Chinese Baby Formula Market New Market Entry Strategy

Question: Discuss about the Chinese Baby Formula Market for New Market Entry Strategy. Answer: Introduction Baby formula is food that is manufactured and sold for the purpose of feeding babies under 12 months of age, generally prepared in the form of a liquid or a powder, for feeding through the use of a bottle or a cup. The fastest growing category of the global baby food market is infant milk formula. According to the FFDCA, infant formula is as a nourishment meant for special dietary utilisation, exclusively for the sustenance of newborn children due to it's complete or incomplete substitutability of human milk(U.S. Food and Drug Administration, 2015). Infant formula is usually processed from skimmed cows milk, include added ingredients such as fatty acids, vitamins and prebiotics and are available in variations such as soy-based formulas, standard cow's milk-based formulas, reflux formulas, hypoallergenic formulas, formulas for premature/low birth weight infants, lactose-free formulas, and special formulas (Medline Plus, 2015). These baby formulae are used as a medical necessity and also for various other reasons, however, parents must make informed decisions regarding its use and administration, depending on their individual circumstances. Environmental Analysis of the Chinese Baby Food Market The following contains the environmental analysis of the Chinese baby formula industry: Political. The recent abandonment of Chinas one-child policy, fuelled by the likelihood of 1.52 million more babies being born in the country each year will promote growth in the sale of infant formula by 1015% (Haenlein, 2015). Chinas announcement regarding its two child policy occurred recently, owing to rising concerns of an ageing population and as a means to support the economy. Post implementation of the two child policy in March 2016, the market share and the contribution of sales volume from foreign infant formula companies including Abbott, Mead Johnson, Nestl, Wyeth and International Nutrition Co. is expected to cross 34%, which demonstrates the significance of Chinas import market for baby formula. Additionally, the Chinese government had put forwards many policies centered around the baby formula industry, in 2013, such as requirements to pass strict food inspections for receiving permission to distribute their baby formula in China, which were implemented in 2014, making it a transformational year for baby food manufacturers in China (Euromonitor, 2015). However, foreign infant formula manufacturers such as Danone have closed exports to China due to the tightening of a tax loophole by the government that had previously allowed lower prices on baby formula sold through websites that were operating from outside China (Chang, 2016). These products sold online and shipped overseas to consumers in China will now face an effective increase in tax by 11.9% due to the governments overhaul of the e-commerce system that had so long inadvertently given certain foreign companies a pricing edge over Chinas domestic competitors. Chinese authorities have since been trying to close down the grey market that is operated by a cottage industry of applications and websites where Chinese people who were living abroad ordered baby formula, vitamins and diapers online on behalf of consumers who lived in the mainland in order to avoid taxes. Economical. China is a leader among the AsiaPacific countries that drive a domestic market characterised by the annual compound growth rate of 7.7% till 2020, which is above that of the global rate of 6.4%, and expected to earn revenues of $72.7 billion in the period 2015-2020 (Whitehead, 2015). The consumption of infant formula in China is thus higher than most other countries in the world. Furthermore, the prices paid by consumers for baby formula inside China, is higher than the global average, owing to demand pressure and low supply. The reason for such as high demand is that baby formula brands have been heavily promoting their products, causing Chinese mothers to assume that infant formula is better than human milk. Another reason for the demand is owing to the improvement in peoples living standards and the 8% growth in national per capita disposable income. In fact, the per capita disposable income of rural residents have grown by 9.2%, which is higher than their urban counte rparts, due to the decrease in rural poverty by 12.32 million people (Daxue Consulting, 2016). This indicated that the spending capacity of Chinese consumers, as well as their consumption level, is on a constant rise, which increases the sale of baby formulae since children are the core focus of every family, who occupy a majority of household spending. The consumption of baby formula by urban families with infants reached 28,844 RMB in 2014 and will continue to growth rapidly. The quality of the baby food is a factor which is more important over price to the Chinese consumer, owing to concerns about food safety (Kong, 2012). Additionally, for the domestic market, discounts are the most effective promotional tool. This has increased the tendency of producers to simplify processes to save costs, and increase efforts on providing high-quality products in a sustainable and ethical way while satisfying consumers concerns for corporate social responsibility. Social. A lot of Chinese parents are unaware about the correct foods to feed their infants, with babies between 0 to 6 months of age consuming both human milk and baby formula, while babies between 6 months to 3 years of age consuming only baby formula and similar supplements. This means that babies in China consume artificial food much earlier in comparison to their Western counterparts. Also, since the majority of baby foods in China are homemade, due to the lack of commercially produced domestic baby formula there is significant potential for the development of Chinas baby formula market. After the relaxation of the one-child policy, families started to have more children, raising Chinas birth rate by 1.237% in 2014 (Daxue Consulting, 2016). This suggests that there were 16.87 million new baby births in China in 2014, with 40 million babies already existing in the age group of 6 months to 3 years. Market research estimates that consumption of 100g of baby formula by each baby per day makes the Chinese baby food market worth more than 80 billion. The currently available baby formula industry stands at only 7 billion, thus the market scale for the growth of baby formula is greater than 60 billion, even with 128 baby formula manufacturers producing around 700,000 tonnes of baby formula in 2013. Technological. The importance of e-commerce in baby formula industry is increasing, a lot of leading manufacturers in the baby formula category have established a presence in the online retailing channel, due to which baby formula has undergone a positive current growth value(Euromonitor, 2015). According to venture capitalists, the start-ups that focus on goods and services for babies, including baby formula in China, have a potential to grow in spite of Chinas economy slow down, owing to the strong demand for safe, and premium quality infant supplies. The current increase in e-commerce for baby formula is due to the interest of generation Y and millennial, who demand better services and are willing to pay premiums for it. An average website like Mami Zhidao has attracted two million users since 2015 and has received funding from SoftBank Group Corp, the venture-capital department of Japans telecommunications company (Osawa Carew, 2015). According to forecasts, the Chinese market for online and offline businesses that deal with mothers and their infants will increase by 15% to $244 billion in 2016 and is expected to double by 2020. Additionally, progressions in the field of infant formulae production, such the treatment of the puree with high-pressure thermal disinfection lessens the measure of a cancer-causing agent that were otherwise produced because of heat treatment systems like canning and jarring (Sevenich, et al., 2014). These emerging technologies and innovations pave the way for better production processes and superior quality of the baby formula. Environmental. China is expected to impose tougher standards and regulations for companies who sell baby formula online to increase food safety. These changes are secondary to the product registration norms, which were introduced by Chinese authorities in the recent past, to reduce the number of imported baby formula brands flooding the domestic the market since 2008. This was also to counter the Chinese infant formula scandal wherein baby formula was found to be contaminated with melamine, which resulted in the death of six babies and the hospitalisation of another 54,000 (Lynch Wen, 2016). An outcome of this was the whittling of international infant formula brands that could be sold in China to just 94 from a previous 800, by the Certification and Accreditation Administration of China in order to tighten standards of food safety. However, food crime still prevails in this industry, on the basis of cheap capitalism, which centres on inferior quality for low price causing the degradation of business ethics and social morality(Cheng, 2012). There is still a lot of outstanding problems in this regards and potentially hidden dangers, causing the situation to remain grim for consumers(Huang, 2014). Chinas efforts in addressing food safety have also faced complications from new environmental health hazards, such as water and soil pollution. Rice and vegetables used in the manufacture of baby formula may be contaminated by heavy metals deposits, but the clean-up process is highly expensive and may take years to complete. The consumer has thus lost a lot of confidence in domestically produced Chinese baby formula. Legal. Law enforcement is the ultimate method for food safety in China (Ni Zeng, 2009) and the legislature regarding pre-packaged baby formula consist of the need for major details to be labelled on the package, which include the following: Name, net substance, specifications and date of manufacture, Ingredients and formula detailing, Producer name, contact data and address, Shelf life, Item standards code, Storage prerequisites, Generic name of the substances added as controlled by national measures; License Number of production, and Other data that must be demonstrated as per relevant laws, controls, and nourishment security norms (GAIN, 2015). A recording system is also expected to be maintained by producers to keep a record of the supply and the examination of food ingredients, related products and additives. Such record is expected to be kept for 6 months after the date of expiration of the relevant food products, or for 2 years if the date of the expiration date is unspecified. An importer of baby formula has to be recorded with the General Administration of Quality Supervision, Inspection and Quarantine (Sim Yang, 2016). A key revision has also been to the law, stating that formula, ingredients, additives, and labels of baby formula have to be recorded with Food and Drug Administrators of the provincial level. The formulas must also be registered with China Food and Drug Administration. Reports and different materials demonstrating the production procedure and security of the recipe must be submitted for formula enrolment. Baby formula equivalents that are made abroad and imported into China must not be repackaged for import purposes. For producers of baby formula, the same recipe can't be utilised under different brand names. External Analysis of the Company The following consists of the external analysis of the company in order to identify market opportunities and threats. 3.1 Opportunities. The baby formula industry in China is expected increase at a value of 15% CAGR (Euromonitor, 2015), owing to the relaxation of the one-child policy, the declining rate of breastfeeding due to the increase in number of working women and modern trends of urbanisation that has gripped the nation(Belasco, 2014). Illegal imports of baby formula that are unavailable in China at cheaper prices has increased the number of the private seller of imported baby formula to over 5,900 stores (Ebeijing.gov, 2015). These stores mainly sell New Zealand brands of baby formula, which shows that there is a huge demand for international brands of baby formula, especially those from Australia. Even though the offline sales of baby formula were around 11 times that of online sales during the period of September 2013-14, the sale of baby formula through e-commerce is expected to rise (EU SME Centre, 2015). In the recent future, smaller brands are forecasted to be delisted or acquired, which will reduce the barriers to entry for new entrants(Daxue Consulting, 2016). The distribution channels for baby formula are also going to become more in number with the increase in e-commerce platforms, super/hypermarkets, convenience/retail stores, and specific baby stores. Chinese parents also prefer international baby formula over domestic players owing to their bad reputation (Daxue Consulting, 2016). Consumers are willing to pay a premium, which shows the increasing popularity of imported baby formula. 3.2 Threats. China's baby formula business sector is immense and developing, with aggregate sales growth of 25% in 2012 to achieve RMB 77 billion ($12.55 billion USD). The territory is home to around 130 domestic baby formula organisations, creating around 600,000 tonnes of baby formula on a yearly basis (GAIN, 2013). In any case, the manufacturers are attempting to rival established foreign players. Presently, foreign organisations represent as much as half of the main 10 dealers of baby formula, which displays large-scale difficulties in the future for China's own baby formula makers. In 2013, among the top10 merchants of baby formula in China, 5 were from abroad, namely Nestle, International Nutrition Co., Mead Johnson, Wyeth, and Abbott which held about 34% of the baby formula market in China. This shows the extreme level of competition and the possible rivalry that can be expected for a new market entrant. The biggest possible competitor, Shanghai Wyeth Nutritional Co Ltd, was the leader of baby formula production in China with a market share of 12% in 2015 (Euromonitor, 2015). Due to the fact that it has been involved in fewer defilement cases, the company continues to establish a strong brand value and brand reputation in China. Likewise, through its premium position, the company possesses the capacity to win the trust of numerous Chinese purchasers, particularly those with solid wellbeing and health concerns. Keeping in mind the end goal to improve trust in its baby formula brands among purchasers, the company has additionally welcomed the shoppers to visit its production plant in Suzhou through a promotion scheme placed in the Huaxi Newspaper. Buyers are permitted to visit each zone of the plant, from production to final packaging. This company will thus prove to be a big threat for an MSE that is a new entrant in the domestic market. Recommendations After conducting an environmental and external analysis of the Chinese baby formula market, for an Australian SME producer of baby formula, it is evaluated that there are a host of opportunities of a global market development strategy into China, owing to the relaxation of the one-child policy, increase in demand for international brands which are considered safer and the growing purchasing power of consumers. However, the intense competition should not be overlooked since it will be difficult for a small/medium enterprise to compete with an established market leader. In this context, it is recommended that the company opt for a brown-field market entry strategy through the establishment of strategic alliances with the market leaders. This will help it to gain a foothold in its market expansion strategy and establish a dominance among foreign importers like itself. 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