New Hope Dairy Group, one of China’s largest dairy groups, announced on 1 April that it would be selling its new infant formula brand named Akarola at a retail price of only 99 RMB from May through the E-commerce platform JD.com (see CL Food News on 3 April 2015). By taking advantage of direct sales through e-commerce channels, New Hope can cut out all superfluous links in the supply chain and the associated costs incurred during traditional offline sales which it is passing directly on to customers allowing it to retail at such a sensationally low price. New Hope has serious ambitions to enter the infant formula market and consolidate a significant market share with a product which undercuts the vast majority of its competitors which normally retail between 200-400 RMB.
Just 2 days after the announcement, another large dairy enterprise Yashili revealed its plans to follow suit with the announcement of its business plan to develop a 99RMB product.
Changing Chinese Consumer Perception is Crucial to Success of Low cost Model
Retail price for infant formula varies considerably, ranging from 100-500 RMB. According to one supermarket purchasing manager “the price of besting selling low end products are between 120-140 RMB/can and the price of the most high performing high-end products is between 200-300 RMB/can, with most premium products being imported”. A high quality imported product sold with a price tag of 99Rmb is likely to be greeted with skepticism by Chinese consumers but with the correct marketing strategy which plays on the NZ origin of its raw materials it is likely Akarola will attract a lot of attention.
Price is one of the key factors affecting the purchasing behaviors of Chinese parents, with the brand, world of mouth and quality & safety also numbering as important factors. A survey of Chinese women revealed that many eschew cheap products due to lack of reputation and tend to correlate lower price with lower quality. Several industry insiders also have a particularly negative attitude to the low price model touting brand reputation as key in influencing consumer purchasing behaviors.
The Gig is Up for Overpriced Imported Infant Formula
Mr. Yang Chaoben the marketing director of New Hope has a different view of their new 99 RMB product. “It takes time for consumers to accept a product seeming cheap but with assured quality. After they gradually become aware of the truth that infant formula products should not have been that expensive but should be more reasonable priced, they will start to try”, said by Yang. The Chairman of New Hope Mr. Luo Yonghao accepts that in the initial stages of launching this brand there would be significant losses but expects things to take a favorable turn when word gets out and on-line sales volumes reaches a certain amount. Mr. Song Liang, a dairy industry expert analyzed that the cost of producing a single can of imported product is between 45-50 RMB. The final cost will reach 75-80 RMB after adding various taxes, e-commerce fees and logistics etc. making the margins on a 99 RMB product very slim. Time will tell if Akarola and its marketing strategy will be a masterstroke for New Hope Dairy or just another failed Coup D’état by a domestic industry struggling to come to terms with the dominance of imported brands. Irrespective of the success of this individual product the rise of ecommerce and the international expansionism of domestic dairy giants is meaning Chinese consumers are increasingly aware they are being overcharged for imported infant formula products.
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