---
title: "Focus on Second Child: The \"14 Billion\" Pie-Eating Contest in the Infant Formula Industry"
description: "Although expected, the full implementation of the two-child policy has excited infant formula companies struggling with overcapacity. The policy is expected to bring at least 14 billion yuan in market growth, but the benefits will not be evenly distributed, favoring well-prepared and capital-backed companies while accelerating industry consolidation."
author: "乳业第一新媒体"
publisher: "New Distribution"
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published: "2015-11-01"
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# Focus on Second Child: The "14 Billion" Pie-Eating Contest in the Infant Formula Industry

> Although expected, the full implementation of the two-child policy has excited infant formula companies struggling with overcapacity. The policy is expected to bring at least 14 billion yuan in market growth, but the benefits will not be evenly distributed, favoring well-prepared and capital-backed companies while accelerating industry consolidation.

Although expected, the full implementation of the two-child policy has excited infant formula companies struggling with overcapacity.
On October 29, following the "selective two-child" policy initiated in 2013, China made a major adjustment to its population policy: fully allowing two children per couple. This long-awaited good news has electrified the Chinese dairy industry.
"It's not a once-in-a-century event, but at least a once-in-a-few-decades opportunity!" said Li Yong (pseudonym), an imported formula distributor who had planned to switch industries due to poor performance, but has now decided to stay. "The full two-child policy will bring at least 20% growth to the formula industry. It's a huge pie falling from the sky; no other industry offers such excitement."
How significant is the two-child policy? Shi Wu (the publication) has been discussing this with dairy industry executives and experts since last night until press time. Based on the current 16 million newborns and a formula market of nearly 70 billion yuan, and considering various factors, the full two-child policy will bring at least 14 billion yuan in market growth.
So the question arises: With a pie of over 10 billion yuan, who is qualified to take a bite?
**Who Will Benefit?**
On the evening of the 29th, WeChat Moments were flooded with news of the two-child policy, and formula company executives were already preparing for media interviews.
"Our domestic and international layout is initially complete, and we have our own development pace," said Li Dongming, CFO of Yashili Group, to Shi Wu. The company's NZ$110 million New Zealand plant will officially commence production on November 6, and Yashili's main product lines will be transferred to the new facility. Additionally, Yashili has partnered with Arla in Europe to launch series products and has taken over the formula businesses of Ausnutria and Dumex, thus being well-prepared in terms of capacity, product lines, and brand portfolio.
Yashili is not the only one prepared. Yan Weibin, Chairman of Ausnutria (01717.HK), was overjoyed, stating that the company is "prepared in all aspects," but will not drastically adjust its business plan due to the two-child policy, continuing its internationalization strategy.
He said that after four years of adjustment, the company has transformed from a sales-oriented to a sales-service-oriented enterprise. "We have been building the supply chain, improving upstream supply capabilities, and enhancing R&D." Ausnutria has been laying a solid foundation in recent years, and will continue to expand in developed countries with goat milk formula and organic formula as spearhead products, while also exploring emerging markets such as South America and Southeast Asia.
Clearly, the two-child policy has boosted confidence in China's dairy industry, but the substantive effects remain to be seen. "Whether institutions or enterprises, those lacking confidence need confidence even more," said dairy expert Song Liang. In third- and fourth-tier cities, families with the means have already anticipated the policy, paying fines to have a second child. In first- and second-tier cities, the high costs of education and housing mean that even a full two-child policy will not lead to a surge in newborns.
However, in an environment of severe overcapacity in the formula industry, even a "20%" increase is a lifeline for formula companies.
Gao Fuliang, General Manager of Longdan Dairy, believes that given the large base of the Chinese market, the development space brought by the policy is still worth anticipating, and it will also prompt adjustments in the maternal and infant industry in terms of strategic positioning and product planning.
"But it won't be an equal share; large enterprises with strong brands and capital support will capture more market share," he analyzed. Especially when the two-child policy is combined with the new formula registration system, it will further accelerate industry consolidation, which is a significant advantage for companies with clear brand, channel, team, and strategy.
The so-called formula registration system is a new regulation under the revised Food Safety Law, requiring each infant formula company to have at most five product series. This regulation is a headache for companies that rely on "one brand, multiple products" to boost sales and scale. Shi Wu recently learned that some brand developers have been lobbying company executives to retain their developed product series.
Therefore, after the two-child policy, some companies may see the increased market but be unable to take a bite.
According to imported formula distributor Li Yong, potential second-child parents in first- and second-tier cities are mainly from elite groups such as civil servants and state-owned enterprise employees. After the full policy, whether they choose domestic or imported formula is a question worth tracking.
According to the latest data from Wyeth, the company's formula sales in China will reach 10 billion yuan in 2015. In the entire market, Wyeth has only three product series, all concentrated in the mid-to-high-end price range.
"Apart from Wyeth and Yili, which have grown against the trend, most other foreign and domestic formula brands have seen varying degrees of decline this year, but the overall market has grown steadily. So we should ask: where have the formula sales gone?" Song Liang believes that overseas purchasing agents and cross-border e-commerce are quietly rising, eroding both existing and new "pie."
**Consolidation Imminent**
The family planning policy, implemented for over 30 years, now has a new plan, undoubtedly giving prepared formula companies a shot in the arm, but it will also trigger fierce competition as more capital enters.
On September 1, 2014, Evergrande Dairy Group was officially established. Subsequently, Evergrande acquired New Zealand's Kawau Milk. On June 26, 2015, Evergrande Dairy's Kawau infant formula sales exceeded 100 million yuan, and by August 10, sales surpassed 200 million yuan.
On April 1, 2015, New Hope and New Zealand's Synlait Milk jointly launched a 99-yuan imported formula, disrupting the traditional formula industry with models such as global same-quality-same-price and direct e-commerce supply. New Hope also attempted to enter the infant formula market through this.
As consumer confidence gradually recovers and channel transformation brings opportunities, industry and cross-sector capital will compete to invest in the formula market. Traditional, conservative companies will fall behind if they don't advance, while innovative disruptors will steadily progress. China's infant formula industry has entered a consolidation phase.
Of course, this is also what regulators want to see, because fewer brands and higher market concentration make market supervision easier. In 2014, through the issuance of new dairy production licenses, some of the 128 infant formula companies under review were eliminated, leaving only about 80.
Before October 1 this year, the China Food and Drug Administration (CFDA) had been soliciting public opinions on the formula registration system. The new regulation proposed two options: 1) For products of the same age group registered by the same company, there must be a difference of at least six nutritional elements; 2) Directly stipulate that a company can have no more than five series or 15 formulas.
In the eyes of many dairy analysts, although the enforceability of previous rectification measures is debatable, the formula registration system is a precise and decisive move. This will effectively address the chaos caused by over 2,000 brands in the market, leaving only about 400 brand series, and mothers will no longer suffer from choice anxiety.
In June 2014, the State Council General Office forwarded the "Notice on Promoting the Merger and Reorganization of Infant Formula Enterprises" from the Ministry of Industry and Information Technology and other departments. The notice stated that it is necessary to "fully leverage the market mechanism, guide production factors to concentrate on advantageous enterprises and key regions, and accelerate the formation of large infant formula enterprise groups with strong international competitiveness."
According to the plan, by the end of 2015, efforts should be made to form about 10 large infant formula enterprise groups with annual sales revenue exceeding 2 billion yuan, with the top 10 domestic brands achieving an industry concentration of 65%. By the end of 2018, efforts should be made to form 3-5 large infant formula enterprise groups with annual sales revenue exceeding 5 billion yuan, with the top 10 domestic brands achieving an industry concentration of over 80%.
Facing multiple policy supports and benefits, domestic dairy leader Yili is also experiencing unprecedented development opportunities. According to its semi-annual report, Yili's formula business revenue in the first half of 2015 was 3.336 billion yuan, a year-on-year increase of 9.68%. Among them, sales of the high-end infant formula Jinlingguan Zhenhu grew by 33%.
"First, we will continue to strengthen research on the breast milk database and occupy the high ground in scientific research; second, we will expand capacity," Yili responded to Shi Wu. The full two-child policy indeed brings unprecedented opportunities to the entire industry, and the company will continue to advance steadily.
On October 29, Beingmate announced the completion of the acquisition of a 51% stake in Danone's Australian subsidiary, and also established a joint venture with Korea's second-largest dairy company, Maeil, to engage in R&D and research on special medical purpose infant formula, infant formula food, maternal formula, and nutritional products.
Chen Huixiang, Vice Chairman of Beingmate Group, was heading to Hong Kong on business that day. Regarding Beingmate's next development plan after the two-child policy, he said he would "think about it" before replying.
"We must seize the opportunity of national opening-up, not only utilizing foreign resources but also considering developing the international market," Song Liang remains cautiously optimistic about the domestic market growth after the two-child policy, suggesting that companies primarily engaged in formula should accelerate diversified transformation and expand into the nutrition field.
On September 17, Biostime announced the acquisition of approximately 83% of Australian nutrition giant Swisse for HK$7.667 billion. The company's Chairman and CEO Luo Fei called it "an important milestone in the group's development." In fact, this also means that Biostime has found a new growth point beyond the red ocean of formula, and of course, the company has also bet its new future on Australia.


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