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Danone, Nestle Will Cut China Prices Amid State Probe

Danone Joins Nestle in Cutting China Prices Amid State Probe
Customers shop for Danone's Dumex brand of infant baby formula at a store in Beijing. Photographer: Nelson Ching/Bloomberg

Nestle SA and Danone’s infant-nutrition units will cut prices of key products in China after the government started investigating possible price-fixing by overseas companies.

Wyeth, owned by Vevey, Switzerland-based Nestle, will lower the prices of certain infant-formula products by 6 percent to 20 percent, it said yesterday. Danone’s Dumex unit is preparing a price cut and will disclose details later, the company said. Separately, Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, said it had been contacted as the nation widened its probe of consumer dairy products.

China’s National Development and Reform Commission, the nation’s top economic planning agency, started an investigation into the pricing of infant formula sold by Wyeth and other foreign companies including Danone and Mead Johnson Nutrition Co. according to People’s Daily, citing the agency.

The price cut “was a bit of a surprise, and it may trigger further pressure on prices for all of the players in that market,” Jon Cox, head of Swiss equities at Kepler Cheuvreux in Zurich, said by phone. “That’s probably going to have an impact on the profitability of these companies. It’s not positive, that’s for sure.”

The NDRC has evidence that the companies sold goods at high prices in China and their pricing increased about 30 percent since 2008, according to the People’s Daily.

‘Damage Limitation’

Melamine-tainted milk powder killed at least six infants that year, fanning distrust among Chinese consumers of local milk and driving them toward foreign brands at home and overseas.

Fonterra had been contacted by the NDRC on a “broad ranging investigation of consumer dairy products in China,” and it’s cooperating with the authorities, the Auckland-based company said in a statement today.

Wyeth’s price cut “looks like damage limitation, and I’d imagine others will follow,” said James Targett, an analyst at Berenberg Bank in London. “The question is whether this will make the consumer aware it is being overcharged, or whether it will boost volumes.”

Wyeth conducted its own checks and discovered some distributors and resellers had undertaken some “price control measures,” it said in the statement. The Nestle unit immediately adjusted its marketing practices to make sure its operations complied with laws, Wyeth said. The average reduction will be 11 percent and the company promised not to raise prices of new products for a year, it said.

Price Cuts

In a separate statement yesterday, Wyeth said it would cancel a plan announced in May to raise the prices of its S-26 range of infant-formula products sold in China by 4 percent. The price increase had been designed to cover higher costs of raw materials and formula upgrades. Wyeth will absorb the increase in raw material prices instead, it said.

The price cuts would save consumers an estimated 450 million yuan ($73 million) in the next 12 months, Wyeth said.

“I was surprised they are reacting so quickly,” Richard Withagen, an analyst at SNS Securities NV, said by phone. “Prices are likely to come down across the board.”

Nestle’s Chinese infant milk formula business accounts for about 1.7 percent of sales, according to estimates from Jeff Stent, an analyst at Exane BNP Paribas.

Nestle, the Swiss owner of the Gerber brand, agreed to buy Pfizer’s baby-food business for $11.9 billion in April last year to expand into faster-growing emerging markets.

Biostime Slumps

Abbott Laboratories, Dutch producer Royal FrieslandCampina NV and local company Biostime International Holdings Ltd. are also being probed, according to the People’s Daily. The companies subject to investigation may face fines of 1 percent to 10 percent of their revenue if found guilty by the NDRC, the China Securities Journal reported yesterday, citing unidentified experts on the anti-monopoly law.

Biostime’s Assistant Chief Financial Officer Jason Xu declined to comment on the company’s pricing on the mainland when reached by phone today.

Hong Kong-listed shares of Biostime declined for the fourth day today, falling 17 percent to close at HK$31. The stock has slumped 29 percent this month. Danone shares rose as much as 1.3 percent to 55.71 euros in Paris trading and Nestle gained as much as 0.9 percent to 62.35 Swiss francs in Zurich.

“If we assume that there is a 20 percent enforced price reduction, Danone would need to increase volumes 25 percent to stand still,” Guillaume Delmas, an analyst at Nomura, wrote in a report on July 2. “That is, would need to find an additional 250,000 babies or 0.4 percent of the baby population.”

Mead Johnson didn’t have further comment on its China pricing, it said in a statement today. Royal FrieslandCampina didn’t immediately reply to emailed queries about possible price cuts.

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