Official data shows that the sole shareholder (initiator) of Australia's well-known dairy company Murray Goulburn (Qingdao) Co., Ltd changed from Saputo Dairy Australia Pty LTD to Danone Asia Pacific Holdings Pte. Ltd [1]. Danone has taken over full ownership of the Murray Goulburn milk powder factory, which already has several registered milk powder products.
The acquisition reestablishes an infant formula manufacturing presence for Danone in mainland China after it sold the Dumex brand to Yashili over five years ago. It also reflects the multinational giant’s confidence in the Chinese milk powder market despite the current fears of a downturn due to the COVID-19 pandemic.
A mainland manufacturing presence is important for Danone in China.
Among the five major foreign milk powder brands (Wyeth of Nestle, Mead Johnson, Abbott, Danone, and Friso), only Danone has no factories in China [2]. According to Danone chief financial officer Cécile Cabanis, registration is a major factor affecting the growth of the infant milk powder business in 2020. This issue is compounded by China’s slower population growth and the COVID-19 pandemic, which has led to a delay in the launch of some of Danone's new high-end milk powder products.
According to China's regulations, infant formula milk powder and formula food for special medical purposes produced in China, or exported to China through general trade channels must be produced in registered manufacturing facilities and must undergo product registration. A single manufacturing facility can produce a maximum of nine registered formulae. As for companies that have not successfully passed the formula registration, their milk powder products cannot legally be sold in offline stores (mother and baby stores) in China and must rely on cross-border e-commerce platforms and illegal channels such as Daigou.
As regulations have become more stringent, the product formula registration process has become slower. For example, Bellamy’s (an Australian organic milk powder supplier acquired by Mengniu in 2019) submitted an application for formula registration in November 2017 and according to our latest news will only register its first product this year (actually it is not a new product registration but an alteration of an existing product held by a subsidiary of Mengniu).
Given the difficulties associated with registering a product, one strategy larger enterprise can use to expedite the process is to simply buy an existing manufacturing facility which already has registered products. For Danone, its milk powder business in China market is maintaining strong growth but is being somewhat restrained by regulatory issues. According to Danone's 2019 financial report, as Danone's second-largest market, China sales in 2019 accounted for about 10% of its global sales. About 2/3 of that came from the specialty nutrition business, which infant milk powder is a part of. In 2019 Q4, Danone's business grew by more than 20% in China.
Murray Goulburn already has three registered infant formula milk powder products, with the brand name “Maiqile," covering products from stage1 to stage 3. Danone can apply for formula registration through this factory for online brands such as Cow&Gate a2 milk powder and Karicare goat milk powder to achieve omnichannel sales.
Murray Goulburn’s China performance
As the largest dairy company in Australia, Murray Goulburn’s adult milk powder brand Devondale is well-known in the Chinese market and has outstanding sales performance across major e-commerce channels. It ranked No.1 in the imported skimmed milk category in the 2018 Tmall November 11 Shopping Festival pre-sale [3].
Devondale has had a shaky quality record in China. Since August 2017, Devondale products have been refused entry to China six times in one year [4], with the total weight of unqualified products reaching 70.41 tons, covering milk powder, milk, and other dairy products. The reasons for Chinese customs rejecting the products included expiration/shelf-life issues, inconsistencies in certificates, unqualified packaging, etc.
In May 2018, Saputo of Canada took over Murray Goulburn, however this change did not result in any significant improvements in market performance. For its infant formula product “Maiqile," which was registered in 2017, we cannot find any sales information on e-commerce platforms. According to the group's annual report, the half-year loss as of June 30, 2019, was AUD 24.4 million (119 million yuan) [5].
Danone’s China performance
Danone has a prominent infant formula business in China, and it has already registered three product lines: Aptamil, Aptamil Profutura, and Nutrilon. According to ECdataway, as of July 19, 2019, Aptamil had the largest market share on major e-commerce platforms such as Jd.com and Tmall, accounting for 12.5% of the total market share, with a growth of 14.3%.
To cater to the premiumization trend in China’s infant formula market, Danone is doubling down on the launch of high-end products. Last month, it launched the super high-end brand Aptamil Essensis 3 through cross-border channels. The product is said to have the highest content of HMO oligosaccharides among the Danone Nutricia infant formula series. This milk powder's price is 510 yuan for the first and second stages, and 439 yuan for the third stage.
Danone is also expanding into lower-tier channels to drive growth. According to its 2019 financial report, Danone's expansion in low-tier cities is highly successful, and the number of mother and baby stores it has entered has increased significantly.
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