China’s growing love affair with internet shopping is driving up sales of foreign baby formula.
The world’s largest importer brought in 25 per cent more foreign-made infant formula by value in the first six months of this year than in the same period last year, according to China customs data. That increase followed a 42 per cent rise in import value for the comparable 2014 period.
As of 2015, China made up about one-third of the world’s total infant-formula market, with imports valued at $US2.47bn ($3.25bn) annually, roughly three-quarters of which came from Europe. Prices for imported infant formula have stayed high, unlike prices in the broader dairy sector, whose products fell 5.4 per cent per tonne in the first half from the previous year.
A primary driver of the growth is Chinese consumers’ increasing ability to buy infant formula offshore through websites, as online shopping expands throughout China. New parents continue to want foreign products after years of scares involving tainted domestically produced infant formula in China.
The rise of these internet platforms was allowing parents from smaller cities in China, who previously had limited access to foreign formula markets, to buy offshore products, said Yujing Li, a senior analyst at Mintel Reports in China. That has lifted market penetration of foreign products.
Infant formula, which can be fed to older children as well, is made of milk, vitamins, minerals and other products such as whey-protein concentrate. The data are for dried infant formula imported ready for sale with less than 5 per cent cocoa, according to customs’ definition.
Online sales rose to about 22 per cent of China’s infant-formula sales in 2015 from around 2 per cent in 2010, according to a report from investment bank UBS, which said that urbanisation and the increase in internet access could continue to drive online-sales growth of baby formula specifically.
Parents remain concerned about the safety of China-made products after a series of formula-related incidents. The worst, in 2008, resulted in six children dying and 300,000 falling ill because of locally produced formula tainted with the chemical melamine. As a result, many Chinese companies headed offshore to make products, and global companies are producing more formula outside of China to sell in the mainland to meet demand.
“All my friends and relatives use imported milk powder when they have babies,” said Wu Dan, 27, from Hai’an in Jiangsu province, who relies on friends travelling overseas to bring it home for her. “My baby is eight months old, and I’ve been feeding him imported infant-milk powder since he was born. I’ve been to Germany before and I trust German brands.”
Manufacturers — including the three largest competitors in the infant-formula sector, Nestle, Mead Johnson Nutrition and Danone — have embraced e-commerce channels such as Amazon.com and Chinese-language site Tmall in recent years.
Imports of baby formula made entirely beyond China’s borders represented 35 per cent of Mead Johnson’s retail sales in China at the end of last year, compared with just 5 per cent in 2014, a spokesman said. “In China, the ongoing shift in consumer demand for fully imported product may continue to negatively impact our locally manufactured brands,” the company said in its 2015 annual report.
China, however, clamped down on a tax loophole in April: consumers now have to pay a value-added tax and a consumption-products tax on formula. This will result in a tax of 11.9 per cent on offshore purchases of less than 500 yuan ($99), which were previously excluded.
Furthermore, the government has introduced regulations to improve industry standards.
This is expected to hurt some buying by Chinese consumers and by small retailers planning to sell within China.
Because the coming changes were made public early, some of the uptick in sales at the start of the year could be related to stockpiling before the changes came into force, Ms Li said.
Also, Chinese retailers likely have been stocking up ahead of an expected increase in babies conceived during this year’s Year of the Monkey — one considered especially lucky — as well as a forecast for a small uptick in babies being born because of the relaxed one-child policy.
The birthrate was the lowest in five years in 2015, partly because Chinese didn’t like to give birth in the Year of the Goat, resulting in Nestle’s market growth slowing, said a spokeswoman. She estimated that the company’s infant-formula market growth to be “3 per cent to 5 per cent” this year.
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