July 5, 2013

 

Nestle, Danone to lower Chinese infant milk prices

After Beijing launched an investigation into possible price-fixing and anti-competitive behaviour in the sector, Wyeth Nutrition, which Nestle bought last year, as well as Danone, are responding by cutting prices of their key products.

 

Wyeth Nutrition said it had been cooperating with a probe by China's National Development and Reform Commission (NDRC) and was responding by cutting prices and improving sales and marketing practices.

 

Danone said in an e-mail to Reuters that its Dumex business had also been cooperating with the NDRC and was preparing a price-cut proposal whose details would be disclosed later.

 

Both companies, along with Mead Johnson Nutrition Co and Abbott Laboratories, said they were being investigated by the NDRC. Analysts see the probe as possibly part of a broader Chinese plan to boost consumption of local infant milk products. Mothers turned away from Chinese milk powder in 2008 when infant formula tainted with the industrial compound melamine killed at least six babies and made thousands sick with kidney stones.

 

China has since made efforts to crack down on persistent food safety problems that have included chemical-laced pork and infant milk contaminated with cancer-causing agents.

 

"Wyeth Nutrition decided to implement a price reduction of key products from July 8 through 2014. The average reduction will be at 11% with the biggest single product price reduction at 20%," it said without giving more details. The company said it would not raise prices on any new products over the next year.

 

Analysts said the investigation could result in fines and tougher rules governing imports into an infant milk market set to grow to US$25 billion by 2017. The firms could face fines ranging from 1% to 10% of their annual sales, a news agency quoted experts as saying.

 

 

"It is part of the whole idea of a consolidation process," said Renee Tai, a Hong Kong-based analyst at regional brokerage UOB Kay Hian. "It is pointing the same direction of supporting local producers, making it difficult for importers."

 

Some Chinese infant formula companies have started forming partnerships with foreign firms to try to boost brand recognition and gain technical know-how. Foreign brands may also soon have to rely on their Chinese partners if they want greater access to the Chinese market. The Chinese government has expressed an interest in bringing the supply chain under the control of Chinese firms as part of its goal of reducing the number of local infant formula producers to 10 from more than 200 within two years.

 

The Ministry of Industry and Information Technology said in June that the integration of the milk powder industry was expected to involve 10 large companies with revenues exceeding RMB2 billion (US$326 million) in two years. As part of this consolidation, China Mengniu Dairy Co Ltd signed a second takeover deal in a month in June to buy Carlyle-backed Yashili International Holdings Ltd in a deal worth about HKD12.5 billion (US$1.6 billion) as part of a plan to expand its milk powder business.

 

Domestic milk powder brands want to appeal to the rapidly growing middle-class, which can afford the pricier baby formulas made by their international rivals. At supermarkets in big cities like Shanghai, a 900-gram tin of infant formula made by an international firm costs between RMB175 (US$29) and RMB275 (US$45), compared to about RMB100 (US$16) for domestic milk powder in lower-tier cities in China.

 

Milk producers boasting foreign ingredients have raised prices to the same range as global brands in an effort to distinguish themselves from the local crowd. On Wednesday (Jul 3), China's official Communist Party mouthpiece, the People's Daily, said foreign and local players were equal before the law but foreign brands should not raise prices often without regard to the law and abuse their competitive advantage.

 

"From 2008, some foreign milk powder brands have increased their prices by up to 30%, nearly double that of local milk powder brands," an editorial said, adding if local brands raised standards and won trust, they could replace foreign brands as the favourites.