Last week, China released the new national food safety standards for infant formula (GB 10765-2021), older infant formula (GB 19766-2021), and young children formula (GB 10767-2021). These three standards replace GB 10765-2010 and GB 10767-2010, and will be effective starting from February 22, 2023. More details can be found on ChemLinked.
The new national standards put forward higher requirements, which would improve the market entry threshold and accelerate the industry reshuffle.
More small and medium-sized brands would get knocked out.
China implemented the "The Administrative Measures for the Registration of Product Formulas of Infant Formula Milk Powder" in 2016 (referred to as the strictest policy on milk powder in history) to rectify the excessive domestic infant powder formula numbers, random formula formulation, and frequent replacement and other chaos.
The implementation halved the number of formulations. As of December 31, 2020, the number of infant formula products that have passed registration approval was 1,311, compared to more than 3,000 before the implementation.1 Many small and medium-sized enterprise were forced out of competition.
The new GB standards put forward stricter quality control requirements for enterprises, and lifts standards on the production process, research and development and production capacity.
A noticeable feature of the new standards is that it sets stricter standards for macro elements. For example, the latest standard stipulates that for milk-based infant formula food, it is not allowed to use fructose or saccharose as the carbohydrate source, and the best substitute for that would be lactose. If it is used, lactose should account for at least 90% of the carbohydrate. Under this circumstance, the production cost per ton of milk powder will increase by about 1,000 yuan, which poses a severe test for small and medium-sized milk powder enterprises.
The new standards also set the minimum and maximum level of some nutrients in milk powder, which add strains to the entry of many small and medium-sized enterprises due to higher technical threshold.
As the new standards propel the phase-out of the incompetent players, enterprises with sophisticated research and development capabilities could occupy more market share. The industry concentration would increase at an accelerated pace. China dairy industry senior expert Song Liang forecasts the top 10 infant formula milk powder companies’ market share in China would reach 90% in 2021.2
Leading domestic brands would gain a stronger foothold.
The new standards’ release precipitates the expansion of local brands in the lower-tier markets, which used to be occupied by small brands. With channel exploitation advantages and brand operation capabilities, local brands expect to usher in a seminal development period.
Since the epidemic in 2020, the overall sales performance of foreign-funded infant formula brands has been sluggish, with most brands showing a pronounced year-on-year decline. From January to April in 2020, foreign brands’ sales declined by about 15% year-on-year, and Wyeth, Abbott and other brands declined by more than 25%.3 See ChemLinked report on 2020 FY review of major overseas dairy giants here.
While Chinese domestic brands have already embarked on an upward growth trajectory, according to the recent 2020 financial reports released. For example, Feihe achieved revenue of 18.592 billion yuan in 2020, up 35.5% year-on-year. The financial report highlights that in 2020, Feihe’s infant powder revenue was 17.674 billion yuan, a year-on-year increase of 41%, which exceeded the company's total revenue growth. Feihe has maintained double-digit growth in recent years, with a compound annual growth rate of 49.47% from 2016 to 2020 in terms of revenue.
The trend towards premiumization would gather steam.
The release of the new national standards is conducive to the upgrading of the infant formula industry, with research and development expecting to become the core of future competition. Meanwhile, it also reflects consumers’ increasing demands for high-end products. High-end milk powder (including ultra-high-end and high-end) will be the growth driver of the infant formula industry.
It is expected that the high-end milk powder market will reach 1,998 billion yuan by 2023, with a compound annual growth rate of 16.6% from 2018 to 2023, and the market share will rise from 38% in 2018 to 58% in 2023.3 Goat/sheep milk powder, A2 and organic milk powder are prominent high-end segments.
Also, more brands would pay attention to various high-end ingredients, including nucleotide, lactoferrin, HMO, and OPN to empower more value for their products.
ChemLinked is going to hold a webinar interpreting the impact of the new infant formula GB standards, stay tuned if you are interested.
