The infant formula industry is in the spotlight again after the launch of a price-fixing investigation into foreign and domestic milk powder makers and intensified government efforts to consolidate a nationwide hodgepodge of producers.
The investigation by the anti-monopoly arm of the National Development and Reform Commission follows a 30-percent rise in imported baby formula since 2008. The surge in demand for foreign brands came after a nationwide scandal involving melamine-tainted domestic milk products. Six infants died and thousands were treated in hospital.
Worried mothers turned to foreign milk powder brands they viewed as safe, accepting rising prices as a sign of their trustworthiness, said Song Liang, a senior analyst at market research firm China Commercial Distribution Promotion Center.
"The high price of foreign milk powder has put a lot pressure on ordinary consumers," he said.
According to a 2009 Nielsen survey of nearly 2,000 shoppers for infant products in China, 73 percent of visitors to supermarkets said they buy foreign brands of milk powder. That figure rose to 77 percent when shoppers at maternity and infant specialty shops were queried.
Imports of bulk infant formula in the first half of this year rose by a quarter, the General Administration of Customs said. The price remained fairly stable.
Industry fragmented
Earlier this month, when the price-fixing investigation became public knowledge, leading companies such as Abbott, Danone baby foods unit Dumex, Nestle's Wyeth Nutrition and several domestic firms said they would be reducing retail prices of milk powder by up to 20 percent. It may take some time for that price-cutting to ripple down to retail channels.
Infant formula is big business in China. Retail sales of milk products, according to Euromonitor International, are expected to reach US$10 billion by 2014.
Though the industry is dynamic, it remains extremely fragmented.
At the Shanghai International Children-Baby-Maternity Industry Expo last week, many of the more than 1,400 exhibitors were displaying regional brands with little or no national recognition.
Gao Fu, an inspector with the consumer goods division of the Ministry of Industry and Information Technology, told an industry forum late last month that domestic companies account for only 20 percent to 25 percent of high-end infant powder sold in China. Only three companies among 127 producers had an annual production capacity of 30,000 tons or more.
The crowded field of players hasn't stopped new entries into a high-margin business. Neolac (Shanghai) Nutrition Co, a unit of Dutch-based Hyproca Dairy Products BV, is one of the latest to join.
David Zhu, the company's general manager, says he is confident that industry consolidation efforts will bring more order to the industry.
Under a government blueprint, China will gradually eliminate outdated or inefficient infant formula makers within two years and create 10 leading milk powder companies, each with annual revenue of more than 2 billion yuan (US$326 million).
Yashili International Holdings, the Hong Kong-listed arm of Guangdong Yashili Group, was China's top milk powder producer last year, with infant formula sales of about 3 billion yuan.
Public concerns
The domestic milk powder industry is trying to regain public confidence, but it's still unclear if consolidation, price cuts and improved product quality surveillance will achieve that end.
Chinese consumers, after a series of food-contamination and price scandals, have become wary and the government is under pressure to show that it is addressing public concerns.
Skullduggery is not confined to the milk powder industry.
