[This post was first published in the Fairfax NZ Sunday Star Times on 28 September 2014]
In the last six years the Chinese infant formula market has grown threefold to about $NZ18 billion. Some projections suggest it could double again within the next six or so years. So the challenge is not the size of the market. Rather, the challenge is that everyone is trying to get a slice of it.
There are at least five unusual features of the Chinese infant formula market. First is the overall reliance on formula rather than mothers’ milk. This is in part because young mothers return to work soon after giving birth. It is the grandparents who then look after the baby.
Second is that formula products are used for toddlers up to three years and sometimes above.
Third is the ongoing impact of the 2008 melamine scandal in which 300,000 babies became sick. It will take a generation before those memories fade.
Fourth is the high price of infant formula in China. Mid-range brands sell for about $40 per 900g can, about twice the supermarket price of infant formula in New Zealand supermarkets. Top of range brands in China are selling online for $NZ90 per can.
Fifth is the current proliferation of brands. In 2013, there were over 100 local brands and a similar number of imported brands. Nowhere else in the world does such a proliferation occur.
From early this year, the Chinese Government has required brand owners to have strong links back through the supply chain to the manufacturing process. This has been the first step to encourage market consolidation and get rid of the opportunist entrepreneurs.
An immediate effect was to reduce the number of brands coming out of New Zealand, but on a global scale the impact of this has been modest. In May 2014, the Chinese Government announced they had already approved 40 international companies as meeting the required import standard, and since then many more have been approved.
So going into 2015 there are still likely to be well over 100 brands of infant formula on the market in China. In the long run, how many of these can succeed?
Today, I visited my local New World supermarket in Lincoln, New Zealand, to see how many infant formula brands were on sale there. The total was five. The three mainstream brands were Nurture (Heinz), Karicare (Nutricia/Danone) and S26 (Wyeth). Each had multiple formulations. There were also two specialty brands – Karicare Goat formula and a2 Platinum (The a2 Milk Company).
Across the many provinces of China there will be room for more brands than in New Zealand, but in each region it is highly unlikely that more than a few brands can survive. It is the way of the modern world, be it in food or in smart phones, that a few brands prosper but most fall by the wayside.
The attrition rate in China amongst the current infant formula brands may therefore be close to 90%. Those who survive will need deep pockets from which to build and then maintain market share.
All of the above provides the context for Fonterra’s proposed joint venture with China’s Beingmate. Fonterra by itself clearly would not have the financial muscle to go it alone with its own brands. Even in New Zealand, Fonterra does not have its own infant formula brands.
Despite the lack of brands, Fonterra does have infant formula manufacturing capacity, both at its Canpac plant in the Waikato and at Darnum in Victoria, Australia. Both plants have become under-utilised, with the brand owners now needing their own control over the manufacturing process.
Beingmate is the largest of the local Chinese companies with about 10 percent overall market share. It is particularly strong in the regional cities across China. There are 150 regional cities in China with populations above 1 million, and any national brand must be able to reach these cities. Beingmate has some 80,000 sales outlets across China.
What Beingmate has lacked until now was its own manufacturing plant outside of China. Without this, it was always going to struggle at the top end against the international heavyweights.
Assuming that Fonterra does indeed want to be in the infant formula business, then Beingmate is an ideal partner. Not only does Beingmate have an existing strong brand, it also has the logistics system that Fonterra could never hope to develop itself. Perhaps more importantly, this same distribution system could be invaluable in providing a logistics framework for other consumer products. These include Fonterra’s Anmum for pregnant and lactating mothers, and Anchor milk for general consumers.
I am previously on record as saying that in terms of marketing strategy, the alliance with Beingmate is Fonterra’s biggest strategic decision in at least the last five years. That does not necessarily mean it will be successful. As the old English proverb says: there is many a slip twixt cup and lip. But it does provide Fonterra its best chance to succeed in the fmcg (fast moving consumer goods) category in China.