What’s next for China’s infant formula market?

In the eve of its 9-month sales results announcement, the world’s largest food group quietly revealed plans to shut down an infant formula manufacturing plant and R&D center in Limerick, Ireland. The factory, which employs 542 people, produces formula exclusively for export to markets in Greater China and Asia.

“Clearly, birth rates around the world are in decline; birth rates in China are very low,” responded Mark Schneider, CEO of Nestlé during a press conference the next day. “Relatively speaking, when it comes to restoring our market shares, we are making good progress in China but

“there’s no stepping away from the fact that compared to the manufacturing set-up that we were building several years ago, today’s global demand is not what it used to be.

“And so it was about rebalancing, it was about meeting specific demands around Chinese consumer where clearly interest in locally manufactured products is on the rise and that is behind the plan that we outlined yesterday.”

Nestlé’s plan for the Wyeth Nutrition infant formula factory – which it acquired in 2012 as part of the Pfizer Nutrition acquisition – don’t end with its potential closure. The multi-national is proposing to transfer R&D work from Ireland to two existing facilities - in Suzhou, Mainland China and Konolfingen, Switzerland. This is a clear signal that the CPG giant is looking to bolster its research and development capabilities in various disciplines.

China’s infant formula market: entry barriers and consolidation potential

China is the dominant force in the global infant nutrition market, with around 900,000 tons of powdered milk being sold every year. The country’s birth rate has plummeted in the last five years, reaching a record low of 1.09 in 2022 (in comparison, at its peak in 1963, it was 7.51, and 1.81 in 2017, the last year before a steady decline began). The Chinese national statistics bureau estimated that 9.6 million babies were born in 2022 compared to 18 million in 2016, and the number for 2023 is predicted to be under 9 million. Industry insiders argue that policies aimed at preventing overpopulation in China may have brought about this negative trend, but China isn’t an outlier when it comes to declining birth rates – neighbours Japan and South Korea have some of the lowest rates in the region, while the global fertility rate has also halved in the last 50 years, according to World Bank data. In 2023, around 2.3 babies are being born per woman, compared to 5.3 in 1963.

By the end of 2023, China's population had shrunk by 2.08m from 2022 to a total of 1.409bn - though the country's birth rate of 6.39 per 1,000 people was on par with other advanced East Asian nations such as Japan and South Korea. Nevertheless, the trend is plain to see. 

Additionally, increasingly stringent regulatory standards have led to ostensible market contractions in China in the past 7 years – and more small and medium-sized players could be squeezed out of the market in the coming years.

Michelle Huang, consumer food analyst at Rabobank, explained that infant milk formula product registrations declined from 2016 to 2021 after the China Food and Drug Administration (CFDA) required registration of all domestic and overseas infant formula companies. “Each manufacturer was limited to three brands for stage 1, 2 and 3 formulas, for a total of nine products, valid for five years. After the implementation of the new policy, IMF product registrations declined by around 40% from 2016 to 2021.”

In 2023, new national standards implemented in February on the content of milk formula ingredients set an even higher barrier to entry. Key changes included revised minimum and maximum levels of protein and nutrients such as selenium, manganese and choline, and a ban of sugars, sucrose and fructose. Huang told us that as of early September 2023, only around 827 products from 308 brands from 70 dairy companies had successfully completed product re-registration.

“Regulatory changes are driving consolidation over the years, with top five players’ share increasing from 37% in 2015 to 64.3% in 2022,” Huang said. “In 2023, we expect market consolidation will speed up, as many small and medium-sized brands will exit the market, given the cost and timing of registration. They could not continue normal production without re-registration.”

But it’s not just SMEs that could suffer negative consequences from an increasingly stringent regulatory landscape. Australia’s a2 Milk Company, a major player in the Chinese IMF market, saw its shares decline over regulatory approval delays until the company finally secured approvals from the CFDA for its formula stages 1, 2 and 3 products in June 2023, after two years of work. Speaking to Australian Financial Review, chief executive David Bortolussi said the company’s strategy ‘is very much focused on realizing the full potential of business in China in the infant milk formula category’. “We are fortunate enough that we have been executing well, investing in our business, our brand and our presence in China, and gaining significant share. So, we fully expect to continue to gain share going forward.”

New channels and product differentiation

Commenting on the likely next moves by IMF manufacturers, Rabobank’s Huang said: “The IMF market is already a crowded space, with competition intensifying over the years. IMF players’ growth strategies are likely to include increasing market share for existing products via new channels or product differentiation and horizontal expansion via geographical diversification - e.g., expanding into regions with income and growth of newborn babies - or portfolio diversification, for example in adult and/or medical nutrition.”

In recent months, FrieslandCampina Ingredients, the ingredient arm of Dutch dairy co-operative FrieslandCampina, told DairyReporter that it was looking for ‘pockets of growth’ for its dairy-derived early life nutrition ingredients through a new ingredient portfolio for fortifying products aimed at children aged 3 and up. Example solutions include galacto-oligosaccharides for enriching powdered milk drinks, or MFGM ingredients for fortifying drinkable yogurts.

The company claimed that there is a growing focus on nutritional products for young children, a trend that could offer fresh opportunities for early life nutrition firms. “Ultimately, this market is driven by demographics, and we don’t foresee any increase in the world’s birth rate any time soon,” said Timo Faber, global marketing lead, early life nutrition, at FrieslandCampina Ingredients. “There is still a huge infant milk formula market, but the potential for the future lies beyond that.”

New Zealand dairy co-operative Fonterra has also been exploring new opportunities for its dairy-derived ingredients in China through brands NZMP and Nutiani. The latter launched in 2022 with a global focus, including China and an aim bolstered the co-op’s foothold in the everyday and medical nutrition sectors. Meanwhile, NZMP China offers a range of solutions for F&B and nutrition applications alike.

To strengthen its position against increasingly influential local players, Danone has been re-organizing its China assets, including divesting its Mengnui shares and re-purchasing the Dumex Baby Food infant milk unit from milk powder maker Yashili International Holdings. Danone described the Chinese market as ‘highly strategic’ for the firm and said that acquiring the IMF unit would allow the multi-national to ‘further expand its ability to locally manufacture infant milk formula products’. The company has also announced​ at Growth Asia Summit 2023 that it would launch a novel infant formula containing droplets that closely mimic the structure of the human milk fat globule.

France-based Lactalis Group also opened a Chinese ingredient subsidiary in 2019, stating the move formed part of its plans to support customers’ growth on key markets, infant nutrition and dairy products. Lactalis also entered the pharmaceutical-grade lactose market this month with the launch of brand Lactalis Ingredients Pharma and a new range of milled and sieved lactose monohydrate.