Distrust of local milk lingers a decade after crisis

More than a decade after tainted infant milk powder in China killed six children and exposed institutional neglect of food safety, Chinese parents still don’t trust local companies to feed their babies.

That could mean another goldmine for foreign producers as the battle for infant milk shifts to the hundreds of smaller cities beyond the metropolises of Shanghai and Beijing.

The deadly milk scandal of 2008 was a watershed moment for China’s consumers. Some 300,000 children were poisoned after Chinese suppliers added melamine, a chemical used to make plastic, to powdered milk to artificially boost protein levels. yesterday marked the 10th anniversary of the sentencing to death in China of those at the center of the contamination and its concealment.

The scandal fueled a new era of consumer suspicion and China’s USD27 billion infant-formula industry was reshaped to the near- exclusion of homegrown companies among the market leaders.

While Chinese government regulations on milk powder production are in line with international standards, consumers like Chen Jijie, a Beijing-based mother of two, will neither forgive nor forget.

“I won’t even consider giving domestic brands a chance, even 10 years later,” said Chen, who has a two-year-old child and a newborn baby. “The incident brought my confidence in Chinese baby formula brands to the lowest level.”

Nestle SA’s share of China’s milk-formula market has quadrupled since the scandal to make it the clear leader, while annual revenue at Australia and New Zealand upstart A2 Milk Co. has soared to close to NZD1 billion ($673 million) from only NZD1.5 million before the crisis.

Foreign milk labels are still viewed by consumers as safer, higher-quality and a mark of affluence, but domestic suppliers are fighting back with savvy branding and lower prices. The prize is clear: With only a quarter of Chinese moms breast-feeding, China’s infant-formula market will expand 21 percent to about $32 billion in 2023, according to Euromonitor International.

Both Danone and Nestle are focused on parents in so-called lower-tier cities. Danone is bolstering its e-commerce business, since there are fewer retail stores that stock its goods in rural China, while Nestle is assessing which of its products can best capture demand in these areas.

In a statement, Nestle said it carefully chooses its ingredient suppliers. The company also set up a dairy farming institute in northeast China in 2014 that helps teach farmers to produce safe, high-quality milk.

Meanwhile, Chinese dairy companies are finding that some sort of association with foreign cows – real or imagined – can go a long way toward gaining market share. Chinese milk giants Inner Mongolia Yili Industrial Group Co. and China Mengniu Dairy Co., both of which were found to have batches of tainted milk a decade ago, are racing to build up foreign milk sources in a bid to win over local mothers.

Mengniu sells a high-priced, made-in-New-Zealand line called Milk Deluxe, whose tins are emblazoned with snowy, Alps-like mountains.

“Ten years ago, everyone felt depressed and said there was no hope for China’s domestic dairy industry,” Jeffrey Lu, Mengniu’s chief executive officer said in an interview at the World Economic Forum in Davos on Tuesday. Most local brands now have international supply chains that produce baby milk powder on par with the global brands, he said.

While more than 90 percent of Chinese consumers are drinking local milk, Lu admits that its harder – and will take longer – to gain Chinese mothers’ trust for infant milk. “We need to make the supply chain more transparent,” he said.

“In the short term, seeking overseas milk sources is the most effective way for Chinese milk powder brands to win back consumer confidence,” said Luo Yixin, a consumer analyst at Hua Tai Securities.

Among Chinese producers of milk powder, the only company that’s managed to eke out any meaningful share since the scandal is Feihe International Inc. It had 8.6 percent of the market in 2017, Euromonitor said.

Even then, Feihe’s success is likely tied to a branding campaign that implied a foreign provenance: Up until 2013, it was listed on the New York Stock Exchange and named American Dairy Inc.

After reverting to its Chinese name and going private, the company’s top-selling product line, Firmus, emphasizes that its milk is sourced from cows in the milk belt that spans from Wisconsin in the U.S to Hokkaido in Japan. Its cows are actually located in Heilongjiang in the country’s northeast.

“Domestic baby formula has the highest quality in history and compares with the leading brands in the global market in technology, equipment and management,” said Feihe in a statement to Bloomberg. “We spare no efforts to improve the technology and enhance linkages with international dairy peers.”

Products made and packaged overseas can command a price that’s as much double that of domestically produced milk, said UOB Kay Hian consumer analyst Robin Yuen. Bloomberg