On May 29, the State Administration for Market Regulation issued a notice rejecting formula registration for three milk powder brands, marking progress after a three-month pause in the registration process.
According to reporters, as of the latest list on February 24, a total of 1,138 formulas had passed the new milk powder regulations domestically, but hundreds of formulas are still pending review. Some brands that failed to register have exhausted their inventory and exited the market. Reports indicate that half a year after the implementation of the formula registration system, the market is consolidating around major brands, leading to more intense competition, and the milk powder market war is entering its second half.
Registration Difficulty Increases; Some Brands Run Out of Stock
The notice from the State Administration for Market Regulation shows that the formulas for three infant formula series—Citoli, OfmomTM Love, and Celia—submitted by the Caron Huilia Dairy Plant under Lactalis, the world's third-largest dairy company that previously had a salmonella outbreak, were not approved for registration.
Although this is a rejection notice, the update still gave hope to milk powder companies that have not yet passed registration. Since the latest registration list was published on February 24, the State Administration for Market Regulation has not published any new formula approval lists, putting some brands that have not yet passed registration in a difficult position.
As of February 24, 2018, the former China Food and Drug Administration had approved 1,138 infant formula product formulas from 148 factories, including 864 formulas from 102 domestic factories (accounting for 93%) and 274 formulas from 46 overseas factories (accounting for 35%). It is estimated that more than 500 brands have not yet passed approval or registered. Although according to the new formula registration system, products that were imported before January 1, 2018, without registration can still be sold until the end of their shelf life, reporters learned that companies typically stock up for three months to half a year, and some unregistered brands have already exhausted their inventory.
Ning Tao, a New Zealand milk powder merchant, told reporters that due to capital safety considerations, his company did not stock up much at the end of last year. Recently, the company's inventory has been depleted, forcing them to temporarily exit the market and transfer existing channels to another brand from the factory that has already been approved. He expressed frustration, as even if the formula passes review later, the channels may be difficult to restore because the market has been out of stock for a while, and both the brand and channels have dispersed.
Song Liang, an independent dairy industry analyst, told reporters that currently, major overseas and domestic brands have completed their applications. The later the registration, the greater the difficulty. Some companies that have not yet passed registration are unable to hold on and are gradually exiting the market. Others are waiting anxiously for approval; their sales preparations are complete, but they dare not produce because the formula has not been approved. The early preparations have consumed significant funds, putting great pressure on the companies. For some newly launched companies, although they do not have significant cost and channel pressures, they are equally eager to pass review quickly and begin market recruitment.
Liu Xuecong, Secretary-General of the China Nutrition and Health Food Association, stated that based on a rough estimate of the number of existing companies and formula quotas, the total number of submitted formulas will not exceed 1,800. However, overall, under the framework of the registration management measures, the requirements will certainly be raised, meaning "strict approval."
Competition Enters Second Half; High-Price Stubbornness May Loosen
Since its implementation on January 1, 2018, the new formula registration system has been in effect for half a year, bringing significant changes to the domestic milk powder market. Competition has shifted from small and medium brands coexisting with major brands to intense competition among major brands.
"Weichuan, Sanyuan, and Wandashan are all contacting me, and the cooperation method is bare-price operation," Ma Jun, a milk powder distributor in a prefecture-level city in Shandong, told reporters. After the implementation of the registration system, small brands that used to seek cooperation have almost disappeared, and now it is major brands that come, with very favorable conditions, making market competition even more intense.
Ma Jun cited an example: Weichuan's milk powder retails for over 300 yuan, but the bare-price supply is only a little over 120 yuan. With an initial purchase rebate of about 20%, the cost per can is just over 100 yuan, which is very attractive.
Reporters also learned that with intensified competition, large enterprises have significantly increased marketing investment. Promotions such as "buy three get one free" have become common, along with substantial gift support.
Liu Senmiao, Vice President of Junlebao Dairy, told reporters that recent market research shows some positive signals in the domestic milk powder market. On one hand, the market is returning to rationality; the number of miscellaneous and fake foreign brands has indeed decreased, and the trend of demand concentrating on major brands is becoming more evident. Large milk powder companies are becoming beneficiaries of the formula registration system.
According to Liu Senmiao, from January to April, Junlebao's milk powder orders exceeded 1.5 billion yuan, a year-on-year increase of over 100%.
Cai Fangliang, President of Feihe Dairy, also told reporters that on the basis of overall sales growth of over 60% in 2017, from January to April this year, Feihe's infant formula performance maintained high growth, with a year-on-year increase of nearly 60%. In 2018, it is expected to achieve a sales target of 10 billion yuan. In the first quarter of 2017, Feihe's overall growth rate was around 34%.
On the other hand, in Liu Senmiao's view, since the oversupply situation in the market has not changed, intense competition among large enterprises may not necessarily lead to a large-scale price war, but the stubborn problem of excessively high milk powder prices may loosen as a result.
The melamine incident ten years ago ultimately led to domestic milk powder prices far exceeding international levels. Milk powder that averages over 100 yuan in European and American markets sells for several hundred yuan in China. The prosperity of overseas purchasing agents is partly due to some consumers' trust in the quality of overseas products, but more importantly, it is driven by price differences.
Song Liang told reporters that the current formula registration is not yet complete; new lists may be published next week or the week after. Since most of the remaining pending brands are from overseas, or even newly built factories, overseas production capacity will further release into the Chinese market, exacerbating the oversupply problem. Market competition, especially in the channel end, will become more intense.
In his view, the bare-price model was mostly used by small enterprises in the past. Large enterprises adopting the bare-price model aim to compete for distributors' funds and seize market space. This will also make milk powder prices decline more significantly. Some brands that have passed registration will gradually be eliminated from the market, which is expected to be seen in the second half of this year and the first half of next year.
Source: First Financial -END-