Consumer Confidence in China and the Baby Formula Demand
Chinese demand for Australian products has always been high. In fact, since 2009, China has been Australia’s most important export market, according to the Australian Trade Commission report, How Dependent Are Australian Exports on China? In 2013-14, Australia sold China goods and services worth $107.5 billion, which is approximately one in every three export dollars earned over the year.
The truth of the matter is that consumer confidence in Chinese products is at an all-time low. In October 2015, consumer sentiment fell to 109.7—the lowest recorded reading by the Westpac MNI China Consumer Sentiment Indicator since 2007, when the survey began. Counterfeit food products are a big concern for the Chinese and nowhere is this lack of confidence and need for Australian imports more evident than in the infant formula industry.
There have been a few Chinese formula scandals in the past decade that have made Chinese consumers weary to buy their own products. In 2004, about 50 babies were thought to have died from being fed fake infant formula that did not contain the adequate levels of protein. Then, in 2008, another milk scandal occurred, this time with six deaths and 15,000 infants needing hospital treatment after a formula was found to contain melamine. Later, in 2010, 64 tonnes of raw dairy contaminated with Malamine were confiscated. Melamine is a toxic compound that can lead to the development of kidney stones and renal failure in babies.
With so many issues, it’s no wonder that Chinese consumers are concerned about their baby formula. There are strict standards in Australia about the composition of infant formula. That regulation has provided a huge boom for the Australian infant formula market in China and marketers have taken advantage
Imagine a strapping young man, topless, and wearing a baby bib around his neck. To his left, are four tins of infant formula and a bouncy baby. The message is clear, if you feed your child the advertised formula, they’ll grow up strong like the young man. That’s what Chinese families are seeing daily, and it’s working.
The demand for Australian infant formula in China is so high, that it has been likened to a “white gold rush,” according to The Sydney Morning Herald. The rush has hiked up prices to astronomical levels thanks to the black market and the fact that infant formula has the advantage of not being a restricted or prohibited item under the Customs Act, and Customs and Border Protects says it does not control its import or export. .
The truth is that there are 20 million babies born in China each year and only quarter of them are breastfed. Compare that to Australia’s 300,000 babies and the Chinese market is the clear winner. Though the Chinese economy has stumbled, the demand for infant formula is expected to continue to grow. The two products that are gaining the most from China’s high demand are Bellamy’s Organic and a2 Milk.
Bellamy’s revenue over 12 months jumped 153 per cent to $131 million, and net profit surged 617 per cent to $9.1 million. In fact, in the first six months of the 2015 calendar year, about $27 million worth of Bellamy’s infant formula was bought in Australia and sold to the Chinese market. As for a2 Milk’s Platinum branded formula, sales leapt 445 per cent to $41.67 million over just 12 months. In fact, a2’s chief executive expects sales to triple this financial year, 2015-16.
The high prices and demand aren’t just working for the companies; they’re also working for gray market Chinese travelers. In 2013, News Corp revealed that Chinese students and backpackers were being recruited en masse to buy up Australian infant formula to sell on the black market for as much as $100 for a $25 tin.
The demand has also encouraged many logistics services specializing in shipping food products to China to spring up. Many of these places cater to Chinese individuals looking to stock up on infant formula and other health products. According to Vice, on one street in West Melbourne, just outside the CBD, there are six businesses specializing in the same service. For the Chinese, buying directly from Australia pays off because it saves consumer from the 30 to 40 percent Chinese commercial tax
Unfortunately, the high black market demand has ended in some ugly scenes, according to a senior staff member at Woolworth’s Airlie Beach supermarket. The staff member told The Sydney Morning Herald that Chinese travelers can fund their entire stay in Australia by sending back tins of baby formula, which has led to some heated incidents at the checkout between Australian and Chinese shoppers. The issue is becoming so heated that according to ABC.net.au, the Australian Federal Government has started talks with big retailers about resolving the growing baby formula shortage.
It’s happening everywhere and it’s causing problems for Australian parents who can’t find the products they need. Though many Australian chemists and supermarkets stores including Priceline, Aldi, Coles, and Woolworths have tried to enforce limits to keep product on the shelves for longer, it’s not working well and formula still flies off the selves as soon as it arrives.
Other supermarkets, have decided to cash in on the demand. Chemist Warehouse, offers promotions on formula, written in Mandarin, revealing affordable shipping of formula to China and a promotional price of $7.50/kg. For many retailers, the advertising makes sense, since it gives them a bigger slice of the transaction, considering most of the formula is being taken to China anyway.
Michael Clifton, Austrade Senior Trade Commissioner in Shanghai, revealed to News.com.au and, there is pressure on local milk and powder suppliers to produce enough infant formula to cater to both the domestic Australian market and the Chinese market. He even said that Chinese authorities were perplexed about why there were not more Australian branded products available for a growing market.
For one Australian blogger, Kate De Brito on Mamamia, she sees it as an issue for both sides. “For every parent who is angry that their baby formula is being bought out of Aussie stores and sold overseas, I want to remind them that there are literally thousands more in China buying our products because their children were poisoned by corrupted milk,” she said. “Maybe we need to be a bit more tolerant about why people are buying up formula to on-sell. Yes, middlemen are absolutely chasing a profit…but only because to many Chinese parents there is a real and important need.”