China Consumer

Against the grain

Milk and wine producers struggle to regain consumer confidence

Against the grain

CCTV’s annual auction of primetime advertising slots has long been considered a useful economic indicator. Last year, companies spent a record $255 million for ads. But just as exposure on the country’s various rich lists might not be a cause for celebration for the very wealthy (the rankings are known as “pig killing lists” by more bashful billionaires fearful of being called in for questioning), so too CCTV airtime can turn out to be a poisoned chalice for some bidders.

Take Confucian Wine, a liquor maker that lodged the highest bid at CCTV’s first ad auction in 1994. It went under within 10 years. A counterpart called Qin Wine, the top bidder in 1995, suffered a similar fate. And the founders of Aiduo VCD and Panda Mobile, top spenders in 1997 and 2002 respectively, were both jailed at a later date.

There are other trends worth noting too. For instance, baijiu makers have replaced dairy firms as the biggest spenders during the more recent auctions. Few WiC readers will be unaware of the problems in the Chinese dairy sector. But could baijiu bosses risk incurring a similar curse, as safety concerns grow?

The dairy industry’s challenges are well documented, leading to decisions like that of Qingdao-based Synutra International last week to obtain regulatory approval to invest $130 million in building a new milk factory in the Brittany region of France. The Nasdaq-listed formula maker expects to start production in France in 2015, to supply cheese to Europe as well as whey powder for the China market.

By producing overseas, Synutra is one of a number of local dairy producers hoping to win back the confidence of domestic consumers. One interpretation of the message is that it’s a pretty desperate one: that the best way to guarantee quality is to produce abroad. But it’s no more than Chinese shoppers already believe, as they spread further afield in search of what they regard as safer milk powder for their kids. Where once they alighted in Macau and Hong Kong, they are now flying long-haul: the British have just joined a growing list of countries imposing restrictions on Chinese tourists buying milk formula in bulk from supermarkets.

So what happened to regulatory efforts to boost consumer confidence in the sector? A new national standard for infant formula was introduced in 2011. But instead of imposing stricter standards, the perception is that the rules have been watered down in an effort designed to give breathing space to the battered domestic producers.

Central authorities say 99% of domestic dairy products now meet the new standards but CBN reckons consumers are no longer interested in such assurances.

“The confidence crisis hasn’t been soothed by high pass rates under the relaxed rules,” it warns.

So have any lessons been learned? Concerns that regulators may make a similar mistake with winemakers suggest they probably haven’t. The Economic Observer reported last week that new rules lifting the minimum levels of chemical plasticiser permitted in liquor products are about to be announced. To the relief of baijiu makers, says the Beijing News, 80% of existing products will meet the new standards. Share prices at baijiu producers surged on the news. But onlookers, including some in the state media, were concerned that the rules will be too loose to be effective. “The baijiu industry may suffer the same confidence crisis as domestic dairy,” China National Radio warned.

Perhaps that’s why baijiu makers are also following in the footsteps of dairy firms by venturing aboard. Rather than making stuff overseas, Chinese winemakers seem keener on luring foreign consumers. Wuliangye, China’s best known liquor brand after Moutai, plans to invest Rmb70 million ($11 million) this year to expand overseas. And like the spending on CCTV in the past, most of the money will be spent on TV commercials.

Cynics doubt it will be money well spent. They question whether baijiu executives might learn more from the experiences of their counterparts in dairy. Before spending big on promoting the benefits of their products, they might be better advised to be doubly sure about getting the quality right first.

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