Will the New Policy on the Registration of Infant Formula Lead to Massive Clearance Sales in China?

Background

Recent Chinese infant formula policies have sparked a large scale “acquisition battle” between large dairy companies. The purchase of a 100% share of ADP by Ausnutria Dairy is recent news. ADP is one of the 8 Australian manufacturers of infant formula that were granted registration with CNCA and some internal sources said that Ausnutria bought this company in order to get the approval to export to China. Another example is Bellamy that for the same reason bought a 90% quota of Camperdown Powder Pty, a company that also was previously granted registration with CNCA, although suspended at the moment (reported in the news section of our website).

It is also worth mentioning that on 1^st October of last year that CFDA 26- “Administrative Measures for Registration of Infant and Young Children Milk Powder Formula Recipes”, the new policy for milk powder began to be implemented, ordering that all infant formula companies can’t exceed three product lines and 9 different recipes, regardless of whether or not their product was made in China. Consequently, the varieties of baby formula already registered and the ones that we will find in shops in the future will be directly proportional to the number of registered companies.

Consequences of 14^th July CFDA Statement

Getting to the July 14^th statement from CFDA, we remind you that it is aimed at clarifying questions on FSMP food and infant formula recipe registration during the transitional period and includes the provision that all products imported before 1^st January 2018 can be sold in China until their expiration date. Some professionals analyzed the situation predicting that, under the influence of the new policy, companies that are about to quit the market will probably dispose of their stocks by carrying out clearance sales.

In an interview given to Beijing Shangbao, Senior analyst of the dairy industry Song Liang stated that the decision to extend the registration period to 1^st January was made in order to provide companies who still didn’t register with a buffer period. A huge number of small manufacturers will also be cleared out. Song Liang said that at the moment China counts 108 infant formula companies and 77 importers of which only 45 completed at least the registration application. According to previous estimates, of about 2000 brands, there will be only 528 remaining, an impressive 75% reduction.
 

Who will benefit from this Decimation? 

Song Liang stated that with the new regulations on registration of Infant Formula, there will be notable advantages for mainstream and foreign investment brands. In fact, many lower level producers will gradually be forced to withdraw from the market but mainstream ones will be spared. Premium and Ultra-Premium products will see their market share quickly become bigger and bigger as the tendency towards premiumization of infant formula is already evident. According to statistical data from the industry the period 2012-2016 saw a steady growth of the market share of premium (retail price around 290-390yuan/900g) and high premium (price more than 390 yuan/900g) infant formula. The first one went from 14% in 2012 to 24% in June 2016, and the second from 13% to 25% in the same amount of time. Many industry sources also think that in the future the route to premiumization will lead to success, and this is especially true for domestic producers. Song Liang also reminded Beijing Shangbao readers that the road to high premiumization is not easy to follow but products like organic and goat milk-based formula have good chances of becoming popular.

Under the influence of such policy, dealers and consumers share the concern that companies that didn’t obtain registration will suffer from a loss in consumer confidence who may avoid buying their products. One possible outcome of this is that companies forced to leave the market soon might decide to reduce production volume and focus on dispatching existing stocks.

However, many companies that will never be registered can still hope for big profits. In fact some experts predict that, hoping for the “purchase frenzy” that will happen just before 1^st of January, some operators might engage in mass production. Nonetheless, increased production is not necessarily a positive phenomenon because distributors feel hat not being able to register the brand will mean a reduction of imported goods and stocks and will refrain from purchasing those products and this will in turn lead to increased stocks abroad.