Chinese authorities has been rolling out its Action Plan for the Promotion of Domestic Infant Milk Formula, published in May 2019, involving stricter manufacturing quality standards to improve Chinese consumers’ perception of domestic brands. It set a goal of increasing the portion of domestically-manufactured infant formula in China to 60%, with a goal to also increase the use of China-produced fresh milk in production via tax incentives and subsidies.
Domestic players such as Feihe, Junlebao and Yili have been leveraging the official support for their product quality with advertising campaigns. Feihe marketing jingles stress the company’s products as “more suitable for Chinese infants”.
The advertising seems to be working as China Feihe Ltd is now the country’s leading infant formula player, having grown its market share from 12.3% in 2019 to 17% in 2020, according to Nielsen. The group’s revenue rose 22.5% to Rmb 22.78 billion (US$3.46 billion) in 2021.
Both Feihe and Junlebao have been spending aggressively in acquiring customers in smaller cities through ‘nutrition seminars’, both offline and online, as well as targeting the key retail channel of specialist mother-and-baby stores. In 2021 alone, Feihe claimed to have conducted more than 1,000,000 face-to-face seminars, securing more than 2.2 million new customers.
China’s standardisation of the country’s dairy industry have bolstered consumer confidence in local manufacturers, which had been battered by the 2008 melamine milk scandal. It has also boosted confidence by forcing the consolidation of the upstream dairy industry, and consolidating the sector around giant dairy enterprises, such as Mengniu and Yili. Bigger companies have the financial means to ensure consistent quality control and compliance with government regulations, such as the Administrative Measures for the Registration of Product Formulas of Infant Formula Milk Powder (2016). The government has also forced out the smaller players through a registration system where they are required to register their infant formula ingredients and are limited to 3 formula recipes. This effectively reduce the number of products in the market while at the same time eliminated fake and lower-end brands.
The pandemic has also benefited Chinese brands as it closed the country to inbound travels reducing the volume of foreign-label infant formula (daigou) coming in from Hong Kong and other key destinations.
Chinese government efforts to promote the growth of domestic infant-formula manufacturers however have been weakened by the country’s falling birth rates. To counter this, both domestic and foreign manufacturers are now eyeing on premiumisation strategy, i.e. selling pricier quality products, which they see as an area of growth. Feihe, for instance cited the success of its premium infant formulas due to growing urbanisation, rising disposable income and growing health awareness in China. Despite this opportunity, competition is about to get more intense with the existence of foreign players like Nestle’s Nan label and Danone’s Aptamil Profutura sub-brand competing alongside Feihe’s Organic Zhenzhi label as an example.
Despite the competition, premiumisation strategy makes sense as China’s overall infant formula market has plateaued in terms of retail sales volume. This figure is expected to fall by an average of 4.1% annually to 2025, according to projections by consultancy Frost & Sullivan.
Domestic infant milk producers face a growing challenge of higher feed costs which affect their profit margins. Unsurprisingly, Chinese dairy prices remain more expensive than American or most European production due to the high input prices and scarcity of local fodder, said a Beijing-based western supplier of cows and feed for YST and other Chinese dairies who spoke anonymously. This in turn will result in higher selling prices of their milk products.