Linking the Past and the Future – What China’s IMF Sector Can Learn From 2017

Relaxed birth policy

In their 2017 results announcements, companies welcome China’s relaxed birth policy, which has brought a rise in families with two children. In our view, the relaxed birth policy is positive, mostly as it is preventing a precipitous fall in the overall birth rate.

Premiumisation

Sales growth of super-premium and premium-end IMF products (which are mostly imported) has continued to outperform that of lower middle-end and domestic products.

Segmentation

IMF companies have recently started trying to establish a portfolio of brands with different price points and product offerings. This variety is hard to achieve without access to or control over licensed/certified OEM plants and/or in-house plants, suggesting the strategic value of owning a plant or having proper access to it.

Category expansion/finding a niche

Citing intense competition in the market, the listed IMF companies are investing in R&D efforts and are attempting to launch new products with a unique or different angle. These products include organic IMF, goat-milk-based IMF, and special IMF for babies with medical needs.

Diversification

In response to the fierce competition in the marketplace, the companies in question have sought various degrees of diversification into adult nutrition, probiotics, and non-food baby care products (such as diapers).

Channel investments

Continued investments are being made to drive sales growth in mother & baby specialty (MBS) chain stores and e-commerce. Products with different positionings are being deployed in different channels, such as MBS, e-commerce, and modern trade (supermarkets and hypermarkets), to achieve different strategic objectives related to brand upgrading, channel transformation, channel development, product categories, and halting price decline.

Marketing/engaging consumers

The various regulatory constraints are calling for creative and targeted marketing initiatives, which need to be cost-effective. These initiatives are carried out both online via new media (search engine optimisation, search engine marketing, online videos, online forums, verticals, etc.), and offline through events and activities, assisted by big data. Companies are paying special attention to mothers born after 1990 as they are increasingly dictating the trends in the market, driving the premiumisation of products.

Offshore supply chain:

With premiumisation embraced by consumers, IMF companies continue to focus on an offshore supply chain (Europe, Oceania, and North America) as a way of delivering high product integrity. This also reflects where Chinese consumer confidence lies.

Regulatory impact

Various types of grace periods have been granted by Chinese regulators. But the registration requirement may have hindered 2017 sales growth for IMF companies – especially for those with more than three brands, which is the new regulatory limit – as they attempted to consolidate internally the products under registered brands. RaboResearch sees this as the shape of things to come and expects to see in the slightly longer term a round of real market consolidation in the post-registration era.

Lead time to formula registration

The listed IMF companies’ annual 2017 reports appear to indicate that the lead time for registering a brand/formula series is roughly six months, as RaboResearch had previously estimated.

For more background info on the Chinese IMF market, please see our March 2018 report China’s Infant Milk Formula Market in the Post-Registration Era.