7 Trends that shaped China’s Infant Formula Sector in 2019

1. A Race to the Top - Premiumization Trends

The most crucial trend in China's infant formula sector in 2019 was the trend towards premiumization, a trend that significantly shaped the product development strategies of companies and the purchasing preferences of consumers. For clarity, premium products are defined as products ranging in price from 330 RMB to 430 RMB, and anything over 430 RMB is considered an ultra-premium product. To give you some currency context that 330 to 450 + price range converts to prices ranging from 42 euro to +60 euro for a 900g tin of milk powder. Another way to consider premium products is by assessing the ingredients and raw materials used, which include cutting edge bioactives like OPO, pro- and prebiotics, lactoferrin. Differentiating the milk source by using goats milk, A2 milk (the A2 milk companies flagship product is affectionately called the "Hermes of milk powders" by Chinese consumers) or organic milk are further premium product development strategies being used to good effect.

 

The premium and ultra-premium segments now dominate China's market, accounting for 61% of all sales in the multi-billion dollar sector. Currently, premium products occupy about 40% of the market, while ultra-premium is at about 20%. As expected, we have seen a concomitant decline in the sales of lower-end products. This trend is occasioning a race to the top that will only inevitably end in greater homogenization of the products available to Chinese consumers. Given the limitations on product development imposed by Chinese infant formula product standards (GB 10765 and GB10767), we are expecting and are already seeing companies attempt to differentiate their brand by developing more comprehensive services for their customers, which moves us nicely on to trend #2.

 

2. Quality and Safety as Standard

The safety and compliance of infant formula circulating in China's markets has trended above 99% over the last several years based on inspections conducted by both customs administrators and market regulators. Product safety is now a given, and while it still ranks top of the list in terms of importance for consumers, it's no longer enough. Brand strategies are currently being readjusted as Chinese consumers are expecting companies to go above and beyond just delivering a high-quality and safe product. We are already seeing the industry respond by offering better customer care services - a strategy that significantly contributed to national infant formula powerhouse Feihe (known as Firmus in English) to become China's number 1 domestic infant formula company. Companies are also engaging with customers by offering educational content across a host of easily accessible social media platforms like Wechat official accounts. The content focuses on feeding tips for new mothers, nutritional advice, early childhood education, and much more. "New retail" is shaping brand strategies in the sector with more brands laying out integrated online and offline marketing, retail, and services.

 

3. Paradoxical Decline in Birth Rate and Breast is Best

Declining birth rates and rising breastfeeding rates come in at number 3. In 2016 China reformed its longstanding one-child population control policy in favor of a more lenient two-child policy. Everyone was predicting an explosion in the birth rate until the exact opposite occurred. Over the last several years, China has been suffering from a paradoxical decline in birth rates attributed to multiple factors. Infant formula manufacturers are feeling the pinch.

 

As Chinese consumers are exposed to scientific content marketing on topics like health and nutrition we are also seen as a marked increase in breastfeeding rates and overall duration of breastfeeding. This effect has been augmented by high-level government policies designed to promote breastfeeding. The consequences of these changes have been a marked decline in the sales of stage 1 (0-6 months) and stage 2 (6-12 months) infant formula, which hasn't been helped by a ban on advertising of all infant formula for children under the age of 12 months. 

 

4. Cyclical and Strategic: Selective Regulatory Pressures

Cyclical regulatory reforms. A recurring theme throughout my content over the last several years is China's use of cyclical and strategic regulatory changes (TBTs) to manipulate its markets. China's government has masterfully implemented this strategy over the last decade to bring its domestic infant formula ever closer to parity (43% as of 2018) with its still dominant international competitors. Imports still dominate the sector, but the margins are now very narrow. International stakeholders should note that the endgame is a domestic sector controlling 60%+ of the market. So what can we expect? More selective regulatory pressures implemented both domestically and internationally, more mergers, acquisitions and consolidation, and more overseas expansionism. What reforms and regulations can we expect? Traceability requirements for sure, which will integrate with GACs and SAMRs increasingly digitized supply chain management systems. Additional reforms of GB standards … (beyond what has already been shown in the new draft standards. China is pouring serious cash into teasing out the nuanced nutritional requirements of Chinese babies, and we can expect the results of this research to shape the development of GB standards in the future. More stringent overseas inspection of manufacturers – annual inspections are a likelihood — more stringent review of registration dossiers and more stringent application of regulations.

 

5. Skin in the game

If I was advising new entrants on a market entry strategy for the IF sector, it would be to set up their company in China or have some significant supply chain link based in China. There's a very obvious trend of the Chinese government favoring international companies with "skin in the game", or more specifically, China headquarters, mainland processing facilities, or mainland R&D capacities. Blurring the lines between what is considered a domestic or foreign company is in the best interests of most stakeholders looking to gain any serious traction.

 

6. In the trenches

As tier 1 and 2 cities become increasingly saturated, the critical battleground is low-tier cities. It is expected that in the next decade, low-tier cities will dominate China's IF market. Importantly, retail in low-tier markets is still dominated by bricks and mortar channels and trending away from e commerce. Crossborder e-commerce and standard e-commerce have limited influence in these markets, so general trade regulatory compliance is a must, and localized branding and brand building are essential.

 

7. Rise of the domestic giants

Just several short years ago, China laid out its domestic infant formula sector development roadmap. At that time there was no Chinese IF company with revenue that exceeded 5 billion RMB per year. Fast forward several years and we have several companies that have surmounted the 5 billion barriers and one company (Firmus) that can surpass the 10 billion revenue per annum psychological barrier. (a company which has become China's most valuable IF company, and who was the subject of a stratospheric rise in share price after IPO). More changes are on the way, as the government has called for greater vertical integration of the IF supply chain, specifically calling for brands to have their own pastures, processing facilities, canning/packaging, etc. In line with these reforms, China is also going after improvements in primary inputs. Both industry and government have laid out new standards for liquid milk that will align China's dairy outputs with international best practices. More stringent standards on cell count, protein content, fat, etc. are being implemented. Chinese dairy giants are also flexing their muscles overseas by buying up high-value companies and other supply chain assets.