According to Euromonitor data, although infant formula’s market size keeps increasing in China, its growth rate dropped continuously, from 8.88% in 2018 to 4.38% in 2020. Its import performance is not optimistic, either. The import volume of infant formula in 2020 dropped by 3%, the first import decline in the recent years. Under such circumstances, many enterprises are eager to know if there are still opportunities in China’s infant formula market, and what strategies can be taken to revive the sales performance. With these questions, ChemLinked interviewed Mr. Song Liang, a famous dairy expert in China, to share his unique insight on China’s infant formula industry.
Mr. Song Liang is a leading dairy expert in China. He once worked for Ministry of Commerce for 10 years, dedicating himself to the study of dairy and infant formula industry, dairy products’ international trade, China’s new retail, as well as relevant industry policy, regulations and market mechanism. During his work in Ministry of Commerce, he continued to offer thoughts and suggestions to the central government/the prime minister through specific reports and internal reference, among which some were accepted. He is dedicated to writing industry reports, and what he writes each year serve as the internal references of Ministry of Commerce.
In the recent 10 years, Mr. Song Liang has published multiple articles regarding China’s dairy industry. His main ideas are widely accepted by the government and enterprises. Relying on his professional knowledge and insights, he also serves as leader of expert group of China Agricultural Reclamation Dairy Industry Alliance, committee member of Specialization Nutrition Consumption Committee, and strategy consultant in and independent director of multiple listed dairy enterprises.
After 30-years development, China’s infant formula market is undergoing significant transformation.
The overall market:
The sales of infant formula milk powder have covered the whole country, from the first-tier cities to fifth-tier cities.
China has well established a mechanism integrating raw materials processing, product manufacturing and R&D of infant formula products. Besides, the government standardized the market development through clear policies and regulations.
There is a significant change in the sales channels of infant formula products. Recent years has witnessed the development of maternal stores channel and e-commerce channel.
During the recent five years, China’s infant formula market is more and more centralized. At present, the market share of top 10 enterprises occupied more than 70%. Also, the market is totally saturated, which means the competition is increasingly fierce. It becomes a zero-sum game among enterprises.
China’s infant formula market polarizes significantly. On the one hand, giant companies had booming sales, no matter for revenue or profits; on the other hand, quite a few SMEs had poor sales performance and had to quit the market. In terms of the market share of Chinese and foreign brands, the sales of Chinese domestic products greatly improved thanks to the enhanced consumption confidence. However, the market share of foreign brands keeps declining in the recent two years. At present, the market share proportion between Chinese and foreign brands is approximately 6:4.
Birth rate and product price are the key factors impacting the market size of infant formula. It is anticipated that the newborn population will decrease to 9-10 million this year, and the breastfeeding rate is expected to be further improved. In addition, infant formula products are overpriced today, but it will become reasonable in future. Actually, we have already seen this trend. For example, many high-end products are now sold at a discount. In conclusion, I predict that the market size of infant formula will gradually decline and then remain stable at a certain level. The infant formula market is worth around 100 billion CNY in 2019, then it may drop to 80-80 billion CNY in 2021 and remain stable at around 85 billion CNY as of 2025.
There are three major problems:
The first one is the decrease of birth rate. The government has realized the urgency to deal with this issue and will unveil a series of policies in the next two years to encourage fertility.
Second, China’s infant formula sector is overcapacity. Those excessive capacity needs to be consumed by upgraded products with product structure optimization.
The third one is the “price war”. Although it can rationalize the price system (currently the price is artificially pushed high), “price war” has also greatly attacked the market that many retailers and distributors had no way out but to quit the market.
Last but not the least, infant formula enterprises are confronted with homogeneous competition, including the sales channel, product formula, etc.
There are three key measures. Firstly, the government should make efforts to enhance the birth rate, at least, to remain stable. Secondly, market repositioning is significant for enterprises. You need to figure out your brands’ competition status, proper pricing, and major sales channels. The last one, infant formula enterprises should expedite the transformation of their own business, that is, from focusing on infant formula business only, to diversified professional nutrition products business. The targeted population can be expanded to more age groups, including young children, teenagers, the middle aged, and the elderly people.
From the perspective of product upgrade, I think infant formula in liquid form is promising, and I believe there will be significant change in product forms in the future.
In terms of product professionality, I think food for special medical purposes products (FSMP) will be the next growing trend, but here I refer to FSMP targeting at adults. Infant formula food for special medical purposes does have market demand as approximately 10 to 20 thousand babies in China have physical defects or specific diseases. However, it is still a niche market and producing such product is not economically efficient. In this case, we suggest the government providing subsidies to enterprises that produce FSMP for infants.
When it comes to product line expansion, children milk powder would be a good choice. It can help extend the life cycle of infant formula milk powder, which can befit enterprises’ revenue and profits. Besides, there are few professional products targeting at the field of children (aged 3-8 years old) nutrition, and children milk powder can well make up for the vacancy.
Concerning the food safety, in the past years, Chinese consumers strongly held the belief that “the more expensive, the better products”, which caused the climbing price of infant formula and the birth of high-end products. However, with the extremely stringent supervision of infant formula’s manufacture and sales, the food safety issue has almost been solved today. Under such circumstance, consumers are unwilling to pay for those premium prices, definitely leading to the shrinkage of high-end infant formula market. It is anticipated that the market share of high-end products will drop from 60% to 20% in the future, and the price will range from 200 CNY/unit to 300 CNY/unit mostly (now most of them are sold at over 350 CNY/unit). Personally speaking, the development of high-end products in China has come to an end.
I believe this industry will be transformed from focusing on single infant formula milk powder business only, to diversified professional nutrition products businesses. “Diversified” means multiple target population, including not only infants, but also special groups such as pregnant women, diabetics, cardiovascular patients, postoperative patients, and people undergoing menopause. “Professional nutrition” refers to products with functions of nutrition supplement, fortification, health recuperation, etc., which require higher R&D capacity.
After infant formula industry transforming into a diversified professional nutrition business, we can foresee an extremely bright future and growth space. By 2035, the market size of professional nutrition sector will hit thousands of billion CNY.
Interview with Dairy Expert (Part II): Can Foreign Infant Formula Brands Regain Lost Market Share in China?
Interview with Dairy Expert (Part III): Uncertainties for Stakeholders in Infant Formula Sector to Consider