China’s milk powder producers are facing a challenging market due to the country’s declining birthrate. Latest official data showed that the number of births fell for the 4th straight year to 12 million in 2020.
Maternal and baby care businesses reported seeing a falling number of customers to their stores, with a notable impact on milk powder sales. There were reports on social media that Honey-lovely store chain operated by Guangzhou-based Lexin Mother and Baby Products, with over 6,000 branches in China, had suspended its operations.
There are a large number of infant milk powder players competing in what is called a stagnant or declining market. As a result, many producers have resorted to aggressive price cuts to maintain market share.
With the current uncertain economic times, as well as Chinese consumers becoming more affluent with busy work-lifestyles, analysts expect China’s birthrate to continue to plunge. This is not surprising as similar trend can be seen in more developed countries in Europe and the US.
To survive in this market, milk producers need to raise their brand awareness apart from fortifying their products with added nutrition to attract Chinese mothers who are becoming more health-conscious. There is also an increasing need to make the products more traceable by giving more information on sources and contents in the product packaging.
According to Gordon Yang, Senior Vice President of Corporate Affairs at Royal FrieslandCampina China, further consolidation in this sector is likely which will impact on brands ranking below the Top 10.
Latest market development include the US$2 billion sale of Reckitt Benckiser’s infant nutrition business which saw both foreign and domestic infant milk producers competing to acquire the stake. This shows that the market is becoming more competitive, as domestic producers are now hoping to penetrate into the high-end (premium) markets in the 1st and 2nd tier cities like Beijing and Shanghai. On the contrary, foreign infant formula brands like Nestle are accelerating their expansion into the 3rd and 4th tier cities, while taking advantage of the online sales channels (e-commerce).
Since the baby milk scandal affecting domestic producers in 2008, demand for domestic brands has grown particularly from 2017 onwards as domestic players started to invest more on state-of-the-art technology as well as sprucing up their brand awareness by giving mothers more information on their products’ contents and traceability.
Euromonitor estimated that the market for China infant formula milk is nearly US$32 billion accounting for almost 50% of the global market. Amazingly, within quite a relatively short period of time, domestic brands’ shares have skyrocketed from 30% in 2013 to 60% in 2020. Even in terms of pricing, Ministry of Commerce data showed that the average retail price of domestic infant formula brands is Rmb 209 (US$32.82) per kg which is 22% lower than foreign brands. In 2011, the gap was 39%.
The success of domestic infant milk producers could be attributed to their successful penetration in the 3rd and 4th tier cities where birth rate is still comparatively high compared to the major cities in China.
Note: In early June, the Chinese government has announced a new policy of allowing its citizens to have up to 3 children. The success of this new policy ultimately depend on its population. With higher cost of living, urban dwellers are unlikely to have more kids anytime soon.