Analysis: New rules set to shake up China's shrinking infant formula market

Health and Happiness (H&H) International Holdings

20/06/2023 24:00

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      Stricter standards require producers to seek new licenses
    

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      New rules need investment in R&D, testing, marketing 
    

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      Bigger domestic, international brands to take more market
share
    

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      Some will stay out as market shrinks due to falling birth
rate
    

  
    By Farah Master
       HONG KONG, June 20 (Reuters) - China's introduction of
the world's strictest nutrient standards for infant formula are
likely to see scores of brands give up on a market that is
shrinking along with the country's falling birth rates, industry
executives and analysts say.
    New rules imposed in February force infant formula makers to
invest heavily to re-make, test, certify and re-register their
products for China, before potentially conducting new marketing
campaigns. 
    This will further shake up an industry already at the
forefront of China's demographic decline, with bigger domestic
and international brands likely to increase their market share
as smaller ones exit, analysts said. 
    “The new standard requires higher product quality as well as
stronger manufacturing techniques which are expected to
eliminate many small-to-medium-size players,” said Quinn Mai,
analyst at Euromonitor International, which estimates China’s
infant formula market will fall 12.5% to $21 billion by 2025 due
to shrinking demand.
    China's new requirements revise the minimum and maximum
values of nutrients such as selenium, manganese and choline,
mandate lactose content and ban fructose and sucrose. 
    Many experts describe the regulations as the world's
toughest, aiming to get as close as possible to breast milk.
    In 2008, at least six infants died and more than 300,000
fell ill from Chinese formulas tainted with melamine, a toxic
chemical used to boost milk protein scores in tests. More than
20 Chinese firms were implicated, one of a series of food safety
scandals in the early 2000s which industry executives say still
weigh on consumer trust.
    China's National Health Commission (NHC) cited infant safety
when announcing the latest rules. NHC and the State
Administration for Market Regulation (SAMR) did not immediately
respond to comment requests. 
        “The government needs to show Chinese people that ‘we
care about babies, we care about food safety so much that we
come up with the strictest formula regulations’,” said
Auckland-based Jane Li, who has been involved in the China
infant formula market for more than a decade and acts as
principal consultant for Li, Page & Co.
    “Beijing is very clear in their goal. They want to see fewer
and fewer players in the market.” 
    Chinese regulators have approved submissions by 200 brands,
according to analysts and industry executives who expect only a
few dozen more to be authorised in coming months. 
        Under the previous standards, more than 400 brands
battled for share in a market where only around 28% of mothers
opt to breastfeed versus more than 50% in India and 75% in the
U.S., according to Unicef data.
    Celia Ning, director at the nutrition research institute of
formula maker Junlebao, said the registration process could
"easily" take a year. Companies cannot sell new stock until they
are approved and if they fail to register their new products
early they are “out of the market.”
    The process requires many "resources from designing a new
formulation, to trial, analysis and registration as well as good
documentation and factory inspection."
    She said smaller brands may be put off by extra costs,
especially when the whole industry was in a "critical situation"
due to an ageing population.
    China's birth rate last year was just 6.77 births per 1,000
people, its lowest on record, and U.N. experts forecast China's
population to shrink by 109 million by 2050.
    "Maybe we can increase our market share, but everyone will
see total sales reduced," said Ning, whose company is targeting
other milk products such as yoghurt for future growth.
   
    MARKET RESHUFFLE
    U.S.-based Abbott Laboratories  ABT.N  is the biggest global
brand known to have pulled out so far, telling Reuters the
decision reflected "a changed market for paediatric nutrition
products and that the market is well served by multiple other
companies." 
    "We have decided to focus on our growing adult nutrition
business," it said in an email.
        Australia's infant nutrition council told Reuters only
three companies out of nine previously approved to sell in
Chinese retail shops are seeking regulatory greenlight under the
new standards.
    New Zealand's Ministry for Primary Industries told Reuters
up to 15 companies have applied or intend to apply for China's
new product registration. SAMR has so far registered the
products of three of those companies, the ministry said.
    One of them, A2 Milk Company  ATM.NZ  said this month it had
received approval. 
    Another, Fonterra  FCG.NZ , said it was progressing through
the re-registration process but that infant formula made up a
relatively small part of its China business, with declining
birth rates and regulation driving industry consolidation.
    Global players Nestle  NESN.S  and Danone  DANO.PA  said
they welcomed the new standards. Nestle said several products
had already been approved under the new requirements. 
    Hong Kong-listed Health and Happiness (H&H)  1112.HK  said
four of its formulas had been approved as of May and would be
valid for the next five years.
    H&H's new formula cost around 9% more to produce than the
old recipe but the company said the rigorous approval process
would help its image. 
    “Companies such as H&H group that are able to gain approval
will not only be viewed by consumers as more qualitative than
other brands, but also more trustworthy,” H&H told Reuters in an
email.           

 (Additional reporting by the Beijing newsroom; Editing by
Marius Zaharia and Lincoln Feast.)
 ((farah.master@thomsonreuters.com; +852 3462 7709;))