Nestle Says China Baby-Formula Probe Won’t Hurt Margins

Nestle SA (NESN), the world’s largest foodmaker, said the Chinese government’s investigation on the pricing of its infant formula will have no “reasonable material impact” on Nestle’s margins in China in the long term.

Any effect from the probe will be offset by a bigger growth in its other businesses, Chief Executive Officer Paul Bulcke said at a press conference yesterday. The executive also said he doesn’t expect the investigation will spill over into other products.

“I don’t see any real material impact in the sense that this is a part of a bigger business and bigger growth, so we can handle that,” Bulcke said in Chuzhou city, China’s eastern Anhui province where he opened a food factory yesterday.

Nestle’s Wyeth unit is one of the at least five foreign milk powder producers being investigated by China’s top economic planning agency on possible price-fixing and violating anti-monopoly laws. Danone, Abbott Laboratories, Mead Johnson Nutrition Co. (MJN) and Dutch producer Royal FrieslandCampina NV have also been named in the probe and all have announced price reductions with some by as much as 20 percent.

China’s National Development and Reform Commission has evidence to show their pricing increased about 30 percent since 2008, the same year milk powder contaminated with the chemical melamine killed six infants, according to an official People’s Daily report that named the overseas producers in the investigation.

Mead Johnson is the largest baby formula company in China with a 14 percent market share last year, according to industry researcher Euromonitor International. Hangzhou Beingmate Group Co. ranked second with a 10 percent share, followed by Danone’s 9.2 percent.

‘Transparent’ Framework

The Vevey, Switzerland-based foodmaker is working with the Chinese government to create a “clear and transparent” regulatory framework for the food industry, including the infant formula sector, Bulcke said.

“It’s only when there are clear rules that are followed by everybody that you have very honest and sustainable competition,” he said.

Nestle is also working with the authorities to help improve food safety in the world’s most populous nation. Scandals including kitchen waste reprocessed into cooking oil and rat meat being sold as mutton have fueled demands for the government to crack down on safety violations.

“We can share with the government what we think we can do, how we have seen that regulation work well or not well in certain countries,” Bulcke said.

Nestle is expanding in emerging markets such as China to offset slow growth in Europe as a debt crisis there weighs on consumer spending. The maker of Nescafe Coffee and Yinlu peanut milk beverages targets to receive 45 percent of its revenue from emerging markets by 2020.

Nestle said yesterday it invested 880 million yuan ($144 million) in the building of a coffee plant in China’s Shandong province and Bulcke yesterday opened a 2.1 billion yuan factory with Yinlu Foods Group, 60 percent owned by Nestle.

To contact the reporter on this story: Liza Lin in Shanghai at llin15@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

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