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

[June 20, 2023]  By Farah Master

HONG KONG (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."

Baby formula are pictured at a supermarket in Shanghai, China June 11, 2023. REUTERS/Aly Song

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 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 said this month it had received approval.

Another, Fonterra, 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 and Danone 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) 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.)

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