For border officials in Hong Kong, baby formula trumps heroin.
Since the former British colony on March 1 restricted outbound travelers to two 2-pound cans each, a syndicate has been cracked and more people have been arrested for smuggling milk powder than were detained all of last year for carrying heroin.
The reason? Mainland Chinese demand, fueled by distrust of locally made food after scandals that included the deaths of at least six babies in 2008 because of melamine-tainted milk. The U.K. and New Zealand are among countries with limits on milk sales as bulk purchases of brands such as Danone’s Aptamil and Mead Johnson Nutrition Co. (MJN)’s Enfamil caused local shortages.
“Most of them only have one child, and the child is the most important thing in their life,” James Roy, a Shanghai-based analyst China Market Research Group, said of Chinese parents, most of whom are subject to the government’s one-child policy. “They want to be extra careful.”
The crackdown on milk buyers gives Danone, Nestle SA (NESN), and Mead Johnson an opportunity to increase their market share in China at the expense of domestic rivals such as China Mengniu Dairy Co. (2319) and Inner Mongolia Yili Industrial Group Co. (600887)
Sales of baby formula in China grew 29 percent to 95.2 billion yuan ($15.4 billion) last year, more than four times the size of the U.S. market, according to industry analyst Mintel Group. Milk powder retails at higher prices in mainland China, which excludes Hong Kong, Macau and Taiwan.
The country’s top five international sellers of formula -- Danone (BN), Nestle, Mead Johnson, Abbott Laboratories (ABT), and Wyeth LLC -- will increase their market share by 5 percentage points this year to about 55 percent, China Market Research estimates.
“Baby milk scandals in China happened because of corruption, because regulation was very lax,” Roper said. “Until things change in China, and they’re not going to change overnight, only then will the consumer be able to feel assured.”
In 2008, at least 22 companies were found to have sold dairy products containing melamine, a toxic chemical that can make diluted milk appear to have a higher protein content. In 2011, Hohhot, Inner Mongolia-based Mengniu, China’s largest producer, said moldy cattle feed led to excessive toxin levels in its milk.
Mengniu fell 1.4 percent to HK$21.65 in Hong Kong trading, while Yili dropped 4 percent to 29.24 yuan in Shanghai.
Mengniu’s operating profit last year shrank 16 percent to 1.45 billion yuan as sales fell 3.5 percent. Food quality and safety incidents affected consumer confidence and sales, it said in a March 27 statement.
Glenview, Illinois-based Mead Johnson, which makes 30 percent of sales in China, saw operating profit rise 12 percent to $870 million last year on revenue that grew 6.1 percent.
“Food safety in China is a big worry for me,” said 30-year-old mother Helen Li, who gives her one-year-old son Danone’s Aptamil formula from Germany bought on the Internet or by traveling friends. “I feel more secure buying German products, more secure about their ingredients.”
New Zealand in September said it would limit “unlawful exports” of milk powder, with fines of as much as NZ$50,000 ($42,700). Supermarkets in the U.K. and Germany have also imposed restrictions.
Liu Ying, who lives in Germany, runs online shop “Mama Little P” on Chinese e-commerce portal Taobao.com, selling infant milk brands Aptamil and HIPP.
“It’s become very difficult to buy infant formula at the stores since last November,” the 33-year-old said by phone from a town outside Hanover, where she lives with her husband and 2-year-old son.
Some shops limit her to one can, or ask to see her baby, so she drives to several stores a day, she said. She’s stopped taking orders, except from close friends and relatives, Liu said.
Online merchants on Chinese site Taobao have raised prices and the waiting period for overseas formula can be almost two months, said Li, the mother who buys German milk.
Six baby formula brands, including Karicare and others from Danone and Nestle, will be sold on Chinese e-commerce site Tmall, its operator, Hangzhou, China-based Alibaba Group Holding Ltd., said in an e-mail.
“It’s difficult to see any sign for weakening of the demand, at least in the short term,” Danone Chief Financial Officer Pierre-Andre Terisse said on a conference call with analysts April 16. Danone doesn’t plan to significantly increase imports from Europe and will broaden the product selection available in China, he said.
China had 81.6 million children under the age of five, Unicef estimated in a December 2011 report. That’s more than the population of France.
Danone reported first-quarter sales growth that beat estimates as China safety worries helped drive a 17 percent jump in baby-nutrition revenue. Vevey, Switzerland-based Nestle reported first-quarter infant-nutrition sales increased at least 10 percent, faster than the company’s overall growth.
Baby-food businesses have margins of about 25 percent in China, compared with 20 percent in the rest of the world, said Jon Cox, an analyst at Kepler Capital Markets.
A 900-gram (2-pound) can of Danone’s Dumex Precinutri formula for 6- to 12-month-old babies sells for 207 yuan ($33.57) at a Carrefour SA (CA) store in Shanghai. In Frankfurt, Germany, where Danone sells its Aptamil brand, an 800-gram can of a similar formula costs 13.49 euros ($17.62).
A 900-gram tin of Danone’s Karicare Gold+ Toddler formula for babies older than 1 costs NZ$21 ($17.94), at New Zealand online retailer The Warehouse. A similar item costs 190 yuan ($30.81) on Alibaba’s Tmall.
Many Chinese visit Hong Kong regularly to purchase items such as soap, cosmetics, milk and diapers because of lower prices and the concerns about quality at home. While the U.K. returned the city to China in 1997, Hong Kong retains a separate legal system and has autonomy over issues including public security and food standards.
Chinese authorities last month detained a distributor for repackaging milk powder. Yili last year recalled some formula after finding mercury in some of its products.
It’s not just milk that has Chinese consumers worried. Authorities in December said a former supplier to Yum! Brands Inc. (YUM) had provided meat with too much antibiotics.
“Chinese consumers are so frightened and so sensitive to safety issues with milk powder that they are willing to pay a higher premium than consumers anywhere else,” Roy said. “Strong dairy brands understand this.”
Revenue at Danone’s baby-food business, which generates about 20 percent of the group’s sales, will grow 13 percent this year instead of an initial forecast of about 10 percent, Andrew Wood, senior research analyst at Bernstein said in an April 17 report. Danone says China is the division’s biggest market.
In Hong Kong, the milk-powder crackdown is keeping police and customs officers busy. Officials on April 8 said they had busted a syndicate that had more than 4,000 kilograms (8,800 pounds) of baby formula worth about HK$1.1 million ($141,700).
As of April 23, 879 people were arrested, with 8,841 kilograms of powdered milk seized, Calvin Lee, a press officer, said in an e-mail.
Last year, 420 people were arrested by border officials for having restricted drugs. Of those, 81 had heroin, 81 carried cocaine and 161 had ketamine.
“All these scandals that have happened are never good for any industry,” said Heiko Schipper, managing director of Nestle’s Greater China food and beverage division “I can understand the reaction. It may be a bit of an overreaction, but when you talk about the health of your baby, it’s very hard to say to people: ‘you are overreacting.’”
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