The unceasing COVID-19 pandemic, the drop in birth rate, and the supply chain obstacles jointly resulted in ongoing challenges to the infant formula industry in China. According to AC Nielsen1, the sales value of infant formula in China for H1 2022 decreased by 4.0% year-on-year (YOY), showing an overall downward trend in market demand. In such a challenging market, some infant formula companies maintained growth against the headwind, while some faced decline.
Danone posted net sales of USD 13 billion in H1 2022, up 7.4% on a YOY basis. The recurring operating margin stood at 12.1%. By category, the sales of specialized nutrition business (including infant formula) posted sales of USD 3.9 billion, with a YOY increase of 10.4%. Essential Dairy and Plant-Based sales(EDP) reached USD 6.89 billion, up 4.6% YOY.
In the Chinese market, Danone's infant formula business posted mid-to-high single-digit growth (no precise figure released in Danone's 2022 Interim Financial Report) with a continued resilient market share on both Chinese and International labels. Chinese-label grew by double digits, while International-label saw continued growth, with indirect channels (Daigous, Friends & Family) now representing less than 15% of the segment's revenues in Q2 2022. Aptamil maintained strong momentum in China's infant formula market.
Bruno Chevot, the President of Danone Greater China, indicated that Danone identified investment priorities in Aptamil's share improvement, local supply network enhancement and new product development3. In March 2022, Danone reached strategic cooperation with Hunan Eurbest Nutritional Food. In May 2022, Danone announced that it had reached an agreement with Mengniu to sell its stake in the Inner Mongolia Dairy joint venture and Yashili, as well as to acquire 100% of Dumex Baby Food Co. Ltd., a Chinese manufacturer of infant formula owned by Yashili. The changes will notably allow Danone to further expand its ability to manufacture infant formula products locally in China.
Infant Formula of Danone's Aptamil
Nestlé's sales in H1 2022 increased by 9.2% YOY to USD 46.27 billion. Sales in Zone Greater China reached USD 2.71billion, with an increase of 6% YOY.
In Zone Greater China, the infant nutrition business turned positive, led by a strong recovery in the second quarter, particularly supported by Nestlé NAN and Wyeth Illuma. Impacted by COVID-19-related movement restrictions, growth was driven by robust demand in e-commerce channels and continued innovation. During Tmall's 618 Shopping Festival, the sales of Wyeth Illuma ranked the 5th among all cow infant formula brands5. On the JD platform (one of China's major e-commerce platforms), Nestlé NAN and Wyeth Illuma ranked among the top 10 infant formula brands based on sales in H1 20226. Wyeth S-26 Aierle series was approved by China's new GB standard for infant formula products, conducing to its brand reputation.
Infant Formula of Nestlé's Wyeth Illuma
The reported revenue of FrieslandCampina in H1 2022 increased by 19.4% to USD 6.39 billion. The revenue of specialized nutrition (including infant formula) saw an 18.6% growth to USD 593 million.
China again played a crucial role in the company's global infant formula market. Despite the challenges for shipping, import and distribution under COVID-19 lockdowns, the revenue of Friso, an infant formula brand of FrieslandCampina, in China's market rose significantly, mainly led by Friso Prestige's strong growth of 37% YOY. The growing revenue and market share of this ultra-premium segment was brought by its expanded distribution capabilities to China's smaller cities through FrieslandCampina's unique digital distribution channel in China—FrisoGo8, an app to connect the Friso brand with mother and baby stores and local service providers to better penetrate the offline market.
According to Hein Schumacher, the CEO of FrieslandCampina, the specialized nutrition business group will entirely focus on the infant nutrition business of Friso. China will be one of the key markets in which FrieslandCampina aims to further penetrate through Friso's ace products with continuously upgraded formulas and digital innovation.
Infant Formula of FrieslandCampina's Friso Prestige
A2's revenue for FY22 was up 19.8% YOY to USD 830.4 million. By region, revenue in China & Other Asia area totalled USD 417.1 million, increasing 24.5% YOY. This upsurge was driven by performance in Q2 2022 as A2 ramped up its growth strategy supported by strong consumer demand for Chinese-label infant formula.
In China, A2 Zhichu Chinese-label infant formula sales rose by 12.2% YOY, totalling USD 251.3 million with a record-high market share. On the one hand, as A2 enhanced offline distribution capacity with 26.5k stores at the end of June 2022, the market value share in mother and baby stores (MBS) increased to 3.0%. On the other hand, A2 accelerated the domestic online (DOL) channel for Chinese-label infant formula, with market value share in the DOL channel increasing to 2.5%.
Sales of A2 Platinum English and other labels through cross-border e-commerce (CBEC) reached USD 146.9 million, up 53.3% YOY. According to Smart Path, A2's market value share in CBEC was 19.5% at the end of June 2022. Strong revenue growth in CBEC also reflected A2's strategy to make its distribution network closer to its consumers.
A2 and Synlait are working closely on the new GB registration process for A2's Chinese-label infant formula products. It is noted that the New Zealand Ministry for Primary Industries has cooperation arrangements with China's State Administration for Market Regulation (SAMR) which positions New Zealand brands well in relation to China registration processes.
Infant Formula of A2's Zhichu
Abbott reported a growth of 12% YOY in total sales, totalling USD 23.152 billion. Among the four business segments, sales of the nutrition segment decreased by 7.2% YOY to USD 3.847 billion. A voluntary recall and manufacturing shutdown negatively impacted this decline in February because of the cronobacter infections of certain infant formula products at one of Abbott's US plants. As a result, the sales of certain infant formula products in the U.S. plunged to USD 116 million, with a decrease exceeding 58% YOY.
After the outbreak of the cronobacter infections issue, the General Administration of Customs of PRC (GACC) issued an announcement reminding consumers to "temporarily not purchase through any channels" of a related infant and child product of Abbott. Worse still, Abbott has previously trapped a series of quality and safety problems in China, resulting in a declining market reputation and a sharp drop in infant formula market share.
Infant Formula of Abbott's Eleva
The total revenue dropped by 16.2% YOY to USD 1.36 billion. The net profit was USD 318.7 million, representing a YOY decrease of 39.7%. Feihe indicated that the decline was primarily due to (i) a decrease in the birth rate in the Chinese mainland, and (ii) the "fresh" strategy in 2022 to further reduce the channel inventory of products such as Astrobaby products, maintain the high freshness of products on the shelf, and take tighter control over the inventory levels in distribution channels.
Despite revenue and profit declines, Feihe maintained its solid market position in the Chinese infant formula market. In addition to e-commerce sales, Feihe sold its products through an extensive offline distribution network of over 2,000 distributors with more than 100,000 retail points of sale. According to AC Nielsen, Feihe's market share slightly increased to 20% in the first half of 2022, maintaining its leading role in the Chinese market.
Infant Formula of Feihe's Astrobaby
Yili reported a record-high revenue of USD 8.9 billion, with an increase of 12.31% YOY.
The milk powder and milk products business clinched a revenue of USD1.69 billion, a YOY upsurge of 58.3%, far exceeding the growth of other brands in the industry. In particular, the infant formula segment performed noticeably well, with the revenue of USD 1.69 billion (including Ausnutria Q2), remaining the top growth in the infant formula industry. According to AC Nielsen, the retail market share of Yili infant formula increased by 3.5% over the same period last year.
Yili accelerated the pace of product innovation and launched the "JinLingGuan Sainamu" series, the first infant formula in the industry using organic A2 milk source. Worthy of mentioning is that "JinLingGuan" took the lead in China's new GB registration, with several series being successfully approved13. Regarding the distribution, Yili has optimized the mother and baby store channel by setting up the "Lingyinghui" baby club, and has also expanded offline distribution in lower-tier cities which brings more than 30% growth in the mother and baby store channel.
Infant Formula of Yili's JinLingGuan
Beingmate's revenue amounted to USD 226.4 million, with a YOY growth of 43.95%. The net profit to shareholders of the company rose by 28.01% YOY to USD 6.02 million, marking a record-high for the same period over the past eight years.
By category, the revenue of infant formula increased by 18.2% to USD 166.9 million, accounting for 73.74% of the total revenue. On the product side, Beingmate launched the new "Aijia Organic A2" series, catering to the needs of young parents for high-end organic infant formula. On the channel side, Beingmate has realized a new retail model covering online and offline. The company developed 1,685 offline distributors by the end of June 2022, with revenue gained through offline distribution increasing by 16.24% YOY. Meanwhile, the revenue through online channels went up by 12.48% YOY. As for the growth of infant formula production and sales volume, it is noteworthy that it was partly due to the expanded OEM and ODM business.
Infant Formula of Beingmate's Aijia
Mead Johnson China15
After nearly one year of independent operation since being acquired by Primavera Capital Group, Mead Johnson China announced its performance in August 2022. In Q2 2022, Mead Johnson China's revenue increased by more than 20% compared with Q1. The total profit in H1 2022 went beyond expectation by nearly 30%.
Mead Johnson China reaffirmed its major strategies of localized independent operation—optimizing localized demand-oriented product portfolios, improving digital platforms centered on Chinese consumers, and comprehensively penetrating lower-tier markets. Based on these strategies, it identified 5-year goals: to create super high-end products with 10-billion-level of revenue, to tap into new market segments and realize double-digit growth, and to maintain a sustainable and stable partnership.
In addition, Mead Johnson China unveiled its first goat infant formula "Mead Johnson Chunguan", and announced its plan to invest in a 10,000-ton-capacity factory in Tianjin to establish a leading R&D center for more goat infant formula products.
Infant Formula of Mead Johnson's Enfinitas
Mengniu's revenue amounted to USD 6.69 billion, representing a YOY increase of 4.0%. Revenue from milk powder products dropped by 25% to USD 265.7 million, accounting for 4.0% of Mengniu's total revenue.
The revenue of the infant formula business mainly included the revenue from Yashili (in which Mengniu holds approximately 51% equity interest) and Bellamy's (Mengniu's wholly-owned subsidiary). Despite its omnichannel operations through large mother-and-baby chain stores, supermarkets, e-commerce and social new retail channels, Yashili's infant formula revenue went down 4.8% YOY to USD 215.8 million17. Regarding Bellamy's performance, the offline sales of Bellamy's infant formula achieved rapid growth through developing flagship stores, organizing organic brand festivals and other projects. Bellamy's also explored cross-border emerging business channels. During the 618 Shopping Festival, Bellamy's organic infant formula ranked the first on CBEC platforms such as Alibaba and JD.com.
In addition, Mengniu entered agreements with Danone to acquire another 25% equity interest in Yashili from Danone and dispose of 100% equity interest in Dumex to Danone. Mengniu has been preparing for the pre-conditional privatization of Yashili through contract arrangement to adjust the infant formula business.
Infant Formula of Yashili's Ruibuen
In H1 2022, Ausnutria recorded revenue of USD 509.3 million, representing a YoY decrease of 15.1%. The decline in operating performance was mainly due to (i) the short-term impact of Ausnutria's proactive adjustments to the sales strategy of its own-branded cow infant formula products, Hyproca 1897, and (ii) increased support to the company's distributors to sustain their continued growth.
The revenue of the own-branded infant formula business dropped by 21.2% YOY to USD 414 million, accounting for 81.3% of the total revenue. The Hyproca 1897 business unit streamlined its channels and enforced more stringent control over the whole inventory level of its distribution channel, resulting in a decline in the cow infant formula revenue. Meanwhile, the undersupply of infant and maternity formulas led to the underperforming revenue of the goat infant formula Kabrita. Despite declines in sales figures, according to AC Nielsen, the share of Hyproca 1897 in offline market increased YoY by 0.5% YOY; and the retail demand for Kabrita recorded a comparatively higher growth with double-digit between January and June 2022.
Infant Formula of Kabrita's Yuebai
The revenue grew by 9.8% YOY to USD 835.4 million, whilst the net profit declined by 5.2% YOY to USD 65.9 million. By product segment, the infant formula products in the Chinese mainland reported a 3.4% decline to USD 332.3 million due to a series of obstacles, including declining birth rates, constrained demand, and increasing competition ahead of the implementation of relevant new GB standard. According to AC Nielsen, H&H maintained a stable market position of 5.7% of China's overall infant formula market for the recent twelve months ended on June 30, 2022.
Infant Formula of H&H's Biostime
The Trend of the Chinese infant formula Market
Based on financial reports of infant formula companies in H1 2022, inventory adjustment has become an essential keyword in the infant formula industry. For example, Feihe implemented the "fresh" strategy to reduce the channel inventory of "Astrobaby" products. Ausnutria launched proactive adjustments to the sales strategy of its cow infant formula products, Hyproca 1897, at the cost of short-term revenue decline. Those adjustments conduce to the high freshness of products on the shelf and tighter control over the inventory levels in distribution channels.
Distribution Channel Development
In addition to increasing channels, infant formula brands emphasize high-quality channels with exclusive customized projects and preferential supports, which will empower core channels to achieve breakthrough growth. FrieslandCampina leverages the "FrisoGo" app to connect the Friso brand with mother and baby stores and local service providers to penetrate the offline market. Yili established the "Lingyinghui" baby club for high-quality mother and baby stores. Those exclusive customized projects help to build a better distribution ecosystem with bound interests.
The Alliance Between Mid-stream Dairy Giants
H1 2022 witnessed active mergers and acquisitions among dairy enterprises with the motives for the new resource, expanded segment, enhanced brand reputation, and enlarged market. Danone reached strategic cooperation with Hunan Eurbest Nutritional Food to enter the goat infant formula market. Yili acquired Ausnutria to achieve complementary advantages. Mengniu planned to privatize Yashili to boost its infant formula business. China's infant formula market is expected to enter a highly centralized landscape, with several super diary giants dominating the market.
Product-side Trends Under the New GB Standard
As the new GB standard for infant formula will come into effect on February 22, 2023, infant formula brands must proceed with new GB registration updates. With the release of the approved new GB formulas, product-side trends are gradually becoming clearer based on the leading brands' orientations. First, the high-end formulas are still the focus of the competitive landscape. According to the National Bureau of Statistics, China's per capita annual disposable income in 2021 reached USD 4,877, with a CAGR of 8.1% from 2016 to 2021. Such an increase will drive consumers to trade up with the increased consumption momentum of China's high-end infant formula products. Research and development of top-level formulas and raw materials will be the key to infant formula brands' success in the new GB era. Second, infant formula brands accelerate the pace of development of both cow infant formula and goat infant formula. The goat infant formula market expanded rapidly in H1 2022. Dairy giants, including Danone, Feihe, Yili, Junlebao, and Mengniu Yashili, further tapped into the goat infant formula industry.
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