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Industry Focus: 10 Key Forces Shaping China’s Infant Formula Sector in 2019

  •   6 Dec 2019
  •    Shine Hu
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    Looking back at 2019, opportunities in China's infant formula sector have been inextricably linked to major challenges, mostly in the form of regulatory obstacles. As the disruptive influences of technical barriers to trade continue to shape markets, we have seen several companies fall by the wayside. The supply vacuum created in the wake of their market exit has also been quickly filled by market-ready enterprises which have tended to benefit domestic companies. Competition between domestic and foreign brands continues to heat up and is forging greater category differentiation and stoking the fires of innovation.

    As opportunities in tier 1 and tier 2 cities dry up, low tier cities still offer major potential and are now driving growth in the sector, albeit primarily for domestic enterprises. Demand for premium and ultra-premium products is still driving product development towards greater segmentation.  Products that utilize organic ingredients, goat's milk, A2 beta-casein protein, various optional active ingredients like OPO, pre- and probiotics and lactoferrin are all trending strongly but a race to the top has ensued and premium and ultra-premium products now dominate.

    The market reformation strategies and industry development blueprints of the last several years are bearing exceedingly juicy fruits for China's government as several enterprises are now pulling in revenues in excess of 5 billion per annum, championed by domestic giant Feihe (Firmus) who is now challenging international companies and setting its sights on the top spot in China's IF sector.

    Here are the top ten trends in China's IF sector in 2019:

    The Race to the Top: Trends towards premiumization 

    Nielsen data shows that in the first half of 2019, high-end (retail price is between 330-430 yuan/kg) and super high end (retail price is over 430 yuan/kg) products accounted for 61.2% of all infant formula sales. Premium product sales increased from 37.6% in 2017 to 40.8% in 2018, up 18% from a year earlier, while ultra-premium sales grew even faster, from 15.5% to 20.4%, up 43% YoY. As expected there was an inverse proportionality at play and mid to low end product sales suffered a concomitant decline in sales figures.

    Premium and ultra-premium brands including Firmus, Wyeth, Mead Johnson, and Ausnutria recorded impressive revenue figures. Premium product sales were the main source of revenue for Firmus which saw its YOY revenue growth increase from 42.6% in 2016 to 66.5% in the first half of 2019.

    Higher demand for more segmented and professional products

    Foods for special medical purposes, specifically infant formula products designed for babies with medical ailments also saw excellent growth in 2019. In addition, products developed with active ingredients associated with specific functions like probiotics for improved digestive function and improved immunity, Omega 3 fatty acids for cognitive development benefits, Lactoferrin for improved immunity, prebiotics for gut health and a host of other cutting-edge active ingredients also drove both consumer demand and product development in 2019.

    Chinese consumers are increasingly turning to readily available social media outlets providing scientific information on infant nutrition. The influence of this content is now increasingly driving purchasing preference. With many of these content portals being sponsored, affiliated or owned by dairy companies we have also seen a rapid market response to new consumer demands which is translating to development of products which leverage state of the art ingredients or address commonly reported issues in babies' e.g. lactose intolerance, colic, allergies, etc.

    Different strategies for domestic brands and foreign brands

    According to Nielsen data, 3rd and 4th tier cities account for about 40% of China's milk powder market in 2019. The market share occupied by low-tier cities is expected to exceed 70% by 2020. Interestingly these markets are currently dominated by domestic enterprises. International enterprises are struggling in these markets due to a lack of localized assets, unfamiliarity with the market environment, poor traction amongst local consumers and unfavorable positioning.

    Based on their respective strengths and weaknesses, domestic brands and foreign brands should adopt different development strategies. It is vital for domestic brands to improve brand image and shift from channel-driven to brand-driven growth mode. For international stakeholders looking to make inroads into lower-tier markets they need to localize their strategy to align with consumer preference, marketing strategy, channel selection, etc.

    Leveraging the concept of generational care: Product lines for the whole family

    In 2019, many dairy enterprises are expanding their product lines to children's milk powder (often dubbed “stage 4”), milk powder for pregnant and lactating women, middle-aged and elderly milk powder, etc.

    • Launch Sohomin Children's Nutritional Formula Milk Powder featuring hypo-allergenic
    • Launch Love Plus Stage 4 Children's Formula Milk Powder aimed at children aged 3-6
    • Reached strategic cooperation with New Zealand nutrition brand Good health to expand the field of nutrition products
    Kabrita of AusnutriaLaunched Yingjia Adult Goat Milk Powder series
    Swisse of H&H GroupPlan to roll out products revolved around female beauty  

    Reverse Engineering the Breast is Best principle

    As consumers become more aware of the nutritional benefits of breast milk for their babies, manufacturers are now attempting to produce products which best approximate breast milk.

    Continue research on breast milk and has discovered a new breast milk active factor. Its newly launched blue packaged illuma is said to be rich in breast milk active factor gsMO and whey protein.
    FirmusRelease the results of the "Fatty Acid Composition of Chinese Breast Milk" study for the first time at the 52nd European Association of Pediatric Gastroenterology, Hepatology and Nutrition (ESPGHAN) Annual Meeting, which is the first systematic study on the fatty acid composition of breast milk in China.
    Officially upgrade "Yili Maternal and Child Nutrition Research Center" to "Yili Maternal and Child Nutrition Research Institute"

    Globalization of Chinese dairy enterprises

    China's major dairy enterprises are accelerating their international expansion plans. This includes the acquisition of raw materials, pastures, processing facilities, food brands, etc.

    Build an infant formula manufacturing facility in Kingston, Ontario, Canada.
    Build Yili production base in Oceania, collecting high-quality milk from New Zealand, Denmark, and other countries.
    Ausnutria and H&H Group
    Adhere to the business strategy of "Buy Global, Sell Global" by acquiring global quality brands, and at the same time, setting up R&D, production, transportation, and other institutions in the world, to realize the sale of products across the world.

    Rise of domestic milk powder brands

    Firmus, the first Chinese infant formula enterprise to generate revenues in excess of 10 billion yuan, successfully listed on the Hong Kong Stock Exchange on November 13, 2019, recording an initial value that would make its shares the most valuable of all China's listed dairy companies.

    This is a landmark event in the development of China's domestic milk powder industry. In fact, in terms of brand building, scientific research and performance, domestic milk powder brands have built a lot of momentum in the past two years, exemplified by the successes of Jinlingguan of Yili, Yashily of Mengniu, Firmus, Junlebao, etc. According to the report "Insights into the Market Environment of Infant Formula in China 2018" released by Nielsen, the market share of domestic milk powder reached 43.7% in 2018, with a sales growth rate of 21.1%.

    The shift of milk powder main consumer group

    People born after 1995 have gradually emerged as the main driving force of maternal and infant consumption. According to the "White Paper on the Post-85, 95 and 00 Generation" released by Mob Research Institute, the current marriage rate for those born after 1985 (between the ages of 25 and 34, including those born in the 1990s) has reached 72.2%. However, the current marriage rate of the post-1995 generation is only 10.3%, with only 5% already having babies. Therefore, it is clear the future maternal and child market will be dominated by the post-1995 generation.

    China Doubling Down on State Support for Domestic Milk Powder Industry

    From the Opinions on Accelerating the Revitalization of Dairy Industry and Ensuring the Quality and Safety of Dairy Products in 2018, to the Suggestions of the CPC Central Committee and the State Council on Giving Priority to Agriculture, Rural Areas and Farmers in 2019(also known as 2019 Central First Document), and The Promotion Action Plan of Domestic Infant Formula Milk Powder in this June, the government has made it abundantly clear about its plans for China's domestic sector. Expect trends towards a more equitable share of the market for domestic enterprises to continue and expect some more international causalities.

    The competition focused on stage 3 milk powder

    Sales of stage 1 milk powder have stalled due to falling birth rates, rising rates of breastfeeding and a ban on advertising of infant formula designed for babies under the age of one. Data from the Maternal and Child Research Institute showed that the decline in the number of newborns directly led to a decline in the sales of stage 1 and stage 2 milk powder in the first half of 2019, including a 10.9% decline for stage 1 and a 3.8% decline for stage 2. Given the current market performance, of stage 1 and stage 2 infant formula we predict that stage 3 infant formula will be the major battleground as companies fight for market dominance.

    Disclaimer: This article is translated from a Chinese article published by Naifenguanzhu(Milk Powder Focus)/myguancha.com.


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    Research analyst at ChemLinked, focusing on market and regulatory updates of imported products in China, mainly covering food and cosmetics.

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