an announcement released by National Development and Reform Commission, six infant milk powder companies were fined a total of 668.7 million RMB for their monopolistic behavior and high-price fixing. These companies were accused of unjustifiably raising prices by 30% since 2008.
• It is regarded as the largest fine China has ever issued for violations of its anti-monopoly regulations, even exceeding the amount Maotai Group (one of the most famous and expensive white wines in China) was fined in earlier this year.

• As for the reason of punishment,
  • The government accused these foreign brands of strictly controlling the pricing strategy of downstream firms (distributors, supermarket) by offering bribes (which is called “vertical monopoly agreements”). This damaged the price competition among distributors with standard prices and damaged the interest of consumers. That is to say, if any distributor does not follow their pricing strategy, they would not receive kickback and commission from these foreign milk powder companies.
  • These foreign brands force distributors to synchronize their prices with them even if the suggested wholesale price referred from milk powder companies is not a fixed. If distributors fail to abide by these prices, companies threaten to end their contracts.
• As for the specific punishment on each milk powder company, it is illustrated as following table.

This article Market research: Foreign companies in baby formula industry is the first one to appear on Daxue Consulting - Market Research China.

According to the announcement made by Ministry for Primary Industries, the world’s biggest exporter of dairy products and employer of 10,500 farmers, Fonterra Cooperative Group Ltd., was caught producing milk with a low level of dicyandiamide in a recent inspection. Dicyandiamide is a dangerous chemical substance which is applied to pastures by farmers to diminish greenhouse-gas emissions and is toxic to humans in high doses.

Response from Fonterra & Other Partners:

A Fonterra spokesman recently stated that the company was notified by the government that the low levels of dicyandiamide it found were not a food safety concern.
The spokesmen from Abbott Laboratories and Yashili stated that Fonterra’s contaminated milk products were not supplied to them.
Two days later, Mead Johnson made an announcement that they were not affected by Fonterra’s crises since those milk products are not the materials for baby formula. In addition, New Zealand’s government made a statement that low level of dicyandiamide would not bring any negative influence on human’s health.

Market Analysis of the Crises:

In China, large-scale breeding pastures supply only about 40 percent of the country’s milk. The rest of the country’s milk suppliers are private herdsmen. Even though Mengniu, Yili, Guangming has been investing money and technology to establish large pastures, it still cannot meet the strong demand for their milk. As Chinese customers become more sensitive about the quality of milk made by Chinese brands, they are beginning to trust foreign milk manufactures and suppliers more than domestic suppliers. Fonterra found and tried to capture this timing and the opportunity provided by such a huge demand by the market. For a long time, milk from New Zealand experienced a lot of ups and downs in China’s market. The cooperation between Fonterra and Sanlu made Fonterra suffer a heavy loss both in terms of their reputation and financial state. After three years, Fonterra began regaining the trust of China’s market and spent huge amount of money to establish large pastures in the Hebei province. As for now, three pastures have been set up, which have gradually helped Fonterra achieve its goals in China. Others believe that Fonterra’s crises could be a great opportunity for the dairy companies from the USA and Europe to enter China and gain market share in the Chinese dairy market.

Past Crises:

This is not the first time Fonterra has had public issues with their milk quality. These issues have a big impact on the China’s dairy market, since it often affects the nation’s dairy exports, valued at NZ$11.5 billion annually. In 2008, Fonterra was involved in a scandal involving a dairy supplier in China. At least six children died from the incident and 300,000 became sick from milk containing dangerous levels of melamine, an industrial chemical that mimics the properties of protein, allowing producers to water down milk without diluting its nutritional value.

Daxue China Market Analysis

Sources:

• Fonterra
• The Wall Street Journal 1
• The Wall Street Journal 2
• The New Zealand Herald

Picture source: Google Image

This article Market analysis: Fonterra’s dangerous chemical contamination crises is the first one to appear on Daxue Consulting - Market Research China.