FY 2020 Review: Are international Infant Formula Brands Hitting Snags in the Chinese Market?

Financial data

Company	2020 Total sales	YOY
a2¹	NZ$677.4 million (RMB 3.22 billion) (6 Months Ended 31 December 2020)	-16.2％
Nestlé²	CHF 84.3 billion (RMB 587.87 billion)	-8.9%
Danone³	€23.6 billion (RMB 185.70 billion)	-1.5%
Reckitt Benckiser⁴	£14.0 billion (RMB 126.30 billion)	+11.8%
FrieslandCampina⁵	€11.14 billion (RMB 88.63 billion)	-1.4%
Abbott⁶	$34.6 billion (RMB 224 billion)	+9.8%

Abbott and Reckitt Benckiser were the only two to report a performance growth in 2020. In terms of the infant milk powder business, nearly all of them delivered soggy results in the Chinese market.

Company	Infant formula business performance in China in 2020
a2	The sales of a2 Platinum® English and other labeled infant nutrition products were NZ$103.5 million (about RMB 497 million), a decrease of 35.5% over last year. The sales of Chinese label infant formula 至初 was NZ$213.1 million(about RMB 1.023 billion), a year-on-year increase of 45.2%.
Nestlé	Sales in infant formula declined, with improvement in the second half. A positive sales development for NAN was more than offset by negative growth for S-26 and illuma. The roll-out of the locally produced Belsol brand saw good progress.
Danone	Sales of the specialized nutrition business (including early life nutrition and medical nutrition) decreased by 0.9% year-on-year to €7.192 billion (RMB 56.10 billion). Danone's infant formula size in China reached nearly $2 billion (about RMB 12.92 billion), with Aptamil crowning the No.1 foreign brand in China by market share for baby milk powder.
Reckitt Benckiser	Revenue for the nutrition business, including Mead Johnson, was £3.287 billion, or RMB 290.90 billion, flat year-on-year. The infant nutrition business in Greater China declined. The infant formula business in Greater China accounts for 25% of Reckitt Benckiser's nutrition business and about 6% of group revenues.
FrieslandCampina	Revenue from specialty nutrition products, including milk powder, fell to €1.119 billion (about RMB 8.72 billion). The infant nutrition market in China recovered to pre-corona crisis levels starting in the second quarter. Friso Prestige experienced revenue growth.
Abbott	The revenue of pediatric nutritionals was US$4.127 billion (about RMB 26.68 billion), down 0.8% year-on-year. Pediatric nutritionals’ revenue in the international market, including China, was US$2.14 billion (about RMB 13..83 billion), a year-on-year decrease of 6.2%.

International IF giants face dilemma in China

Epidemic implications

In 2020, one of the challenges facing foreign brands in the Chinese market was the devastated Daigou channel due to the COVID-19 outbreak, and the negative impacts on cross-border e-commerce channels.

For example, the sales of a2 Platinum® English and other labeled infant nutrition products fell to NZ $103.5 million, due to the Daigou channel sales' contraction.

Reckitt Benckiser and FrieslandCampina also claimed that virus-induced international movement restrictions had impacted infant nutrition cross-border sales, such as those of infant formula between Hong Kong and mainland.

Increased domestic competition

Increasing local competition put pressure on international brands, as Chinese-grown brands represented by Feihe (Firmus) have begun to clash head on with them.

From 2016 to 2019, Feihe's revenue increased from RMB 3.74 billion to RMB 13.769 billion, with a compound annual growth rate of 54%. Under the COVID-19 epidemic, Feihe still achieved strong double-digit growth despite the overall decline in the infant formula industry. It has become the largest milk powder brand in China, with a market share of 18% in 2020.⁷

Falling birth rates

The number of newborns in China has continued to decline, from 17.86 million in 2016 to 14.65 million in 2019. According to the latest data released by the Ministry of Public Security⁸, the number of registered newborns in 2020 was 10.035 million, down 14.9% from 11.79 million in 2019. Experts have pointed out that China's population will fall into negative growth during the 14th Five-Year Plan period (2021-2025) and will begin to shrink sharply around 2050, with its global share falling to 7% by 2100 from about 19% currently.

The Birth rate is a key driver of the infant nutrition business. Fewer babies mean lower demand and more intensified competition.

How are they going to map out for 2021?

Although imported milk powder brands faced a challenging situation, their performance in 2020 still featured some bright spots.

For example, a2 Platinum® China label 至初 recorded stellar growth of 45.2%. As of the end of December 2020, the company's market share in the mother and baby store channel was 2.4%, an increase of 0.7% year on year. Friso Prestige, which highlighted high lactoferrin content, also experienced rapid growth due to consumers’ attention on immunity enhancement during the epidemic. Its sales exceeded RMB 2 billion in November 2020.⁹

We also keep current on where these companies are headed in 2021.

a2 Milk: innovate distribution mode

a2 said in its interim results that it would continue to invest in the infant formula brand and engage with Chinese consumers. Specific approaches include social media advertising campaigns, investment in training of in-store promotional people, and roadshows and in-store activities to build a brand connection with consumers. The company has also set plans to revive the English label infant nutrition channels (i.e., Daigou and CBEC), including providing temporary support and driving distribution innovation.

Mead Johnson: strategic business review

Reckitt Benckiser, Mead Johnson's parent company, announced in its 2020 financial report to undertake a strategic review of the infant formula business in Greater China. With markets for infant formula in Greater China continually evolving, the strategic review would help strengthen the company’s portfolio. Reckitt Benckiser also took a 985 million-pound impairment charge on its Mead Johnson business.

Friso: focus on e-commerce channels

In January 2020, Bloomberg News said that FrieslandCampina was considering selling the Friso infant formula business. However, FrieslandCampina China emphasized that the Friso brand and the infant nutrition business would not be for sale, and the company is committed to long-term development in China. It will focus more on e-commerce channels, product innovation, and expansion in lower-tier cities.

Nestlé: expand the product portfolio

In response to the slumped births, Nestlé plans to extend the concept of infant nutrition beyond the "first 1000" days of life to the first few years of life to provide nutritional solutions for a wider group. Nestlé will also make more tremendous efforts to push its business down to the third and fourth-tier markets and double down on its cross-border e-commerce business.

Danone: enhance local production capacity

In addition to gearing up for the recovery of cross-border channels, Danone is rapidly expanding its local production capacity in China, with its Qingdao plant already put into operation last month.

FY 2019 Review: https://market.chemlinked.com/industry/infant-milk-powder-firms-struggle-to-win-in-china-market-fy-2019-review