Expert Dialogue: Can Foreign Infant Formula Brands Regain Lost Market Share in China?

The sales performance of imported infant formula is far from satisfactory at present and it could be attributed to the following three reasons.

First, from the perspective of their business strategy. Foreign brands mainly grow their business in first and second-tier cities. However, the birth rate in these cities is now facing a more obvious downward trend. Thus, the market size of imported infant formula is shrinking more rapidly than that of local brands, which have deeply rooted in lower-tier cities.

Second, foreign brands have their problems in management. In the past, China’s food safety issues brought a huge advantage to foreign brands, namely, consumers would preferentially purchase imported products due to safety and quality considerations. However, most foreign brands failed to grasp the chance to optimize their management both inside the company and of the market. That’s why, at this stage, many foreign companies are paying for the management problems, including the problem of channel stuffing and neglect to enter lower-tier markets.

Third, after China gradually solved food safety problems, the market share of Chinese domestic infant formula is increasing under government’s support, which puts a lot of pressure on foreign brands. All of these factors above lead to the current slump in the sales of imported infant formula.

Consumers preference has already changed. When safety is not a problem, the place of origin becomes less attractive. Consumers start to value factors like company background, brand reputation, companies’ management ability, ability to educate consumers, etc.

Among all the factors, the most influential ones are the recipe itself and how companies describe the product advantage. Then comes the price, which is quite influential at present, for the market has been full of similar recipes. Many enterprises begin to sell products at a reduced price.

There are three major obstacles. First, the outbreak of the Covid-19 pandemic greatly influenced and resulted in a continued shrinkage of cross-border e-commerce business. Second, the promotion and marketing of foreign brands in China is sluggish compared to that of domestic brands. Third, their vacancy in lower-tier cities not only restrains their own development but also offers opportunities for its Chinese competitors.

The opportunities can be summarized into four aspects. First, along with the gradual unification of China’s market, the development gap between upper-tier cities and lower-tier cities is narrowing down. Hence, it will be much easier for foreign brands to enter the lower-tier cities in the future. Why do I keep emphasizing the importance of entering lower-tier cities? The fact shows that the third and fourth-tier cities are the largest market for premium infant formula. For example, the high-end brand of Firmus, Xingfeifan, sells the most in lower-tier cities. Why? It is because consumers in upper-tier cities are now more knowledgeable and rational than those in lower-tier cities. They prefer to choose cost-effective products. For instance, they will purchase infant formula via cross-border e-commerce, same quality but with less cost.

Second, with the gradual stabilization and control of the pandemic, the market of cross-border e-commerce will heat up again.

Third, consumers' perception of infant formula is increasing. Once consumers realize the importance of recipes and the role that recipes play in infant formula products, they will re-evaluate and re-consider foreign infant formula products.

The last one is, China is making efforts to build a relatively fair business environment. Based on government actions in the past months, I believe the government will start to standardize the market order in infant formula sector. One article released by Xinhuanet also implies this intent of the government. We predict the exaggerated marketing of infant formula products will be under strengthened management and control. It can also be expected that the new Administrative Measures on Marketing of Breast-Milk Substitutes will be issued next year. Childbirth encouragement is the driving force for the government to standardize the market to create a fair business environment.

Regarding the timing, I believe the year 2023 will be an important turning point. In 2023, the birth rate in China is expected to increase; the second round of infant formula recipe registration will be completed; the market of cross-border e-commerce will see a stable development; and changes will happen to China’s infant formula market structure, etc.

I advise foreign companies to stick to their bullish view on China’s market. First, despite the very complicated international environment, China is adhering to its opening-up and free trade policy. Second, in the near future, China will become the largest consumer market with robust purchasing power. Third, the population quality in China is rising, which demands better products to satisfy people’s needs.

Companies should:

• continue to strengthen brand education in China;

• continue to bring the best and most professional formula into the Chinese market;

• enter lower-tier markets and localize the product;

• further improve efficiency and reduce costs in the construction of supply chain system;

• create a good business ecosystem in China, namely, to build a good relation with government agencies, consumers, distributors, suppliers, experts, media, etc.

Companies that are doing well in these five points are likely to have opportunities.