The so-called "strictest infant formula policy" has been in effect for over a year, with more than 600 formulas approved to date. Infant formula, as the first food for newborns, has seen its prices soar to astonishing levels. Recently, I visited several maternal and baby stores and supermarkets and found that formula priced at over 200 yuan is no longer considered expensive; now, cans priced at 300-400 yuan are everywhere. Industry statistics show that from 2012 to 2015, the share of high-end (retail price 290-390 yuan/900g) and ultra-high-end (retail price above 390 yuan/900g) products in the infant formula category continued to rise, with the former increasing from 14% in 2012 to 24% in August 2016, and the latter from 13% to 25%. Currently, the share of high-end and ultra-high-end formula has grown even further, while mid- and low-end products are shrinking. For example, take Wyeth, a foreign brand with 2016 sales of 11 billion yuan. In 2015, Wyeth's three formula brands had total sales of approximately 10.5 billion yuan in China, with Illuma generating 6 billion and S-26 series around 4.5 billion. According to Tmall and JD.com flagship stores, Wyeth Illuma Stage 1 (900g) is priced at 388 yuan, Stage 2 at 328 yuan, and Stage 3 at 278 yuan; the newly launched Illuma Organic is even more expensive, with Stage 2 at 458 yuan/can (900g) and Stage 3 at 398 yuan/can (900g). Similarly, other foreign brands like Abbott and Mead Johnson have also launched their own high-end and ultra-high-end series, which have brought them significant sales growth and profits. Of course, prices are not cheap. For instance, on JD.com, a can of Eleva Organic Stage 1 is priced at 470 yuan (900g), and Eleva Pure Stage 1 at 378 yuan (900g). Mead Johnson's Blue Zhen Stage 1 is 442 yuan (900g), Stage 2 at 436 yuan (900g), and Stage 3 at 398 yuan (900g). Not to be outdone, domestic brands are also entering the high-end and ultra-high-end competition. On October 31, Feihe announced in Beijing that in the first half of 2017, its high-end formula sales grew by 200%, ranking first among domestic brands. Junlebao, known as the "game-changer" in the formula industry, also announced in the first quarter of this year that its formula sales grew over 125% year-on-year, with star products growing 237%. Sanyuan's formula division general manager Wu Songhang also told media in the first half of this year that Sanyuan formula saw good growth in Q1, with high-end brand Ailiyou sales up 260%. In developed countries in Europe and America, the best formula on the market costs only 13.5 euros, equivalent to about 100 yuan, but in China, these formulas sell for 300 yuan. Similarly, a standard 900g can of infant formula, converted to RMB, averages 89 yuan in the UK, 90 yuan in the Netherlands, 130 yuan in South Africa, 136 yuan in Australia, and 147 yuan in Japan, basically ranging from 90 to 150 yuan. A 900g can of infant formula, even with the best raw materials, costs only a few dozen yuan. In developed countries, there is essentially no distinction between high-end and low-end formula; there are only special formulas for specific infant groups, but prices do not skyrocket just because a certain substance is added. So why is it that only in China do formula prices keep rising with no sign of decline? In my view, there are four major driving factors.

  1. Parenting Attitudes China implemented the family planning policy in 1983, controlling population growth through late marriage, late childbirth, eugenics, and fewer births. This led to most families having only one or two children, who are "pampered and spoiled." Over time, these only-children born in the 1980s and 1990s have formed new families, creating the unique "4-2-1" family structure: four grandparents, two parents, and one child. As a result, a newborn receives care and attention from at least six elders. Combined with traditional Chinese parenting values that emphasize intellectual development and education, with hopes for their children to be successful, both older and younger generations of Chinese parents are extremely demanding when it comes to breast milk substitutes. They care far more about safety, quality, and functionality than price, which has driven continuous category upgrades in the maternal and baby products industry over the past few years. Additionally, with the current consumption upgrade and the full implementation of the two-child policy, China is set to experience another baby boom. The new generation of parents, born after 1985 and 1990, have high spending willingness and demand for quality upgrades, fueling a surge in demand for high-end and ultra-high-end infant formula in China.
  2. Maternal and Baby Channels Unlike developed countries where infant formula is sold through community pharmacies and supermarkets, in China, infant formula is mainly sold through community maternal and baby stores. This channel has grown rapidly since the 2008 melamine scandal, with over 80,000 stores nationwide. According to the latest Nielsen survey, the number of physical maternal and baby stores has continued to increase over the past two years, especially in central and western regions. In 2015, maternal and baby channels accounted for 48.1% of all-channel infant formula sales, up 6.1 percentage points, while supermarket channels accounted for 21.8%, down significantly by 11.2 percentage points. Maternal and baby stores differ greatly from supermarkets and e-commerce in their business model. On one hand, they meet consumers' one-stop shopping and experience needs near home; on the other hand, since they target families with children aged 0-3, their customer base is narrower than general supermarkets. Moreover, with increasing competition from fellow stores, the limited number of families with young children in a given street or township is further reduced. Additionally, rent and labor costs in prime locations and communities keep rising year after year. In the product mix of maternal and baby stores, infant formula already occupies a large share, and this proportion grows even larger in third- and fourth-tier cities. Therefore, maternal and baby stores have to pursue high gross margins to survive and develop, which means they can only sell more high-end and ultra-high-end formula. Otherwise, how could they make ends meet? Rent costs, labor costs, and competition drive maternal and baby stores to seek high-margin products; the demand for high-margin products forces formula manufacturers to come up with new gimmicks to launch high-end and ultra-high-end formulas, otherwise they won't even get shelf space in these stores. How else could they sell?
  3. Numerous Brands Due to the legacy of the planned economy, China has many dairy factories across the country, such as Feihe, Yili, Mengniu, Wondersun, Huishan, Guanshan, Junlebao, Meilu, Shengyuan, Hongxing, Nanshan, Yashili, Huaguan, Chengguan, Mingyi, Yaolan, and many others. This is in stark contrast to developed countries, which typically have only 3-4 dairy companies and 5-6 formula brands. Since the 2008 melamine scandal, various Chinese trading and import/export companies have artificially created numerous formula brands through "overseas OEM" and other means, and domestic factories have also produced a large number of custom brands through "channel customization." At one point, there were over 2,000 infant formula brands in the Chinese market. With over 2,000 series brands, even after this formula registration, there are still 600 formulas and 200 series brands left to cater to 80,000 maternal and baby stores, as well as large supermarkets like Walmart, Carrefour, and RT-Mart, and e-commerce platforms under Alibaba and JD.com. It is truly a case of "too many brands, too few channels"! The advantage in commercial interest bargaining mainly favors the three major channels: maternal and baby, e-commerce, and supermarkets. Therefore, brand owners of infant formula, in order to please channel partners, have to find ways to increase channel price differences to entice these channels to cooperate with them.
  4. Demographic Trends Another reason is that in developed countries, due to persistently low birth rates, the population base has seen negative growth. At the same time, these countries often have high levels of economic development, providing citizens with good social welfare and comprehensive social security systems. Therefore, by subsidizing infant formula companies and consumers, they encourage and reward childbirth, which keeps retail prices of infant formula at relatively low levels in these countries. Of course, since China is still in the primary stage of socialism, its economic development level is far behind that of developed countries, and its social welfare system is still under construction. It is not yet possible to subsidize infant formula through birth subsidies or other means. Nor can it be included in the social security system like medicines. This may also be a major factor preventing our infant formula from becoming cheaper. Perhaps various factors are interacting! Parents in China have to accept the reality that the price of infant formula, the food for their babies, will only get more expensive. Source: Maternal and Baby Industry Observation (ID: muyingguancha) -END-