Can foreign firms milk it?

No way to powder over problem

Scandal seems to flow as easily through China’s much-maligned dairy industry as its core product, the milk. Two weeks ago we reported that toxins were found (yet again) in Mengniu’s milk supply chain. As they have done before, market commentators were soon talking about the latest crisis for China’s largest dairy producer as the perfect opportunity for foreign firms to steal share from their Chinese rivals.

One such example: expect that consumers would “immediately shift” to foreign brands on learning of the latest Mengniu incident, Tracy Sun, an analyst at CSC Securities, told Bloomberg.

But is that really the case? Despite all the scares and scandals, there isn’t much real evidence of a major migration away from domestic dairy products (except, perhaps, for Chinese visitors taking time out of their travels to empty Macau’s shelves of infant milk formula ­– see WiC95).

There were even reports last month of two foreign dairy giants – Nestlé and Danone – shutting down factories in China. Danone closed its Shanghai yogurt plant and Nestlé has confirmed that it is shutting one of its three ice cream factories and ratcheting back on retail sales in Shanghai.

No specific reasons for the closures were given.

For ice cream at least, foreign firms haven’t taken much new ground in the industry. Data from market research firm Euromonitor shows the two market leaders – Yili and Mengniu – together controlling 30% of China’s ice cream market. Nestlé’s share has remained stuck at around 3%.

Perhaps that’s because domestic dairy producers have been quicker to experiment with distinctly local flavours, like sweet corn and hawthorn. They also outscore their foreign rivals in terms of sales networks and logistics, especially important for transporting dairy products, says 21CN Business Herald.

“That foreign brands like Danone have failed to compete with local brands like Yili and Mengniu in China is quite obvious, because the domestic brands have a wider networking system and higher market demand,” says Zhang Guonong, a dairy expert and professor from the Institute of Food at Jiangnan University.

But Nestlé, the world’s largest food company by sales, is not giving up just yet. Perhaps with an eye to Mengniu’s latest scandal, the Swiss food giant is now talking up its own efforts to ensure product quality, with an announcement of plans to spend Rmb2.5 billion ($375 million) on a new dairy-farming institute in the city of Shuangcheng in Heijongjiang province. The Swiss giant told China Economic Times that it hopes that the institute will not only help to boost production but also rebuild the reputation of Chinese dairy products.

“This will transform how raw milk is produced and how dairy farms are managed. The consequence will be more milk and better milk,” Roland Decorvet, chairman of Nestlé Greater China, told Bloomberg. “We need to do more to communicate the milk we have in China is 100% safe and is the best quality.”

In addition to the new dairy plant, Nestle is also hoping that two of its recent acquisitions – the confectionery company Hsu Fu Chi (see WiC114) and the beverage firm Yinlu (WiC110) – will boost its market share in China. Analysts said the deals will help in opening up new distribution channels and in assisting Nestlé’s understanding of local consumer tastes.

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