Infant Milk Powder Firms Struggle to Win in China Market: FY 2019 Review

Despite declining birth rates, increasingly fierce market competition, and regulatory compliance obstacles, the Chinese infant formula market maintained steady growth in 2019.

Prominent domestic dairy firms: Junlebao, Ausnutria, Feihe & H&H Group

In 2019, Junlebao achieved sales revenue of about US$2.4b, a year-on-year growth of 25%, and milk powder sales of 75,000 tons. In November 2019, Mengniu sold all of its 51% holding (US$580 million) in Junlebao, and later on March 16, 2020, Junlebao entered into negotiations with Hillhouse Capital, Sequoia Capital and other investors, which is seen by many analysts as an indication of an upcoming IPO ^[1].

According to Wei lihua, Chairman and President of Junlebao, the group is aiming to be the world's leading brand of infant milk powder, and China’s top low-temperature yogurt brand in the next five years. Its 2020 goal is to exceed infant milk powder annual sales of 100,000 tons and to launch at least two new products.

It released a new organic product name ULTREE (优萃), which was launched in an online press conference on March 11, 2020. Its major selling points are that it is made with raw milk, partially hydrolyzed protein & 2 live probiotics (Bb-12 & HN019).

Ausnutria’s revenue in 2019 was about US$1b, up 25% year on year. Goat milk accounted for 42% of the company's annual revenue, up 40.5% YOY. Kabrita(佳贝艾特), its best selling goat formula brand, accounted for 38% of the company's annual revenue, with sales increasing by 45.0% compared to last year’s figures. Recent data shows Kabrita accounts for 60.5% of China's total imported goat milk powder. The brand has ranked number one in terms of China's imported goat milk powder brands for six consecutive years.

However, Ausnutria’s revenue growth has slowed for two consecutive years, dropping from 43.29% in 2017 to 24.99% in 2019. Meanwhile, the growth rates of both its cow and goat milk powder have been declining. Besides, it’s noteworthy its sales and distribution expenses reached US$260m in 2019, about a quarter of revenue.

Feihe reported revenue of US$2b in 2019, up 32% year on year, and net profit of US$570m, up 75.5%. The revenue of Feihe’s high-end milk powder series accounted for 68.6% of its total revenue, representing year-on-year growth of 41.4%. According to Nielsen, Feihe, held a market share of 11.9%in 2019, making it the country's largest producer of infant formula.

H&H Group also announced its 2019 results, with revenue of US$1.6b, up 7.8% from the previous year. The group also recorded a 19.2% increase in net profit. Its infant nutrition and care products business (BNC), grew rapidly by 17.8% YOY. Its infant formula business accounted for 5.9% of the total infant powder market share in China. However, revenue from adult nutrition and care products, its other significant business segments, fell 6% to an AU$830m, due to the new e-commerce law.

How did international IF giants perform in China market in 2019?

a2 milk

According to its 2020 Interim report ^[2] released on February 26, 2020, a2 Milk recorded 32% revenue growth globally. Its infant nutrition business grew by 33%.

Its a2 Platinum® China label (NZ$146.7m) & English label (NZ$158.7m) both recorded stellar growth, fueled primarily by the 11/11 China e-commerce sales event.  

In JD.com, a2 Platinum® Stage 3 was the top-selling infant nutrition product, and a2 was the second best-selling brand overall. In Tmall, it was the number three infant nutrition brand overall (English and China label combined). The brand also had the most successful infant formula CBEC flagship store.

In addition to driving online growth, a2 milk has also expanded its offline footprint and is now available in 18,300 stores, up from 16,400 stores at the end of 2H19.

Danone

China is Danone's second-largest market, accounting for 10% of its sales. Sales of special nutrition products account for two-thirds of its total US$2.8b revenue in China.

Special nutrition products performed particularly well in the Chinese market, especially in the fourth quarter of 2019, with a growth rate of over 20%, thanks to the outstanding performance of Aptamil(爱他美) in the 11/11 China e-commerce sales event and pre-spring festival promotions^[3]. In 2020 the company will focus on innovating new early life nutrition products.

Nestle, Abbott & Mead Johnson Nutrition

Nestle said in its financial statement that growth in its infant formula segment in 2019 was relatively slack compared to previous years. Its sales in China reached CHF6.9b in 2019^[4], accounting for 8% of its total revenue, up slightly from the previous year with an increase of CNY 700m. Although illuma(启赋) by Wyeth had strong sales momentum, it was impacted by the poor performance of the s-26 series.

Abbott had a total of US$31.9b in revenue in 2019^[5], and its China sales accounted for 7% of its total sales. Sales of infant formula from China was around US$721m, mainly driven by its brand PediaSure (小安素).

According to the FY 2019 results of Reckitt Benckiser^[6], its infant nutrition (Mead Johnson Nutrition) had global sales of £2.98b in 2019, up 2.6% on the previous year. MJN's new product launched in 2019, focuses on the concept of grass feeding, and has been well received by consumers. It is optimistic about the long-term prospects of the Chinese infant formula business and will expand its investment both online and offline channels in low-tier cities.

 2020 forecast

Continuous fierce competition –

In terms of overall performance, high-end consumption, upgrading of brand product structure, low-tier cities market expansion, and e-commerce sales have become the driving forces for the growth of dairy enterprises.

Domestic firms regain consumer confidence & market share –

There is uncertainty around the potential impact on global supply chains resulting from COVID-19. Consumer demand has remained stable. Now is an excellent opportunity for domestic infant formula brands to expand market shares as Daigou and direct mail business has been affected. As CEO of Mengniu dairy, Mr. Lu minfang said, the next 5 to 10 years will be critical for Mengniu and the whole Chinese dairy industry to regain full consumer confidence.

A summary of approved infant formula by companies mentioned in this article(by the end of 2019)