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UPDATED: February 4, 2014 NO. 30 JULY 25, 2013
Higher Faith, Higher Price
While foreign milk powder producers see profits swell, consumers aren't complaining
By Deng Yaqing

MAKING A CHOICE: Shoppers browse baby formula at a supermarket in Guangzhou, capital of south China's Guangdong Province on July 11 (LU HANXIN)

Zhou Chunyan, a 27-year-old Shanghai mother, spends most of her time taking care of her little son. "He is the apple of my eye. I sterilize the tableware he uses every day, choose the clothes he wears and crush food into paste with a juicer, not to mention select the milk powder he drinks," she said.

Because of China's frequent milk powder scandals—such as a recent one involving a company creating phony production dates on its packages and the 2008 crisis in which 300,000 babies were sickened and another six died after some companies were found to have used excessive amounts of melamine in their products—Zhou said she would never trust local dairy products.

"I chose Friso for my son. It is a relatively high-end formula brand," Zhou said, referring to the Netherlands-based dairy products company. "It costs me more than 3,000 yuan ($487) to buy baby formula every month," a huge chunk of the household monthly income of 20,000 yuan ($3,260).

Mothers who have overseas relatives or friends have other alternatives.

"I used to ask my friends to send me milk powder from foreign countries. Including postage and customs duties, the same products purchased overseas are still much cheaper than that bought here in the supermarkets," said Tang Jiajia, a mother of a 2-year-old, who majored in agronomy and has developed a heightened awareness of food safety.

In early July, the National Development and Reform Commission (NDRC) confirmed that a price-fixing probe was underway against several milk powder names in China, both foreign and domestic.

Mead Johnson, the 2012 baby formula sales champion, disclosed soon after the NDRC's announcement that it would reduce the prices of its products by 7-15 percent. Dumex, a French dairy maker under the Danone Group, also promised to lower the prices of its three major dairy products. Beingmate, a Hangzhou-based dairy manufacturer and frontrunner among domestic milk formula makers, also announced price cuts following the launch of the probe. So far, nine milk powder brands are under price fixing investigations.

The rise of foreign brands

Customs figures show China imported 445,000 tons of milk powder in the first half of the year, a year-on-year increase of 24.8 percent, a stark contrast to the 120,000 tons in 2008. At this pace, the figure would hit 1 million tons for the year, not including products smuggled or purchased overseas.

"I spend 700 yuan ($111) purchasing milk powder every month, if I buy these products in China, the cost would be less. What's more important is quality. After so many rounds of exposure, most Chinese mothers don't trust domestic brands anymore," Tang complained.

In 2000, China's dairy industry was on an upswing. In 2005, China was the world's third largest milk producer, a stunning turnaround from being a nation once milk deficient. But the infamous 2008 milk scandal- tarnished the industry.

Before the incident, domestic dairy brands made up 60 percent of the local market and foreign manufacturers 40 percent. In later years, foreign brands like Mead Johnson, Dumex, Abbott Laboratories and Wyeth quickly seized as much as 70 percent of the market in first- and second-tier cities.

According to AC Nelson, the sales of milk powder in China reached 38.5 billion yuan ($6.27 billion) in 2012, and Mead Johnson topped the list with a 12.3-percent market share.

"After the melamine incident, domestic manufacturers lost their pricing power. Since 2008, the cost of producing milk powder hasn't changed much, but the prices of foreign milk products you see on store shelves have soared by 70-120 percent," said Lei Yongjun, a dairy expert from Prospertao, a brand marketing company based in Beijing.

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