China Consumer

Finding the right formula

Can Feihe sustain local comeback in the milk powder market?


Chinese parents are buying more local milk powder

The World Health Organisation has long advocated that babies under six months old should be fed breast milk because of its contributions in protein and calcium, as well as other benefits in boosting protections from disease. But breastfeeding remains unpopular in China. According to a study in 2019 by the China Development Research Foundation, only 29% of infants were breastfed, well below the global average of 43%.

This is partly because many Chinese believe that infant formula is more nutritious than breastmilk. “They [the mothers] were under the impression that it’s not bad to feed babies with milk powders or that it’s even more nutritious,” Wang Zhixu, a professor from Nanjing Medical University, was quoted by the South China Morning Post as saying.

The infamous melamine scandal in 2008, which saw 300,000 children poisoned by chemical adulterants in infant milk formula, sparked longstanding distrust of locally-made brands. Between 2008 and 2017, annual milk powder imports spiked more than seven times from 40,000 tonnes to 296,000 tonnes. The share of domestic alternatives imploded, falling from over 65% to less than 30% on a national level, and only 15% in first-tier cities where families are better able to afford more expensive foreign products.

But if the latest research is anything to go by, Chinese formula makers have been re-establishing themselves in the market.

According to a study from Babytree/Nielsen, Chinese brands accounted for about 56% of total formula sales in June this year. In third- and fourth-tier cities, domestic brands did even better, with about 60% of sales.

Leading the comeback of local milk powder makers has been China Feihe, which is now the leading domestic producer with a 19% market share.

Feihe first started gaining recognition after the 2008 scandal, when it made sure to proclaim that no melamine had been found in any of its products. In 2009, it took control of American Dairy, a distributor of dairy and walnut products that was listed on the New York Stock Exchange’s over-the-counter bourse. But the backdoor listing was poorly timed. The reputation of Chinese dairy brands was tainted while some of the Chinese firms listed in the US were targets for short-sellers. When the Feihe unit eventually retreated from the NYSE in 2013, it was worth less than $250 million.

Back in the Chinese market, Feihe had already made the strategic decision to go upmarket and compete with the international brands for more affluent customers, and not just try to outdo domestic rivals in lower-priced segments. Xingfeifan, one of Feihe’s leading brands, is comparable in price to Wyeth’s Illuma, for example.

To justify the premium pricing, the company invested heavily in marketing campaigns that championed its formula as high-quality and safe, but also as a made-in-China product. Feihe built an entire supply chain in Qiqihar in the northeastern province of Heilongjiang that is able to process raw milk into infant formula within a few hours. “More Suitable for Chinese Babies” claims its widely-marketed slogan.

“After all, imported formulas are developed with the natural constitution of Western babies in mind. While Chinese consumers understood that, they also haven’t trusted most of the domestic formula brands. But Feihe’s differentiation gave them a compelling reason to choose the company,” reckons Tencent News.

To target new parents Feihe hosts seminars around the country, as well as promotional events at large shopping malls to raise brand awareness. After hiring an army of more than 80,000 salespeople, Feihe said it hosted as many as one million events last year.

“Feihe’s around-the-clock advertising on state and local TV networks, and its hosting of countless seminars and shows every year to educate parents, are tactics to make consumers equate Feihe with ‘safety’,” Tencent News adds. Another factor in its favour was the launch of a new registration system created in 2016 by the government in which companies must register their infant formula ingredients and are limited to three formula recipes. This has been weeding out the number of products on offer and forcing some of the smallest producers out of the sector.

Of course, the pandemic has closed down China’s massive outbound tourism industry too, cutting back on the opportunities for traders to bring back shipments of foreign-label formula to the Chinese market.

Over the longer term Feihe’s fortunes will be tested by a falling birthrate. In 2020, the number of newborns in China dropped by 18% on the year to 12 million and births fell a further 11.6% year-on-year in 2021 to 10.6 million.

The company has tried to shrug off these concerns by citing changes in government policy, including a move last May to allow couples to have three children. It is also developing new product lines to encourage higher dairy consumption among older children and adults.

Yet Feihe’s shares have fared disappointingly since going public again in Hong Kong in late 2019. The share price has slid nearly 80% since the beginning of 2021, although Feihe was still worth $6.2 billion as of this week, about 25 times the value when it was taken private in New York in 2013.

Feihe has faced headwinds this year with revenues in the first half of Rmb9.7 billion, down 16.2% year-on-year. Net profit dropped almost 40% to Rm2.3 billion. Feihe has also been exposed to rising costs in the raw milk supply chain, including increases in hay, silage and soybean expenses, some of which have outpaced the price rises for the milk formula itself.

Company executives have blamed weaker sales of Xingfeifan and the commercial impact of a campaign to reduce channel inventory and maintain a higher level of freshness in its products on supermarket shelves. They say sales should recover as the pandemic recedes and the Chinese economy picks up pace again. And the Beijing-based firm is also counting on a move into super-premium formulas to deliver fatter margins, describing demand for the highest-priced milk powder as a “driving force” in the sector.

Not everyone agrees that higher-priced products will bring more profit, however. “Younger consumers today, with the prevalence of the internet, are much more knowledgeable about the ingredients and increasingly aware of the costs to make the formula versus the premium they pay for the brand. At some point, ‘high price tag = high-end’ will lose its appeal,” reckoned Sina Finance.

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