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Keith Woodford sees the marketing of New Zealand's food products in China about to get major disruption via online selling, and infant formula will start the trend

Rural News
Keith Woodford sees the marketing of New Zealand's food products in China about to get major disruption via online selling, and infant formula will start the trend
How long can infant formula premium prices hold in China when major brands start selling online? <a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

By Keith Woodford*

A Chinese language report on WeChat – China’s popular social media platform – indicates that the Chinese infant formula market is about to become a lot more price competitive.

According to a usually reliable Chinese industry website, the New Hope Nutritional Foods Company is about to introduce a new line of products called ‘Akarola’ which will come from New Zealand and sell for less than one third the price of similar products.

New Hope already has a New Zealand sourced brand called ‘Akara’ which is manufactured and canned by Canterbury-based Synlait.

Linked to this, Synlait announced in late 2014 that it was taking a 25 percent share in New Hope Nutritional Foods and that this would create an integrated supply chain from farm to consumers, in line with Chinese Government regulations. 

New Hope itself is a huge agri-food conglomerate with headquarters in the mega city of Chengdu in China’s Sichuan Province. Its interests include a wide range of commodities and agri-food products. 

New Hope’s reach extends throughout much of South East Asia.

Back in 2008, I visited their Sichuan headquarters. That visit confirmed to me that New Hope is both large and ambitious. They have the financial muscle to really make things happen when they want to.

This latest report is saying that New Hope plans to sell the so-called ‘Akarola’ brand, sourced from New Zealand, at less than 100 RMB per can (900g), which is approximately NZ $21.

This is less than a third of the shop price for most imported brands. New Hope’s own Akara brand is currently selling at online shopping website Taobao for up to 378 RMB, but with discounts available.

So are these reports reliable and is it feasible that New Hope will shake up the market in this way? 

Well, whether or not it will actually happen only time will tell. But the report does have an air of authenticity. It was only posted on 23 March, but New Hope would surely have seen it.  And If it were wrong, then presumably New Hope would have quickly contradicted it.  Perhaps they are testing the waters.

However, it is certainly feasible for New Hope to still make a profit at these prices as long as they sell online.

Currently, the margins on infant formula in China are simply enormous.

It is these margins that have brought all of the infant formulas companies big and small to China, like bees to the honeypot.

To put these prices in perspective, most infant formula in New Zealand sells for about NZ $20 per can, so it is hard to comprehend why prices are so high in China where, despite minimal tariffs, the same brands can sell for between $60 and $80 per can.

Part of the reason this happens is that the supply chain through distributors and into retail outlets is an absolute jungle. 

Chinese sources calculate that the landed cost in China of international brands is typically no more than 25 percent of the final retail price. I have other data from a major international consultancy firm which suggests the landed price is considerably lower even than this, sometimes being no more than 15 percent of the final retail price. Everything else goes to wholesalers, multiple level distributors, retailers and brand owners, all of whom make good profits. 

Online selling cuts straight through all of the complex and inefficient within-China supply chain.

It also fits with the buying habits of Chinese consumers, who in recent years have been increasingly buying products online. In that regard, Chinese have been making the transition to online purchasing even faster than New Zealanders have done.

Regardless of whether or not the ‘Akarola’ report proves reliable, there is no doubt that the infant formula industry is ripe for a big shake out. 

New Hope is probably the one company with the power and financial muscle to do this quickly and make a big profit though large scale sales.

But if they don’t do it, then others will do it, but perhaps in smaller steps. It can be taken for granted that the Chinese Government would be highly supportive of any moves that do bring down consumer prices for good quality infant formula. 

For New Zealand, this is not necessarily going to be a bad thing. It is not New Zealand that is making the enormous margins; it is the brand owners and all of the middlemen along the way. Infant formula can still be lucrative at much lower prices. The one proviso is that the product has to be sold online.

This importance of online selling in China is something that goes well beyond infant formula. That is something that all of the New Zealand agri-food industry needs to come to terms with.

----------------------------------

Keith Woodford is Honorary Professor of Agri-Food Systems at Lincoln University. He combines this with project and consulting work in agri-food systems. He will be writing a regular column here. His archived writings are available at http://keithwoodford.wordpress.com

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20 Comments

Nice to see that some countries have compedative markets that work.

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There is a really easy model for biz to follow when selling prods into China:

 

produce prod -> sort out your logistic -> sort out your certifications -> sell your products on Taobao or Tmall

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Just the other day we read on interest.co.nz

http://www.interest.co.nz/opinion/74625/how-alan-bollard%E2%80%99s-jacket-may-help-teach-nz-how-be-service-economy-asia-pacific

How Alan Bollard’s jacket may help teach NZ how to be a service economy in the Asia-Pacific

The remaining 91 percent are what Bollard calls “invisible payments.” They consist of a wide range of services for retail, logistics, banking, marketing and other activities as well as payments for intellectual property and, of course, profits.

 

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[ Irrelevant, off-topic comments removed. General unrelated comments should be posted on 90at9/Top10/What-happened-today stories. Please stay on topic on other items. Ed ]

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I haven't a chance to check but a friend told me Karicare baby milk products are selling cheaper in Aust supermarkets than in NZ, something like $17 AUD in Coles/Woolworths vs $25 in Countdown/New World.  Consider extra shipping cost to AUS.. someone is ripping off the consumers.

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Internet selling would create a very competitive market.

 Just hit on babymilkbuddy.com  the equivalent to gasbuddy.com and you have the cheapest product by brand.

 However this is in a country that sells more Chateau Lafite than is produced in France.

 

 

 The iconic Chateau Lafite has become the poster child for wine forgery. A bottle of Lafite from 1982, considered one of the greatest vintages of the 20th century, can cost upwards of U.S. $10,000.

  That has led to a thriving industry in Lafite knockoffs in China. Aficionados say there is are more cases of 1982 Lafite in China than were actually produced by the chateau that year.     http://www.reuters.com/article/2013/06/09/us-china-wine-fakes-idUSBRE95…
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Too easy.

 

Get Barfoot & Thompson and Hougarden and Greengarden and Rosegardens to advertise the stuff on a teaser advert on their Chinese websites

 

Advertise directly. Ship from New Zealand

Good price USD $40

Guaranteed 100% new zealand made

Delivery 1 week ex-new-zealand warehouse

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Just a thought but isn't it a price and supply distortion, Hope synlait has enought product to keep the price right.

Shows that Fonterra is off on its own tangent, not making sure product is getting to the customers at a reasonable price.

Producers should have made sure that price gouges did not control the market and in effect cause a sence that china was staying out of the market. Truth of the matter the retail price is too hight and minor amounts of product being traded

These  price gougers are playing the rest of the world as chumps forcing margins both ways by causing supply glut outside of China and huge supply shortage inside.

Maybe im mad

I know I am angry that the product is not getting to who wants to buy it at a agreeable price.

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Fonterra's strategy was all ways to be the biggest and extort high prices, they are looking more and more like dinosaurs as  the competition kicks in.

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Hey  the problem with Fonterra is that they are just like how the NZ cricket team were play well in the round robin then choke when it matters at the finals

(Im sure the blackcaps are over this now)

Fonterra has a great product at a great price undersells to comdities but can't finish to get the product where the premium is at the consumers plate.

I know I am a supllier and I follow world market prices and we are allot cheaper than the rest of the world.

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Hey  the problem with Fonterra is that they are just like how the NZ cricket team were play well in the round robin then choke when it matters at the finals

(Im sure the blackcaps are over this now)

Fonterra has a great product at a great price undersells to comdities but can't finish to get the product where the premium is at the consumers plate.

I know I am a supllier and I follow world market prices and we are allot cheaper than the rest of the world.

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Hey  the problem with Fonterra is that they are just like how the NZ cricket team were play well in the round robin then choke when it matters at the finals

(Im sure the blackcaps are over this now)

Fonterra has a great product at a great price undersells to comdities but can't finish to get the product where the premium is at the consumers plate.

I know I am a supllier and I follow world market prices and we are allot cheaper than the rest of the world.

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0

Hey  the problem with Fonterra is that they are just like how the NZ cricket team were play well in the round robin then choke when it matters at the finals

(Im sure the blackcaps are over this now)

Fonterra has a great product at a great price undersells to comdities but can't finish to get the product where the premium is at the consumers plate.

I know I am a supllier and I follow world market prices and we are allot cheaper than the rest of the world.

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0

Hey  the problem with Fonterra is that they are just like how the NZ cricket team were play well in the round robin then choke when it matters at the finals

(Im sure the blackcaps are over this now)

Fonterra has a great product at a great price undersells to comdities but can't finish to get the product where the premium is at the consumers plate.

I know I am a supllier and I follow world market prices and we are allot cheaper than the rest of the world.

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Be patient buddy. When you have a crappy internet connection it feels like nothing is happening but beneath the surface it is . Roll on fibre networks

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doug123,

 The problem is probably not  Fonterras, excdpt for the misguided belief that they could borrow and grow and chinas demand would compound for years.

  China has a debt problem and an over capacity problem caused by cheap credit. I'd include dairy in this.

 

The plain truth is that six years of torrential money printing and worldwide ZIRP have not happened with impunity. On the one hand, massive, sustained and universal financial repression caused an artificial growth and investment boom in much of the world, especially China and the EM, which has now run out of steam and is visibly and rapidly cooling.

There is probably no better proxy for the global investment boom than the spot price of iron ore because it captures China’s massive infrastructure construction spree and the waves of waves of mining, shipbuilding, steel-making and construction materials spending that it set off all over the world.  But this huge tidal wave has now crested, leaving behind the worst of both worlds——cooling demand and still expanding supply.

 

http://davidstockmanscontracorner.com/the-bottoms-not-in-why-this-marke…

 

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EU says end of milk quotas mean opportunities in Asia   http://www.eubusiness.com/news-eu/agriculture-food.10is?
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The word around the traps is that it is not EU/USA companies that are causing problems for/undercutting Fonterra but our processors with foreign investors/foreign ownership within NZ that are more the problem. 

 

One of the reasons that Fonterra was formed was because for NZ farmers it made no sense to be undercutting each other on the overseas markets as we were all the losers in that game.  History now is repeating.  The question could be asked how long before Fonterra is forced to split up (and therefore all the issues of farmers returns v investors arise).  

 

Over the years there has also been long standing chatter that not all Fonterra Directors read all the Board papers before a Board meeting.  If that is the case it might explain some of the issues Fonterra has?

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Thats going to be a tough ship to turn around CO.

In the meat industry we lost that battle years ago, thats if we were ever winning in the first place.

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NZ milk powder futures drop as Fonterra lifts GDT volumes, signalling prices will fall https://nz.finance.yahoo.com/news/nz-milk-powder-futures-drop-231400847…?  
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