Multinationals Continue To Struggle In Chinese Dairy Industry

The withdrawal from China of Meiji Holdings, a Japanese baby milk manufacturer, is the latest example of a foreign company facing difficulties in the Chinese dairy market as the government tries to consolidate the market.

Last week, Meiji announced that they would be leaving the Chinese baby milk market, citing that costs from importing Australian milk powder were too great to continue operating in the country. The Japanese firm has had to import its milk from Australia since 2010, when a foot and mouth outbreak damaged the local supply. There has been some speculation that declining Sino-Japanese relations, as well as the nuclear leak at Fukushima, has damaged the company's sales in China. Some estimates have put a decline in sales of 90% following the 2011 tsunami and nuclear disaster.

Though one of the most promising Chinese markets, foreign companies have found it difficult to establish themselves in earnest in the dairy sector. Multinationals are increasingly turning to the premium end of the market, as domestic firms gain greater share overall. For instance, Nestlé aims to boost sales through distribution channels such as hotels and restaurants. Danone is suspending production at its Shanghai yoghurt plant as part of its restructuring strategy to focus on premium brands in China. Danone also plans to focus its investment efforts on China's first-tier cities such as Shanghai and Guangzhou, in which rapidly rising consumer affluence is translating into a growing demand for higher-value consumer products. Meanwhile, New Zealand-based dairy cooperative Fonterra is reconstructing its dairy farms in the north-east of Beijing. The company plans to build its own large-scale dairy farms in order to ensure the quality of its products. Fonterra expects to construct three dairy hubs in China.

Growing Demand Yet Multinational Problems
Milk Sales (Tonnes)

The withdrawal from China of Meiji Holdings, a Japanese baby milk manufacturer, is the latest example of a foreign company facing difficulties in the Chinese dairy market as the government tries to consolidate the market.

Last week, Meiji announced that they would be leaving the Chinese baby milk market, citing that costs from importing Australian milk powder were too great to continue operating in the country. The Japanese firm has had to import its milk from Australia since 2010, when a foot and mouth outbreak damaged the local supply. There has been some speculation that declining Sino-Japanese relations, as well as the nuclear leak at Fukushima, has damaged the company's sales in China. Some estimates have put a decline in sales of 90% following the 2011 tsunami and nuclear disaster.

Though one of the most promising Chinese markets, foreign companies have found it difficult to establish themselves in earnest in the dairy sector. Multinationals are increasingly turning to the premium end of the market, as domestic firms gain greater share overall. For instance, Nestlé aims to boost sales through distribution channels such as hotels and restaurants. Danone is suspending production at its Shanghai yoghurt plant as part of its restructuring strategy to focus on premium brands in China. Danone also plans to focus its investment efforts on China's first-tier cities such as Shanghai and Guangzhou, in which rapidly rising consumer affluence is translating into a growing demand for higher-value consumer products. Meanwhile, New Zealand-based dairy cooperative Fonterra is reconstructing its dairy farms in the north-east of Beijing. The company plans to build its own large-scale dairy farms in order to ensure the quality of its products. Fonterra expects to construct three dairy hubs in China.

Growing Demand Yet Multinational Problems
Milk Sales (Tonnes)

The major domestic companies, China Mengniu Dairy Co, Inner Mongolia Yili Industry Group, Bright Dairy & Food Co, and Beijing Sanyuan Group control about 40% of the Chinese dairy market. Though Chinese milk still maintains its poor reputation following the melamine scandal in 2008, the government is keen to modernise the industry in favour of domestic players. Last month, it was announced that the Chinese government are set to give 30bn yuan (US$4.9bn) to Chinese dairy firms to help support sector consolidation. In our view, action taken by the Chinese government is likely to deliver industry modernisation and consolidation.

Indeed, recent events from multinationals in China are likely to quicken the pace of domestic consolidation, at least in the short term. This summer, large-scale withdrawal of Danone's products in the country following a health scare from suppliers Fonterra damaged sales in Q313 and looks likely to continue harming revenue. Similarly, news that Danone's baby food brand Dumex attempted to bribe hospital officials has been met with international scorn. Earlier this year, China's National Development and Reform Commission (NDRC) issued a fine of US$108mn to six baby formula companies for price fixing and anti-competitive practices. US-based Mead Johnson was fined US$33mn, with Chinese firm Biostime having to pay US$26.6mn.

Such actions represent the competitive nature of the Chinese dairy industry. As multinational firms face rising costs and domestic firms experience government subsidies, it is likely that the sector will become more domesticated, consolidated and modern.

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Sector: Food & Drink
Geography: China
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