Leading instant noodle maker Tingyi (00322.HK) has big dreams for its baby formula foray in China, but does it have what it takes to win the hearts and minds of Chinese mothers? Given the seemingly never-ending milk quality scandals rocking the market, they can’t be blamed for being highly selective about what to feed their babies.
In a filing with the Hong Kong bourse last Friday, Tingyi revealed it is applying for approval to set up a joint venture with the Japanese brand Wakodo to move into the infant formula and baby foods business in China. Tingyi will own 45 percent of the new firm.
Rumors about Tingyi’s latest plan have pushed up its share price ahead of the announcement. But soon after, investors’ excitement seemed to have cooled down rapidly. Last quoted at HK$22.10, the counter has given up almost all its recent gains.
Tingyi told Securities Daily that it sees huge potential on the mainland and has great confidence in the Wakodo brand. Indeed, the US$12.5 billion market is expected to keep growing with the number of working mothers on the rise, and at a faster clip if there is any easing in China’s one-child policy.
Tingyi’s tie-up with Wakodo came shortly after the much bigger Meiji decided to exit. Why? The Japanese dairy giant cited the high cost of importing Australian milk and intense market competition. But that might not be the full picture. Mainland mothers’ concern about Japanese dairy products after the 2011 Fukushima nuclear leak could have been the bigger factor.
After the country’s domestic tainted milk scandal in 2008 and recent problems involving some imported brands, taking risk is the last thing Chinese mothers want to do when it comes to choosing the baby formula for their offspring.
Sales of Meiji reportedly fell 90 percent right after the tsunami in northeast Japan. The figures may have bounced back a bit since then but clearly not enough to keep Meiji happy. Japan’s border row with China is a less important factor, but some say the issue may also have a negative impact on Japanese products as a whole.
Wakodo may have great products, but it won’t be easy to convince mainland customers.
Tingyi is known for its strong distribution reach, a great complement to Wakodo’s product expertise. But channels for instant noodles and iced tea are not all usable for baby food.
A pilot project to sell baby formula through vending machines located in pharmacies, for example, is a new important channel over which Tingyi has little influence.
One more thing, instant noodles are rarely known for nutritional value. Few would include tea and soft drinks in a healthy diet. Tingyi’s core products do not fit in with the kind of image people look for in a baby food supplier.
To top it all, Tingyi’s Taiwan subsidiary is reportedly involved in an edible oil quality scandal on the island.
Then there are so many strong players in the market. How can the Tingyi-Wakodo team compete with best-sellers like Mead Johnson, Nestle and Danone?
Meanwhile, Beijing has been orchestrating an overhaul of the sector to uplift the quality of domestic produce, with the intention of nurturing a handful of strong local brands. Tingyi and Wakodo will see mounting competition backed by deep pockets — that is, state money.
Homegrown brands are also wasting no time to pull themselves together. Mengniu (02319.HK), which has the backing from state-owned food group COFCO, has been restructuring, building up its in-house raw milk supply, acquired another infant formula maker Yashili, and partnered with Europe’s Arla Foods to upgrade its own offering.
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