Status quo of China's milk powder market

Declining demographic dividend

In recent years, China has come out of the demographic dividend period due to the accelerating aging population and decreasing birth rate. The full liberalization of the second child policy ultimately did not trigger a spike in births. In 2019, total births fell by 580,000 from 2018 numbers down to 14.65 million, and the birth rate dropped to 10.48‰. The numbers of newborn is expected to drop further going under 11 million in 2030 ^[1].

China's 14th Five-Year Plan for 2021-2025 deleted the rhetoric of "family planning" from the previous five-year plans while putting forth the concept of "inclusiveness" in fertility policy for the first time. ChemLinked saw a signal of the country’s relaxation on birth restrictions to encourage more births.

*** “Demographic dividend” refers to the positive impact on economic growth that is generated by a specific demographic structure--a relatively large working-age population and a relatively low dependency ratio in the total population. ***

Chinese milk powder brands occupy more market share

In the first three quarters of 2020, China imported 252,000 tons of infant formula, down 2.5% year-on-year ^[2]. Since the 2008 “Sanlu melamine-tainted milk powder scandal”, China's imported infant milk powder business has been rapidly developing in order to re-win consumers trust. Now however, is the first time to show a downward trend. The decline in imported infant formula milk powder is related to the falling birth rate in first-and second-tier cities and the increasing penetration of domestic milk powder in second-and third-tier cities. Chinese-grown infant milk powder brands have occupied a market share of over 50% ^[3].

Formula registration approval rate slowed

In the first half of 2020, the State Administration for Market Regulation (SAMR) issued 282 formula registration decisions for infant products, including 252 approval decisions. Among these decisions, registration changes accounted for about 80%, and only 11% were first-time registration ^[4]. Among the 30 registered formulas approved for the first time, only 9 were imported products. In ChemLinked’s view, the COVID-19 epidemic has severely impacted the formula registration progress, such as the overseas on-site inspections.

How do international giants react?

Multinational giants are facing compounding problems, including falling birth rate, obstructed international logistics, the Daigou exodus, and slowed formula registration approval progress. In spite of these negative factors, they still regard Chinese market as a growth engine and have deployed multi-pronged strategies in order to win out.

Expand product portfolios

As the birth rate decline has caused the infant powder market to shrink, adult and children milk powder have become prominent directions for product development. We at ChemLinked also suggest some potential sectors including cream, milk protein powder, whey products and cheese suited to Chinese tastes.

a2 has set plans to launch A2 dairy products that "cover all categories and all generations" within the Chinese market. The company currently relies on fresh milk and infant formula milk powder as its core business. It rolled out two new room temperature milk products- a2 milk ® whole milk and a2 ® Smart Nutrition™ children's milk for children 4 years and above at the third CIIE.

a2 launched a2 milk ® whole milk and a2 ® Smart Nutrition™ children's milk for children 4 years and above.

Nestlé focuses on infant cereals, and vitamins, minerals, and supplements for mothers and children to achieve sustained growth. It has also launched milk powder for senior citizens.

Danone has rolled out first child-rearing milk powder AptaGrow and AptaMama live probiotics that can help mothers with long-lasting and quality breast milk feeding.

Fonterra launched several cream products under its Anchor brand to occupy the catering market. Fonterra's catering service team in Greater China plans to launch more than 300 innovative products in the fiscal year 2021.

Fonterra launched its first European imported cream.

Abbott and Mead Johnson launched milk powder for children and the elderly, respectively.

Double down on investment                                                          

Wyeth inaugurated the Greater China headquarters in Shanghai during the third CIIE. Wyeth Greater China Headquarters has built five centers for nutrition science, talent training, global cross-border e-commerce headquarters, customer service, and logistics. It represents the company’s goals to further invest in the Chinese market through new product R&D, logistics construction, and cross-border business.

Danone established the Danone Open Science Research Center for Life-transforming Nutrition in Shanghai. The center focuses on three major areas of breast milk research, intestinal health, and food safety and quality. Additionally, Danone unveiled its "local first" strategy. It divided its international business into five regions: Europe, Asia/Africa & Middle East, Greater China & Oceania, CIS & Turkey, and Latin America. Danone made the Chinese market independent from Asia, marking the pivotal role China market plays in Danone’s overall growth.

Leverage the e-commerce channel

Given the difficulties associated with registering products, international players have started to harness the power of cross-border e-commerce in more proactive manner.

Infant formula products introduced through cross-border e-commerce in 2020

Expand local production capacity

Localized production can reduce lingering uncertainties caused by the COVID-19 pandemic, such as border closure and cross-border channel fluctuations.

Danone took full ownership of Murray Goulburn China (Qingdao) plant this May, reestablishing the infant formula manufacturing presence in mainland China. The plant expects to go into production in March 2021. It also set up special nutrition production bases in Qingdao and Wuxi.

Meanwhile, Wyeth set up a factory in Suzhou, which is responsible for producing S-26 Youerle and Belsol ranges.

Nestlé announced an expansion plan for the Nestlé Dairy Farming Institute (DFI) in Shuangcheng, Heilongjiang this year. The expansion will increase the A2 milk sources and expedite Nestlé's production of local NAN infant formula milk powder.

FrieslandCampina, the parent company of Friso, plans to enhance the capacity utilization of its Shenyang factory.