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Dairy Sector Strategies to Offset Paradoxical Decline in Birth Rate after Reform of One Child Policy

  •   5 Aug 2019
  •    Yilia Ye
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    • After China reformed its one child policy there has been a paradoxical decline in the number of births which is the leading cause of stagnant growth in China’s infant formula sector.
    • The stagnation and emerging challenges have precipitated another mass exodus of SMEs from the infant food sector.
    • Infant formula manufactures can offset this decline by focusing on branding and product diversification, differentiation and innovation.

    Children-Baby-Maternity Expo (short for CBME), the world’s foremost maternal & child industry exhibition, just concluded on July 27th in Shanghai. Despite thousands of attendees, one of the most notable takeaways from the event was a glaring decline in the number of exhibitors compared to the previous year, particularly a lack of infant formula enterprises [1]. Liu Lei, the founder of “Milk powder Think Tank”, explained that the dearth of exhibitors can be attributed to the withdrawal of hundreds of SMEs from the market due to regulatory pressures, increasing competition and diminishing margins.

    Sales in China’s infant formula sector have been comparatively lackluster of late, a marked deviation from the sustained upward growth trajectory that hallmarked the last decade from 2008-2018. According to the 2019 CBME China Children-Baby-Maternity industry report [2], 41% of infant formula agents reported flat sales in 2018, and 59% of distributors reported being unwilling to expand their product portfolio with new brands in 2019. The decline in China’s birth rate is the leading factor for this recent stagnation. In 2018, the total number of newborns was 15.2 million, a decrease of more than 2 million compared to 2017. Liang Zhonghua, a prominent analyst working with Huatai Securities expects things to go further downhill and bottom out at 14 million in 2019, the decline exacerbated by shifting socioeconomic pressures related to family planning, prioritization of career amongst females and fewer fertile women [3].

    Infant formula manufacturers especially SMEs are struggling with current market challenges but are coming up with innovative solutions to offset this stagnation the most successful of which are:

    1. Hire a celebrity/KOL/influencer as brand ambassador

    Recently several high-profile infant formula manufacturers have started to use celebrities to promote their products. For example, Yili is using the famous TV hostess Xie Na as the brand ambassador for their newly launched organic milk powder. Fan Bingbing, one of the most famous actresses in China, has become a brand ambassador for Bestrong manufactured by Shanghai Howell Nutrition Ltd. Co. The correlation between the use of prominent brand ambassadors and increased sales is undeniable and has prompted a flurry of similar marketing strategies. Celebrity endorsement is now regarded as an efficient approach to improve brand reputation and client engagement within the dairy sector in China.

    2. Diversification and differentiation: Chasing the lower hanging fruit

    China’s infant formula registration policy constrains manufacturers to just 3 product lines per manufacturing facility. This has meant that many manufacturers have had to remove product lines from the Chinese market, freeing up production capacities. Rather than attempting to construct and register new manufacturing facilities, many manufacturers are instead choosing to focus on the lower hanging fruit of the child nutritional food sector which has a lower entry barrier and offers excellent market potential. Residual production capacities are now being funneled towards production of other value-added dairy products such as complementary foods for infants/toddlers, food for the elderly, food for pregnant/lactating women etc.

    3. Product innovation: Targeting under-exploited sectors

    Not all segments of China’s infant formula sector are created equal. Liquid infant formula or ready to drink infant formula is still a fledgling industry in China that has failed to gain any significant traction in recent years. This is in stark contrast to the market in neighboring Japan where the product has become a major driver of growth. At present the sector represents just 0.01% of the infant formula sector in China. The sector benefits from lower regulatory barriers, in that manufacturers are not required to register products. The potential of the sector is starting to attract interest with Synutra recently investing in a new product launch.

    The sector is appealing in that liquid infant formula caters to the more globalized behaviors of Chinese mothers, the diminished influence of traditional Chinese values, a greater demand for convenience and the growing influence of men in the rearing of infants and toddlers. In addition, a growing awareness on the excellent safety and stability of liquid infant formula is dispelling traditional beliefs to the contrary. For more info on liquid infant formula please read this report, China Slow to Accept Liquid Infant Formula.

    ChemLinked will publish a report analyzing infant formula market environment from regulation perspective at the end of August. Please stay tuned on our report column.

    Reference link

    [1] Infant Formula SMEs Are Struggling with Market Challenges
    [2] 2019 CBME China Children-Baby-Maternity industry report
    [3] CBN: both marriage and birth rate decline, chills for infant formula sector is coming

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