Infant formula gains continue in China

While Chinese economy is slowing, Irish product continues to attain a premium on shop shelves in Beijing.

Jack Kennedy

26 October 2016

Dairy accounted for 75% of Ireland’s total exports to China (including Hong Kong) at €491m and, within this category, infant formula exports accounted for €427m (87% of the overall dairy category).

Milk from Irish cows makes quality product for Chinese shop shelves.

The growth of shelf space designated to Organic or A2 Infant Formula seems to be growing. The A2 powder product range comes from the Australian company where the beta-casein protein comes from cows specially selected to produce the A2 beta-casein protein exclusively, rather than A1.

The Illumina brand of infant formula made in Wyeth in Limerick comes in four stages (1 to 4) and is retailing currently on shelves in Beijing for about €58/kg. Wyeth buys milk from a number of Irish dairy processors.

Chinese sales of Dumex were hit hard by the 2013 Fonterra botulism scare, when three batches of whey protein concentrate potentially contaminated with Clostridium botulinum entered the food chain. Tests later revealed that the contaminant was non-toxic, but this was too late for Dumex, which had already pulled infant formula from shelves as a precaution. Danone terminated its supply contract with Fonterra and launched legal action and arbitration, which we understand is ongoing.

International competition is big on the Chinese shelves with much of the competition coming from other European brands but Irish brands are still holding onto a premium. The tub on the right is the relatively new Beingmate brand with product made from milk produced on Kerry dairy farmers (€50/kg). Right beside it is Friso which is the baby powder brand for FrieslandCampina retailing at a 30% price reduction compared to the Beingmate brand.

Despite talk that the Chinese economy is slowing, the Chinese population continues to grow and GDP figures continue to grow. While the heady heights of double-digit growth figures are not on the radar, the relaxation of the one-child policy and consumers with more money means infant formula sales are still growing.Imported infant formula products continue to retail higher than products packaged in China. A continuing distrust seems to exist on processing infant formula in China. Just this week, 19 people were arrested in Shanghai for allegedly repackaging powder that had gone past its original expiry date.

Imported infant formula products continue to retail higher than products packaged in China. A continuing distrust seems to exist on processing infant formula in China. Just this week, 19 people were arrested in Shanghai for allegedly repackaging powder that had gone past its original expiry date.

Overall Irish food and beverage exports to mainland China (excluding Hong Kong) have more than trebled over the last three years. Exports increased by 40% in 2015 compared with 2014 to reach a value of €514m. Irish exports were driven by strong growth in dairy (€382m: 39% growth year-on-year), pigmeat (€72m: 83% growth year-on-year) and seafood (€19m: nearly four times the 2012 export figure). Total food and drink exports to mainland China and Hong Kong reached a record €654m in 2015, up 20% on the previous year. Dairy accounts for 75% of our exports followed by pork (12%) and seafood (4.5%).

Dairy accounted for 75% of Ireland’s total exports to China (including Hong Kong) at €491m and within this category infant formula exports accounted for €427m or 87% of the overall dairy category. Infant formula exports to mainland China grew by 59% to €339m in 2015 and have more than trebled in only two years since 2013 (€103m). The largest dairy export is the Wyeth Illuma brand, which sells in the super-premium infant formula category.

With a population of 1.38bn (19.3% of global), China is the most populous country in the world and therefore one of the largest consumers and producers of agricultural products. Land is heavily utilised for agriculture. However, since the 1950s China has lost one fifth of its arable land to soil pollution and water shortages as well as to the nation’s rapidly expanding cities. China faces the huge problem of feeding one-fifth of the world’s population with just under one-tenth of its arable land.

Food safety in China remains a fundamental issue for consumers and an increasing focus for government. Food safety scandals are a regular feature in the media, with notable high-profile scandals in the meat sector (OSI Meats 2014) and the dairy sector (Melamine 2008). Such scandals have shifted middle- and high-income consumers toward imported products, in particular infant formula.

China’s self-sufficiency in milk production has been declining rapidly in the past years despite leading global year-on-year production growth. This is attributed primarily to China’s increasing dairy consumption. This growth is expected to increase by 38% by end of 2022; China will continue to rely heavily on imports.

China has operated a one-child policy since 1979, although this policy has gradually been loosened to the current situation where a general two-child policy is in effect for most families.

So while imported dairy product attains a premium on Chinese supermarket shelves, the premium Irish dairy farmers receive from processors is limited. Processors and international companies own the brands that multiply the value of the base product once it leaves the farm. The Kerry Group innovation to package infant formula in Charleville is the first venture that should theoretically bring the premium value back closer to the farmer.

Mead Johnson, Dumex, Nestle, Abbott and Wyeth represent the group of multinationals operating in the infant formula space.