Is China’s infant formula market about to see a price crash?

A Chinese language report on WeChat –China’s popular social media platform – indicates that the Chinese infant formula market is about to become a lot more price competitive. According to a usually reliable Chinese industry website, the New Hope Nutritional Foods Company is about to introduce a new line of products called ‘Akarola’ which will come from New Zealand and sell for less than one third the price of similar products.

New Hope already has a New Zealand sourced brand called ‘Akara’ which is manufactured and canned by Canterbury-based Synlait. Linked to this, Synlait announced in late 2014 that it was taking a 25 percent share in New Hope Nutritional Foods and that this would create an integrated supply chain from farm to consumers, in line with Chinese Government regulations.

New Hope itself is a huge agri-food conglomerate with headquarters in the mega city of Chengdu in China’s Sichuan Province. Its interests include a wide range of commodities and agri-food products.

New Hope’s reach extends throughout much of South East Asia. Back in 2008, I visited their Sichuan headquarters. That visit confirmed to me that New Hope is both large and ambitious. They have the financial muscle to really make things happen when they want to.

This latest report is saying that New Hope plans to sell the so-called ‘Akarola’ brand, sourced from New Zealand, at less than 100 RMB per can (900g), which is approximately NZ $21. This is less than a third of the shop price for most imported brands. New Hope’s own Akara brand is currently selling at online shopping website Taobao for up to 378 RMB, but with discounts available.

So are these reports reliable and is it feasible that New Hope will shake up the market in this way?

Well, whether or not it will actually happen only time will tell. But the report does have an air of authenticity. It was only posted on 23 March, but New Hope would surely have seen it. And If it were wrong, then presumably New Hope would have quickly contradicted it. Perhaps they are testing the waters. However, it is certainly feasible for New Hope to still make a profit at these prices as long as they sell online.

Currently, the margins on infant formula in China are simply enormous. It is these margins that have brought all of the infant formulas companies big and small to China, like bees to the honeypot. To put these prices in perspective, most infant formula in New Zealand sells for about NZ $20 per can, so it is hard to comprehend why prices are so high in China where, despite minimal tariffs, the same brands can sell for between $60 and $80 per can.

Part of the reason this happens is that the supply chain through distributors and into retail outlets is an absolute jungle.

Chinese sources calculate that the landed cost in China of international brands is typically no more than 25 percent of the final retail price. I have other data from a major international consultancy firm which suggests the landed price is considerably lower even than this,,sometimes being no more than 15 percent of the final retail price. Everything else goes to wholesalers, multiple level distributors, retailers and brand owners, all of whom make good profits.

Online selling cuts straight through all of the complex and inefficient within-China supply chain. It also fits with the buying habits of Chinese consumers, who in recent years have been increasingly buying products online. In that regard, Chinese have been making the transition to online purchasing even faster than New Zealanders have done.

Regardless of whether or not the ‘Akarola’ report proves reliable, there is no doubt that the infant formula industry is ripe for a big shake out. New Hope is probably the one company with the power and financial muscle to do this quickly and make a big profit though large scale sales. But if they don’t do it, then others will do it, but perhaps in smaller steps. It can be taken for granted that the Chinese Government would be highly supportive of any moves that do bring down consumer prices for good quality infant formula.

For New Zealand, this is not necessarily going to be a bad thing. It is not New Zealand that is making the enormous margins; it is the brand owners and all of the middlemen along the way. Infant formula can still be lucrative at much lower prices. The one proviso is that the product has to be sold online.

This importance of online selling in China is something that goes well beyond infant formula. That is something that all of the New Zealand agri-food industry needs to come to terms with.

[This post was also published at http://www.interest.co.nz]

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About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
This entry was posted in Agribusiness, China, Dairy. Bookmark the permalink.

8 Responses to Is China’s infant formula market about to see a price crash?

  1. mrmj says:

    Great article Keith. Online distribution will always help margins, but I am curious why you mention that online distribution is the only way to make profit feasible in China at $21 per can, given that the same product sells for $20 in NZ. Are the shipping costs per can that large?

    • Keith Woodford says:

      It is not the shipping margins that are so great; in fact shipping costs are modest. It is the complexity of the within-China distribution systems, and the wholesaler and distributor margins. Online selling cuts through all of that and links the brand owner directly to the consumer. Of course there is also considerable skill in online marketing, but I expect that New Hope has the resources and skills to get that right.

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