October 23, 2012

China's milk product market boosts earnings of food companies

International food companies are benefiting from China's market for baby products such as milk powder.

Danone announced that its baby products sales in the third quarter of 2012 increased by 11.5% from the same period in 2011. Particularly, Dumex, Danone's key brand in China, kept significant growth.

Nestle issued its third quarter financial report on October 18 as well, according to which, its emerging market sales increased by 11.7% on-year in the third quarter of 2012, aiming to double annual sales in China this year.

However, the price of milk powder in China is more expensive than in many other countries.

Data from AC Nielsen reveals that middle- and high-end milk powders sell the best in China, accounting for 42% of total milk powder consumption. Besides, the sales of high-end milk powders priced at over CNY300 (US$48) increased rapidly as well, from 4% in 2011 to 9% in March, 2012.

It was reported that the price gap was at a high of CNY200 (US$32) per can for the same series of products by Nestle.

"China is the country with the highest milk powder prices," said Stefan Hipp, President of Hipp, the largest milk powder brand in Germany.

The high prices for milk powders in China are believed to be caused by a special Chinese market structure: a distribution system, which creates extra costs and distributors sharing part of the profits.

In Germany, milk powder can be provided to retailers directly from manufacturers; while in China, the land is too vast that it is difficult for milk powder producers to supply straight to retailers, according to Hipp.