China milk powder firms court foreign cachet for domestic gains

SHANGHAI Wed May 22, 2013 5:25pm EDT

1 of 4. Yashili's milk powder products are displayed at a supermarket in Beijing May 20, 2013.

Credit: Reuters/Kim Kyung-Hoon

Related Topics

Photo

Under the Iron Dome

Sirens sound as rockets land deep inside Israel.  Slideshow 

SHANGHAI (Reuters) - The rolling green hills and gurgling blonde toddlers in the ads for Yashili International Holdings Ltd underscore how keen China's biggest milk powder producers are to appear global to emerge from the shadow of a fatal baby formula scandal.

The 2008 incident, which involved melamine-tainted milk powder, soured China's $12.5 billion infant formula market for local firms and helped multinationals with established safety records to nearly double their market share in the past five years. Foreign brands now account for about half of total sales.

Armed with global partners and slick marketing, Chinese firms such as Yashili, Biostime International Holdings and Zhejiang Beingmate Scientific Technology Industry and Trade Co Ltd now want to challenge the dominance of international brands with "100 percent imported" brand labels and competitive prices.

"We're an international Chinese firm in exactly the same way that Coca-Cola or McDonald's are international U.S. companies," said a Yashili spokesman, adding that the company sources all its raw products from New Zealand.

China's infant formula market is expected to grow to $25 billion by 2017, Euromonitor data shows, as more mothers join the workforce and spend less time breastfeeding. Food safety concerns have so far played in favor of global firms like Nestle SA, Danone SA, Abbott Laboratories and Mead Johnson Nutrition Co..

Local companies are now fighting back by espousing foreign safety standards - Bright Dairy and Food Ltd, for example, sources the raw materials for its Pure Canterbury brand from New Zealand, while China Mengniu Dairy Co Ltd this week struck a deal with Danone.

"I wouldn't underestimate the power of Chinese brands to go upmarket and gain the trust of Chinese consumers, but forging these international ties is key," said Shaun Rein, managing director of China Market Research Group.

"They can have the best of both worlds - the safety and quality of the product, but also the local know-how, marketing, sales and distribution."

HAPPY COWS, HIGHER PRICES

Domestic milk powder brands want to appeal to the rapidly growing number of middle-class working mothers who can afford the pricier baby formulas made by their international rivals.

China's middle class currently stands at around 300 million people or over one-fifth of the 1.3 billion population, a proportion which could rise to over a half by 2030, consultants KPMG said in a recent report.

At supermarkets in big cities like Shanghai, a 900 gram tin of infant formula made by an international firm costs between 175 yuan ($29) and 275 yuan ($45), compared to about 100 yuan ($16) for domestic milk powder in lower-tier cities in China.

To distinguish themselves from the local crowd, milk producers boasting foreign ingredients have hiked prices to the same range as global brands.

Beingmate also plays up ties with Swiss foodstuff group Hochdorf Holding AG while Biostime's website lists Arla Foods as a partner. Then there are the Yashili TV adverts, featuring lush green fields studded with contented dairy cows and a blonde-haired mother playing with her child.

These marketing strategies are winning over consumers.

Yashili's turnover last year was more than 40 percent higher than 2009, the year immediately after the tainted milk scandal, while Beingmate's revenue was up 65 percent over the same period. Biostime saw its revenue grow six-fold to 3.4 billion yuan in 2012 from 559 million yuan in 2009.

Li Chuan, a teacher who buys Yashili milk powder for her 4-year-old son, said more friends now recommend Chinese brands.

"There are still some problems with some Chinese milk powder brands, but I think established brands like Yashili will undertake strict checks before they enter the market," she said.

EXORCISING THE MELAMINE GHOST

Foreign partners may help Chinese milk powder producers improve their reputation, but few parents will ever forget the six infants who died and the more than 300,000 who fell ill from local formulas that were tainted with melamine, a toxic chemical used to boost milk protein scores in tests.

More than 20 Chinese companies were implicated in the scandal, resulting in a spike in demand for imported brands.

Some Chinese still risk prison by smuggling in formula from Hong Kong, where prices are lower. Others travel as far as Europe and Australia to buy milk powder in bulk.

Dissident artist Ai Weiwei highlighted public concerns over milk safety at his latest exhibition, a collection of formula tins arranged in the shape of China.

"A country like this can put a satellite into space but it can't put a safe bottle teat into a child's mouth. I think it's extremely absurd," Ai told Reuters at his studio in Beijing.

Some experts say China's milk powder companies can eventually soak up market share from international companies if they avoid further scandal and maintain safety standards.

"In the premium sector it will be a long time before foreign firms are seriously challenged," said David Mahon, Beijing-based managing director of Mahon China Investment Management Ltd.

"But in the middle of the market we'll see considerable change in the years to come."

($1=6.14 yuan)

(Reporting by Adam Jourdan; additional reporting by Maxim Duncan and Shanghai Newsroom; Editing by Miral Fahmy)

FILED UNDER:
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (3)
Harry079 wrote:
Maybe Yashili International Holdings Ltd could partner up with America’s biggest coporate killer Monsanto and they could lawsuit, bribe and lobby into forcing every baby on the planet into being force fed China’s new everpure dry powder baby formula.

May 27, 2013 5:23pm EDT  --  Report as abuse
Disgusting. Stay far away from the European market.

May 27, 2013 5:36pm EDT  --  Report as abuse
mfw13 wrote:
Forget it. The reputation of Chinese firms is already mud….trust, once lost, is VERY hard to regain….

May 27, 2013 10:04pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.