Report Highlights:

China’s baby formula market is huge and growing, with total sales growing by 25% in 2012 to reach RMB 77 billion ($12.55 billion USD). The mainland is home to around 130 domestic baby formula companies, producing around 600,000 tons of baby formula powder on a yearly basis (Food Navigator Asia). However, the domestic formula producers are struggling to compete with more reputable international players. In 2011, in the wake of a string of well-publicized food safety outrages, China’s General Administration of Quality Supervision, Inspection and Quarantine (GAQSIQ) raised the quality standards for baby formula which forced 475 of around 600 Chinese firms to shut down their operations. Post believes the Chinese government will encourage even more consolidation in the coming years.

Executive Summary:

Overview of China’s Domestic & Imported Baby Formula Market

China’s baby formula market is huge and growing, with total sales growing by 25% in 2012 to reach RMB 77 billion (USD 12.55 billion). The mainland is home to around 130 domestic baby formula companies, producing around 600,000 tons of baby formula powder on a yearly basis (Food Navigator Asia). However, the domestic formula producers are struggling to compete with more reputable international players. In 2011, in the wake of a string of well-publicized food safety outrages, China’s General Administration of Quality Supervision, Inspection and Quarantine (GAQSIQ) raised the quality standards for baby formula. According to the food administration deputy director Teng Jiacai, these changes forced 475 of around 600 Chinese firms to shut down their operations.

Now, according to Euromonitor, foreign companies account for as much as half of the top 10 merchants of formula – presenting enormous challenges in the years to come for China’s own formula producers. This year, 5 of the top10 sellers of baby formula in China were from overseas, and these five companies alone – Mead Johnson, International Nutrition Co., Wyeth, Nestle, and Abbott - commanded 34% of the formula market in China (China Market Research).

Opportunities for Growth in the Imported Baby Formula Market

China’s young population makes its demand for baby formula – and other baby food - one of the highest in the world, accounting for 23% of the USD 41 billion global market (Euromonitor). Despite China’s one-child policy and slower birth rates than previously, its population continues to grow at a remarkable pace of 16 million births per year. Interestingly, 2012 – the Chinese year of the dragon – was considered the ideal year for young couples to have a child, leading to a 5% spike in birth rates (BBC News). This has had a tangible effect on the baby formula market, and will continue to affect demand for toddler and children’s food products.

More specifically, imported baby formula is especially desirable, due to both persistent concerns over food safety on the mainland, as well as the tendency for busier, wealthier mothers to prefer feeding their babies with bottled milk over traditional breastfeeding.

In spite of government efforts to encourage mothers to breastfeed their newborns, breastfeeding rates in China are surprisingly low – hovering at around 30% (Euromonitor). This phenomenon can be attributed to a number of factors, including aggressive, and potentially misleading, advertisements promoting the supposed nutritional benefits of baby formula, and the (possibly illegal) deal-cutting between hospital staff and formula companies.

Controversies: Domestic & Imported Baby Formula

Babies are by definition the most vulnerable consumers out of any age group, due to their rapidly developing bodies and susceptibility to sickness. So the safety standards for the food they consume must be high enough – and implemented effectively enough – to ensure their wellbeing and health, as well as their parents’ satisfaction. Both domestic and foreign baby formula companies have experienced blows to their reputation, and subsequently, sales. However, Chinese companies have been tarnished the most by concerns of adulterated baby foods, false promises to consumers, and other scandals. The next section will outline some of consumers’ sources of concern for both Chinese and international formula companies, and what this means for the baby formula market as a whole.

New Regulations

China’s State Food and Drug Administration collaborated with the Ministry of Industry and Information Technology (as well as eight other government agencies) in 2013 to produce a document outlining new regulations for foreign formula imports into China (Food Navigator Asia). These measures require foreign infant formula producers to comply with the same strict product certification system that drug companies are subject to – such as report the ingredients used to the Food Safety Administration, and register their products with Beijing before importing into China. With baby formula now treated as medicine, it is tightly monitored by way of identification, authentication, and tracking.

This could mean the end of a particular strategy used by Chinese baby formula companies, whereby they register their companies to a foreign address, repackaging bulk formula in China, which allows them to market their products as “imported” formula – and charge “premium” prices. This has been a significant problem in mainland China: this year, the New Zealand Baby Formula Export Association reported that only 10% of its >200 “Kiwi” infant formula brands on sale in China actually came from New Zealand.

In further attempts to curb the influx of foreign baby formula products into China, the General Administration of Customs has imposed a series of high tariffs and extra costs on imported dairy products coming into the mainland.

The Potential for Online Sales of Imported Baby Formula

Ecommerce as a substitute for traditional food retail is growing in China. That said, supermarkets and hypermarkets are still by far China’s biggest sellers of baby food, including milk formula. Other types of brick-and-mortar outlets like baby shops, and specialty stores, fall slightly behind. However, due to the extremely low operational costs and investments required, as well as the convenience afforded to increasingly busy consumers, turning to online platforms could be an ideal move for baby formula companies.

Ecommerce makes up a very small segment of total sales of baby food in China. However, its market share has been increasing every year since 2007.

The Internet has become a major source for parents to buy imported baby formula since Hong Kong introduced its 2-can limit for cross-border travelers in March. China’s market for baby and children’s products is booming, with the rise of disposable incomes, “little emperors” (in plain terms: spoiled only children), and consumption-driven lifestyles.

Many of the issues discussed above point to the high potential for growth of online sales of imported baby formula, which remain unsaturated. Milk formula in general is an ideal product to sell online because, in its powder form (which represents >95% of all formula sold in China) it is relatively easy and cheap to store and transport, especially with technological advances in modern logistics. This means costs of operation are low for potential sellers. This, coupled with the flexibility of selling online, could make online sales a lucrative market for baby formula companies looking to import to China.

In 2011, Taobao, China’s largest online retailer, reported a huge spike in baby formula sales, along with online sellers rushing to capture the local market for baby/children’s nutrition, apparel, toys, and other goods. It reported a RMB 100 million turnover every day for the baby and children segment, and sold 700 tins of milk every minute – a truly astonishing figure. That said, online sales of (imported) baby formula in China tend to be dominated by specialized international mother & baby sites, such as BBTime, OKBaby, Bambino Mio, and Clevamama. These sites, while more expensive than Taobao and the like, are most appealing to image-oriented urban mothers in China.

Threats to Imported Baby Formula Ecommerce

However, not everyone is willing to play by the rules. Savvy to the benefits of ecommerce mentioned above, some entrepreneurially minded Chinese have set up their own virtual Taobao shops, selling imported baby formula at much cheaper prices than those of the foreign formula available in retail stores. They are able to do this by – illegally – bypassing Chinese import regulations and tariffs by smuggling in product from nearby overseas ports.

So far, it appears that Chinese authorities have turned a blind eye to this idiosyncratic trade pattern: a search on Taobao for “private seller of baby formula” yields 6,000 different stores, selling baby formula products primarily from New Zealand and Japan. Chinese consumers say that the high prices are a huge deterrent to their desire to purchase imported formula through legitimate channels, including legal online outlets as well as brick-and-mortar stores. This largely unregulated C2C business could drive significant numbers of customers away from more expensive, but legal, online sellers