19 March 2019
A multilayer distribution chain has made infant formula products much more expensive in mainland China than elsewhere. Photo: Bloomberg
A multilayer distribution chain has made infant formula products much more expensive in mainland China than elsewhere. Photo: Bloomberg

High margin days of mainland baby formula market may soon end

Infant formula is generally more expensive in China than elsewhere, which is why Hong Kong has imposed restrictions of the amount of baby powder milk that shoppers can take across the border to prevent a shortage of the product in the city.

But a relatively new player in the mainland baby formula market has found a way to drastically cut the cost of the product — by selling it through the internet and by phone. Hong Kong Economic Journal’s EJ Tactics column examines the changes it may bring to the industry.

Globally, the average price of a 900 gram can of baby formula is 120 yuan (US$19.30). But in China, it costs about 220 yuan. For foreign brands, the cost easily can be three times more in China, where they are preferred by mothers whose confidence in the safety of local products has been shattered by the 2008 tainted milk scandal.

With an international benchmark setting the affordable monthly expense on baby formula at 500 yuan, it is not difficult to see the huge burden imposed on mainland parents.

Why does it cost so much more to buy baby formula in China? The culprit is a multilayer distribution chain that involves so many middlemen in between the manufacturer and the end-consumer.

But things are about to change. Junlebao Dairy, 51 percent owned by market leader China Mengniu Dairy Co. Ltd. (02319.HK), has pledged to overthrow the standard distribution channels  by selling directly to consumers over the internet and telephone. 

The strategy reduces a great deal of intermediary fees and profits while benefiting consumers with free delivery of their orders straight from the factory.

Junlebao, a leading yogurt maker, sells a 900 gram can of baby formula for 130 yuan, compared with the normal price range of 200 to 500 yuan.

Junlebao is among the first batch of milk powder producers that secured regulatory approval after the central government tightened rules in the industry.

Product quality is not an issue. Junlebao sources its raw milk from a farm in Tongshan, which is co-owned by New Zealand’s Fonterra Co-operative Group Ltd. The raw milk passes through more than 50 inspection and quality controls from the plant entrance to the production lines.

To assure buyers Junlebao that it is not sacrificing quality for profit, the company said that despite the relatively low prices, its milk powder products will still enjoy far better margin than its core yogurt business.

Rivals may not be happy about Junlebao’s move. But if its strategy proves successful and the company starts grabbing market share, they won’t have too many choices but to follow suit.

The fat margin days of China’s baby formula market may soon be over.

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Freelance journalist

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