Keith Woodford reports on a significant disruptive shift in China's infant formula market that will see the huge margins vanish but make the product available to millions of new consumers

Keith Woodford reports on a significant disruptive shift in China's infant formula market that will see the huge margins vanish but make the product available to millions of new consumers
New Hope is about to change the Chinese infant formula market in a major way
Image sourced from Shutterstock.com

By Keith Woodford*

Synlait’s Akarola is about to transform China’s infant formula market.

Fonterra’s new partner Beingmate, and all the other marketers of infant formula, are in for a huge shakeup.

On 25 March of this year I foreshadowed that infant formula prices in China were about to become much more competitive.

I based my report on information from dairy industry sources within China that New Hope Nutritionals – owned 75% by China’s New Hope and 25% by New Zealand’s Synlait  - was about to  launch a new brand of New Zealand- made infant formula called Akarola.

I reported that the new brand would be sold exclusively online, at prices much less than half of normal prices in China.

A few days later New Hope Nutritionals launched their online campaign on JD.com.

The price that I foreshadowed of 99 RMB for a 900 g per can was indeed correct. In New Zealand dollars, this is about $21, or $16 in American dollars.

In itself, there is nothing remarkable about selling infant formula at this price. It is a price that is broadly in line with international prices.

But it is a price that is totally out of line with what has been happening in China.

For the last few years, Chinese consumers have been paying several times the normal international infant formula prices. Brand owners, distributors, and retailers have all been making a killing.

It has been a crazy scene.

In 2012 and 2013 it was possible to buy infant formula at retail prices in New Zealand, Australia and the UK, then ship it to China, and still make a huge profit.  There were also more than 100 brands – some have suggested over 400 brands – that were coming out of two Auckland factories.

The Chinese have tried to bring order to the market in various ways. First, in 2013 many of the large dairy companies, including Fonterra, were fined for alleged price collusion. And then in 2014, new laws were put in place requiring all brand owners to meet stringent standards of documentation and certification relating to food safety.

Those new rules have quickly sorted out most of the fly-by-night brigade. Within parts of the New Zealand media there was considerable anguish, based on a false assumption that it was all some Chinese conspiracy to block legitimate New Zealand companies. However, it was something that had to be done.

What New Hope and Synlait are now doing is the next stage in a major revolution.

This time everyone else marketing infant formula in China will be very concerned.

In marketing terms, the News Hope and Synlait strategy is a disruptive behaviour.

It is changing the rules of the game.

New Hope is telling Chinese mums and dads that they have been getting ripped off.

On JD.com they are showing what infant formula sells for in other parts of the world, and comparing that to the crazy prices in China.

New Hope and Synlait’s online presentation comparing international retail prices for infant formula.  The big message is why should  English mums buy infant formula at 89 RMB, Dutch mums at 90 RMB, and Canadian mums at 105 RMB, while Chinese mums pay about four times this price?

They are telling the mums and dads that they can now have the same quality product from the green pastures of New Zealand, and saying there is total traceability back to the Synlait factory on each individual can.

The story is illustrated with pictures of Canterbury pastures and snow clad Mt Hutt.

Linking Akarola back to  Synlait’s Canterbury production base.

New Hope is a huge Chinese agri-food conglomerate headquartered in Chengdu.

It totally dwarfs a company like Fonterra. And it has the financial resources to make a play which others can only dream of.

New Hope has figured out that it can still make a nice profit at these much reduced prices, as long as it can build market share. They know that about 40% of infant formula purchases are already made online and that this is increasing rapidly. So the key to success will be getting sufficient supply from Synlait.

Within days of the product launch on JD.com, the existing supplies ran out and currently there is still no more supply available.

Over the next few months, they may well struggle from an ongoing shortage.

However, as Synlait’s third dryer comes on stream in September, with specialist infant formula capacity, those supply issues should be attended to.

That new Synlait dryer has a yearly capacity to provide 50,000 tonnes of product per annum, which is 55 million cans of formula!  [Correction: I am advised by Synlait that they do not currently have the canning capacity to turn all of that new processing capacity into 900g cans. Some will still be exported as bulk ingredients.] 

The classic analogy for a market disruptive strategy is Henry Ford and the Model T car. It wasn’t Henry who first invented a car. And initially the invention of the car did not in itself threaten horse drawn carriages. But once Henry Ford introduced the Model T in 1908 at a price that millions could afford, the world did indeed change. There was no going back.

Chinese dairy company Yashili, which uses only New Zealand dairy products in its infant formulas, has now responded by saying that from May it too will sell its infant formula online to Chinese mums and dads for a similar price. The final price has yet to be confirmed, but it will be no more than 108 RMB.

Now that the ball is rolling, others will have to follow suit.

It may take a while, but the outcome is inevitable:

Chinese infant formula prices are going to come down to international levels.

I am already getting mail from some industry players saying that this is going to be a disaster for New Zealand. But I don’t think that is necessarily so.

The middle men have been the ones soaking up all of the profits.

The supply chains into baby shops – where most infant formula is sold - will now have to become much more efficient to compete with online sales.

But there is a lesson here for all New Zealand agri-food suppliers into China: if you aren’t selling online then you are going to end up missing in action.

China is different and online is where all the action is.

New Zealand and Synlait linked to China on JD.com

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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

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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7 Comments

But there is a lesson here for all New Zealand agri-food suppliers into China:

Is the lesson more: How plans change/what a slippery rope that supply chain is, just when you think you're moving up, they...

Synlait’s 51% owner, Chinese company Bright Dairy, is also its first customer and will sell the New Zealand manufactured product for about $80 a can.

“What we are finding is there’s premiums available for products from this part of the world and it’s all about the trust that’s provided when you make and finish a product here when it goes into the market sealed,” says Synlait Milk chief executive John Penno. “If it’s got all the good things about New Zealand sealed up in a can, they’re prepared to pay premiums for that and that’s something you can’t take away.”

Penno says demand for infant formula is growing worldwide and New Zealand is recognised as a source of quality product and that’s what has driven the factory expansion in Dunsandel, Canterbury.

http://www.ruralnewsgroup.co.nz/rural-news/rural-general-news/synlait-mi...

and Penno says the move from commodities to higher value products is very significant for Synlait. “We’re starting to earn more from the same inputs, from the same farms, the same fertiliser, the same labour and it’s so important for us to do that.

“We’re aiming to put as much as we can into finished cans because we can capture the most value for ourselves and for the country the further along the value chain we get. For us, the strategy is about building volumes of this product because it’s so much more valuable than the other products we can make.”

Industry wise, where are the over and above commodity returns for produce?
Not in the branded SKU's crippled by the Oz supermarkets.
Not in infant formula (seems the picture on the can and cert. of incorporation are give aways).

and now
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1142...

Synlait Milk's share price has tumbled after the Canterbury-based specialised milk powder manufacturer reported a $6.4 million net loss for the six months to January and revised down its full-year earnings forecast.

The company, which is 39 per cent owned by Shanghai's Bright Dairy - through Shanghai Bright Dairy and Food - said the loss arose from unrealised foreign exchange losses of $6.8 million.

Synlait Milk last week increased its forecast market milk price upwards for the 2015 season from $4.40 per kilogram of milk solids to a range of $4.50 to $4.70 per kg - still below the average cost of production for most farmers.

same thing happened to clothing market some 20 ish years ago

and yet these folk seemed to have kept their margin /shirts/ premium price...

But now the NSW farmer-owned co-op is celebrating more than nine months of sales into the giant market, and is aiming for the end of this year to reach approximately 50,000 litres of milk a week exported to China, selling for between $7 and $9 a litre.

Norco chief executive officer, Brett Kelly, says some of the potential sales figures being discussed are mind-boggling. “Some of the figures you get thrown at you are like telephone numbers,” he says.

http://business.nab.com.au/chinese-consumers-thirsty-for-fresh-aussie-mi...

I would seem imminent PBOC QE will exact a chilling, exported deflationary price drop.

MNI continues that "although wide range of possibilities tabled about how PBOC operations could change, common thread of discussion involves need to expand balance sheet to ensure supply of liquidity meets economy’s demands, report says."
In other words, China is about to engage in the biggest QE of them all, and drown the world with exported deflation as the global supply glut which we explained yesterday, hits unprecedented levels and ultimately leads to the biggest inventory dumping phase in global history which central bankers will have no choice but to offset with Friedman's infamous "helicopter drop" of money, finally leading to the terminal phase for fiat currencies.
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Seems the New Zealand consumer remains at the mercy of the supermarkets pricing, while there are changes in China. In which country then do citizens have more rights.

When domestic companies who have overseas entitites and pay little or no tax

Thanks to Google and Amazon and Apple, the Australian Senate is conducting an enquiry into "profit shifting" out of Australia into Singapore

Now it appears they're all doing it - and have been for years - and they've only just woken up

Corporate tax inquiry: BHP reveals effective tax rate in Singapore of 0.002%

Through their marketing hubs, both companies, (RIO+BHP), "buy" Australia resources from their Australian arm and re-sell at a higher price to China and other Asian nations. Profits booked in Singapore are then virtually tax free for BHP.

http://www.smh.com.au/federal-politics/political-news/corporate-tax-inqu...

BHP Billiton hit with $522m tax bill on Singapore marketing hub
http://www.smh.com.au/business/mining-and-resources/bhp-billiton-hit-wit...

Remember RIO? That outfit that receives subsidies on Tiwai Point

Time to check out Fonterra Singapore
Looks exactly like a marketing hub
http://www.fonterrafoodservices.net/en/sg/aboutus/8

search on Fonterra Brands Singapore - its registered in Singapore - has to file accounts - has no web-site - can anyone find Fonterra Singapore's published accounts?

Synlait = Loss = Tax Credit

no, I hear you've got to have lots of taxes or you get anarachy, and while anarchy does appear to describe Singapore driving conditions they seem to be surviving as a country... ;) :p