2021H1 Results: How did Foreign Infant Formula Brands Perform in China?

Danone

In 2021H1, Danone’s sales stood at €11.835 billion, up 1.6% on a like-for-like basis. The Specialized Nutrition Business (including infant formula) posted revenue of €3.513 billion, down 2.6% year on year.

According to Danone¹, Adult Nutrition, which now represents approximately 15% of Specialized Nutrition revenues, delivered high single-digit sales growth, while Infant Nutrition posted low single-digit sales growth.

In China, performance remained polarized. Domestic labels posted positive growth in the quarter, despite the very high base of comparison, leading to a semiannual growing at around mid-single digits. E-commerce platforms for international labels delivered very strong growth, while indirect cross-border channels, including Daigou business, Friends&Family Daigou and the Hong-Kong platform, continued to be under pressure and declined within the 45% to 60% range in the second half of 2020. Aptamil market share continued to be resilient.

Danone is now aggressively expanding its own cross-border business, such as establishing a global distribution center in Guangzhou, establishing a bonded distribution center in Chongqing, and designating Qingdao, where the local infant formula production facilities are located, as a vital import port.

Nestlé

In the first half of 2021, Nestlé’s sales increased by 1.5% to CHF 41.8 billion². Reported sales in the zone AOA (Asia, Oceania, and sub-Saharan Africa) rose 1.5% to CHF 10.2 billion. China recorded double-digit growth, helped by a recovery in out-of-home channels and the consumption during Chinese New Year. However, Infant Nutrition (including Wyeth) saw a sales decrease, impacted by lower birth rates in the context of the pandemic.

Nestlé is dedicated to launching new premium and ultra-premium infant formula products in the Chinese market through the cross-border e-commerce channel. In the first half of 2021, Nestlé launched BEBA SUPREME (adding five HMOs) and Wyeth LUXA (adding six HMOs) on the CBEC channel. During the 618 mid-year shopping festival, Wyeth cross-border product line recorded double-digit growth. Nestlé also rolled out the Chinese-label product Wyeth illuma Yunchun (combining OPN active protein and a2 milk source), which is regarded as the most crucial product in the Chinese market. The organic infant formula Wyeth illuma Yuncui also recorded more than 150% growth during the 618 promotional campaign.³

While Nestlé faces challenges of falling birth rates and competition from local brands in the Chinese market, it remains committed to long-term success in the world’s largest infant formula market.

FrieslandCampina

According to FrieslandCampina⁴, the Group’s revenue slightly decreased 1.8% to €5.5 billion in the first half of 2021. The revenue of Specialized Nutrition was under pressure due to the difficult infant nutrition market, which decreased by 14.9%. Friso Prestige in China improved considerably in terms of revenue and market share in the growing ultra-premium segment, while Friso Gold in mainland China and Hong Kong decreased.

Cross-border e-commerce has become a growth engine for Friesland’s infant formula business in China. The group's cross-border e-commerce business grew 34%⁵ in the first half of this year. The latest HMO milk powder is also launched on the cross-border channel.

According to Chen Ge, president of Friesland China, the lower-tier market, cross-border e-commerce and category segmentation will be the future focus. For example, Friesland will continue to deepen the penetration of the ultra-high-end Friso Prestige and also tap into segmented sectors such as goat milk power and children’s milk powder. Friesland also established the China for China (C4C) team this year, which is the first time for the group to set up an R&D team in a single country market, hoping to deepen engagement in the Chinese market.

Abbott

Abbott's total revenue for the first half of 2021 was $20.679 billion, increasing 37.4% year on year. Revenue from Abbott's global pediatric nutrition business was $2.159 billion, up 2.2% from a year earlier. In the international market, which includes China, pediatric nutrition revenue was $1.123 billion, up 1.1% year on year.⁶

Among imported players, Abbott seems to have lagged behind. Its market share has been much lower than Friesland, Wyeth, Danone, and Mead Johnson.

Abbott's advantage in organic milk powder has been gradually replaced by Wyeth and domestic brands Yili and Junlebao. Besides, Abbott has been frequently involved in quality and advertising scandals. Since 2018, Abbott has been fined several times by regulators for using disease treatment or medical terms in product advertisements and has been fined a total of 11.47 million yuan so far. This May, Abbott was fined 9 million yuan for the detection of vanillin in the stage 1 infant formula.

Reckitt Benckiser

Reckitt Benckiser’s revenue for the first half of 2021 was ￡6.598 billion7, up 1.5% year on year. Excluding IFCN China (Infant Formula and Child Nutrition business in China), the net revenue was 6.274 billion, up 3.7% year on year. Nutrition net revenue declined by 8.5% on a like-for-like basis, primarily due to the significant decline in IFCN China.

In Greater China, IFCN net revenue declined significantly in the period as the market continues to be challenging. Competitive pressures are intensifying, the Hong Kong border remains closed, and the 18% decline of birth rates in 2020 materially impacts the demand.

This June, the Group announced the definitive agreement to sell its Infant Formula and Child Nutrition business in China (IFCN China) to Primavera Capital Group for an implied enterprise value of $2.2 billion. The disposal of IFCN China is expected to complete in the second half of 2021.

In the future, Primavera Capital will leverage its resources and local leadership to support Mead Johnson's development in China from many aspects, such as business innovation, operation improvement, channel optimization, and digital transformation.

Future trend of Chinese infant formula market

The development of the mother and baby industry is closely related to the newborn population, which is more pronounced for infant formula enterprises. China recorded 12 million new births in 2020, marking the fourth consecutive year of decline. The disappearance of the birth bonus inevitably leads to a shrinkage of the domestic infant formula market. According to Frost & Sullivan, China's infant formula industry has entered an era of slower growth since 2019. At the same time, infant formula companies are engaged in a more heated competition, with the market shares of CR10(the top 10 companies by market share) reaching 76.9% in 2020.

However, consumers' demand for premium and personalized childcare has increased substantially, providing opportunities for infant formula companies to find new growth drivers. Since 2021, China has issued a series of policies to prop up the implementation of the "three-child" policy from fetation, parturition to upbringing and education to stimulate population growth, which is undoubtedly good news for the infant and child industry.

According to Chinese dairy analyst Song Liang, as China recovers from the epidemic and introduces various birth support policies, the fertility rate will rebound significantly. Besides, with the release of the new infant formula national standards and the competition of the second round of formula registration, the market reshuffle will lead to a sounder development environment for the infant formula industry. The market is expected to thrive after 2023.