Introduction: After the melamine scandal, how did domestic formula brands rise quickly from the ruins? After losing its leading position, where is the opportunity for Nestlé's infant formula to overtake on the curve?
At the end of last month, Nestlé, the world's largest food company, publicly announced a major strategic shift. It elevated Greater China to a Greater China Region, aiming to reverse business momentum and restart the mainland market by revitalizing its formula and children's supplementary food businesses, amid the dual crises of declining newborn numbers in China and domestic formula brands competing for the sales crown. In contrast, Abbott Nutrition recently announced a business adjustment, gradually stopping the operation and sales of infant and children's nutrition products in the mainland China market. "Over the next year, we will work with relevant parties to gradually stop our Abbott infant and children's nutrition product business in the mainland China market." These two vastly different moves have once again drawn attention to the formula market. After the melamine scandal, how did domestic formula brands rise quickly from the ruins? After losing its leading position, where is the opportunity for Nestlé's infant formula to overtake on the curve?
Channel difficulties in sinking to lower-tier markets led to missing the mainstream market
The mainstream market creates mainstream consumption opportunities, which in turn determine a company's growth ceiling. Compared with the glamour of first- and second-tier cities, third-tier and below cities are the main force of domestic consumption. With a population of nearly 1 billion, accounting for nearly 70% of the total population, and covering nearly 95% of the land area, the lower-tier market has undoubtedly become the main force of domestic consumption. Among infants and young children aged 0-3 in China, first- and second-tier cities account for only 20%. Under the pressure of high housing prices and high education costs, the opening of the two-child policy has made white-collar workers in first- and second-tier cities feel powerless. As early as ten years ago, foreign formula brands noticed the huge contrast in population base and proposed a development strategy to enter the lower-tier market. However, due to differences in channel structure and operational methods between domestic and foreign markets, they unfortunately suffered from "acclimatization" problems when developing the lower-tier market. The core reason for Abbott's exit from the Chinese market is business shrinkage, which is also a common concern for many foreign formula brands. Unable to hold the first- and second-tier markets and unable to penetrate the third- and fourth-tier cities, they are forced to shift their strategic focus to areas such as medical devices.
- Channel "acclimatization": Formula is not popular in supermarket channels in lower-tier markets
In foreign countries, infant formula is a standard product, and people can buy it in supermarkets and drugstores like buying mineral water, without requiring extensive market education and parenting experience sharing from the brand. But in China, new mothers and fathers are very concerned about whether the formula causes heatiness, the taste, the reliability of the milk source, the freshness preservation technology, the nutritional content, and which brand's fortified formula is more suitable for their child's physical condition. Without the recommendation of terminal sales guides and the science popularization of maternal and infant KOLs and doctors, there will be great obstacles in developing new customers. Therefore, in terms of sales channels, maternal and infant stores have become the main battlefield for formula sales due to their advantages such as professional recommendations, convenient purchasing, crowd gathering, nanny-style service experience, and high-frequency promotional activities. Even if consumers can choose to buy in supermarket channels after receiving science education, due to the limited number of large supermarkets and the variety of formula in supermarket channels, the lower-tier market relies more on maternal and infant channels than on supermarket channels.
- Operational "acclimatization": Foreign brands struggle to adapt to the "dirty, tiring, and hard" work
The channel sinking of foreign formula brands is not a new topic. In November 2017, Nestlé announced the launch of its third major brand, SMA Zhenyun, in China, targeting third- and fourth-tier cities and establishing a dedicated business operations department. Royal FrieslandCampina and Mead Johnson also made similar moves, but years have passed, and the progress of channel sinking has not been smooth. The supermarket distribution methods commonly used by foreign brands in first- and second-tier cities will struggle in maternal and infant stores in third-tier and below cities due to small profit margins, lack of mass ground promotion tactics, and nanny-style channel service systems. They may even be avoided by maternal and infant channels due to issues such as chaotic pricing, overly rigid pricing, and sales contracts that cannot adapt to market conditions. Regarding distributors, which are closely related to formula sales, foreign formula brand distributors are also accustomed to a condescending "enjoyment attitude" and find it difficult to go to villages to hold activities like domestic formula distributors do, or to develop potential consumers by cooperating with village committees and giving gifts to develop new customers.
Weakened product advantages and insufficient competitiveness in mid-range products
- Domestic formula quality improvement narrows the perception gap.
Product is the origin of brand and marketing. The improvement of product quality directly relates to the enhancement of brand competitiveness. The counterattack of the domestic formula market is similar to the high-end development of domestic mobile phones. How do domestic mobile phones impact the high-end market? They do enough commonality in product commonality, gradually catching up in system fluency and stability, strengthening camera lens parameters and Leica algorithms, and continuously narrowing the gap in chip performance; in product characteristics, they surpass through fast charging technology, high refresh rate screens, full-screen technology, multiple color schemes, and vegan leather feel. The quality improvement of domestic formula is the same. Lactoferrin, OPO, and DHA ingredients were once the patents of foreign formula brands. Nestlé's Wyeth took the lead in 2011 by launching the Qifu series with OPO as the core, becoming the leader in the domestic ultra-high-end formula market. However, after the new national standard was issued, domestic formula not only introduced lactoferrin production lines but also impacted the ultra-high-end market with high lactoferrin content; Yili Jinlingguan redefined the OPO formula with "Super Third-Generation OPO," and Meilu Zhenrui, Wandashan Qinbei, and Apta Profutura Platinum Edition respectively refreshed the content of lutein, CPP, and probiotics. The quality gap between domestic and foreign formula has been greatly reduced. While doing enough commonality in products, domestic formula also plans to redefine the measurement standards for advantageous milk sources. By using fresh milk claims to attack the freshness issues of foreign brands' original cans during long-distance transportation, they weaken the cognitive advantage of foreign milk sources.
- Foreign brands have weak mid-range product strength, leading to an unstable mainstream market.
Haitian Soy Sauce was hit hard by Qianhe due to additive issues. Foreign brands in low- and mid-end formula formulas have also failed to firmly establish themselves in the mainstream consumer market with a 70% share due to similar issues. Adding low-nutritional-value maltodextrin to first-stage formula can easily lead to insufficient intake of protein, calcium, iron, and zinc in infants, causing weak immunity and developmental delays; ethyl vanillin (flavoring) increases the fragrance of formula but can also easily cause picky eating in infants, which is not conducive to cultivating light and healthy eating habits; whether palm oil is detrimental to calcium absorption is controversial, but it is a consensus among mothers that it can easily cause constipation in infants. In the 200-300 yuan price range, when many domestic formula brands have achieved easily absorbable deep hydrolysis, some foreign formula brands still remain at the stage of moderate hydrolysis. Although the above additives comply with national standards, in consumers' perception, they become a weakness in brand competition. Under the cognition of "never be poor in education, never let children suffer," no one is willing to let their children suffer or take risks in food.
Lack of brand characteristics makes it difficult to become the first choice for consumption
- Emphasizing product characteristics over brand characteristics, foreign formula brands fall into cognitive homogenization.
Before actual contact with the product, the brand is the first factor in consumer choice, affecting the formation of initial cognition and subsequent decision-making behavior. Outstanding brand characteristics easily attract consumers' attention, leading to designated purchases and psychological pre-sales; while homogenized cognition increases consumers' choice costs, increasing the probability of random purchases. Now almost all major brands have launched comprehensive formula series to meet consumer needs. If there is a lack of strong brand characteristics, leaving the impression that everyone's products are similar, consumers will need to repeatedly compare elements such as milk source, production location, feeding standards, process standards, formula ingredients, price, and review feedback among hundreds of product series and thousands of products. The amount of calculation, the difficulty of comparison, and the time cost are imaginable. This is similar to the tea market back then. With the stacking of a series of consumption elements such as origin, process, age, appearance, and price, consumers were already confused. Fortunately, Xiaoguan Tea, with its "affordable canned" characteristics and endorsement by tea masters, rewrote the ranking of tea selection factors and became the first choice for many novice customers. From the red ocean of marketing focused on product promotion to the blue ocean of cognition focused on brand promotion, Feihe simplified and restructured complex consumption factors through the characteristic of "more suitable for Chinese babies' constitution," while Junlebao stood out with the safety feature of "EU double certification." Only foreign formula brands have fallen into the quagmire of cognitive homogenization in the pursuit of comprehensiveness. Among the common 27 foreign formula brands, who knows the obvious differences between Nestlé, Wyeth, Mead Johnson, Aptamil, Karicare, Nutrilon, Cow & Gate, Friso, Abbott, Hipp, A2, and others?
- Insufficient aggressiveness in online promotion is not conducive to educating and developing new customers.
Against the backdrop of slowing growth in maternal and infant channels, online new media has become an important platform for mothers and fathers to learn about formula knowledge. Maternal and infant apps, Weibo, Zhihu, short videos, and seeding platforms have a recommendation effect far greater than word-of-mouth and official brand websites due to their systematic knowledge, vivid scenario displays, and large numbers of review feedback. Domestic formula brands actively learn from new consumer brands in brand communication, building a full-domain brand communication matrix around spokespersons such as celebrities, experts, big Vs, industry media, and high-end customers, quickly seizing the new increment of over 50 million maternal and infant independent devices in 2021. However, Nestlé and Wyeth still pay insufficient attention to new media communication, so when searching on Douyin, the official account works of Nestlé and Wyeth have very few likes. Most KOCs, when making ranking recommendations, also mainly promote domestic formula due to profit issues, and may even report negatively on foreign brands.
(Low likes on Wyeth's account and negative comments from KOCs)
Li Xiangru, senior consultant at Best Management Consulting, senior brand strategy expert, with 12 years of brand strategy positioning experience, serving Fangtai Kitchen Appliances, Jinmailang, Foton Pickup, Yihai Kerry, and other multi-billion-yuan enterprises. His consulting experience spans FMCG, industrial goods, condiments, catering, and other industries. He has upgraded positioning theory and brand image theory, and created the meaningful brand strategy methodology.