Will Consumers Buy into “Imported Ingedients”

Monday, May 27, 2013 1:56
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As mentioned in a number of previous posts, but more recently in the post Would you Sell Your Milk Powder to a Chinese Firm?, Chinese firms scramble to regain the trust of consumers.  And while it is not limited to the powdered milk industry, it certainly seems that this is the industry that is actively doing their best to deliver a “trusted” product.

A subject covered in the article  China milk powder firms court foreign cachet for domestic gains:

Armed with global partners and slick marketing, Chinese firms such as Yashili, Biostime International Holdings and Zhejiang Beingmate Scientific Technology Industry and Trade Co Ltd now want to challenge the dominance of international brands with “100 percent imported” brand labels and competitive prices.

“We’re an international Chinese firm in exactly the same way that Coca-Cola or McDonald’s are international U.S. companies,” said a Yashili spokesman, adding that the company sources all its raw products from New Zealand.

China’s infant formula market is expected to grow to $25 billion by 2017, Euromonitor data shows, as more mothers join the workforce and spend less time breastfeeding. Food safety concerns have so far played in favor of global firms like Nestle SA, Danone SA, Abbott Laboratories and Mead Johnson Nutrition Co..

Local companies are now fighting back by espousing foreign safety standards – Bright Dairy and Food Ltd, for example, sources the raw materials for its Pure Canterbury brand from New Zealand, while China Mengniu Dairy Co Ltd this week struck a deal with Danone.

A few things to point out.

1) Danone produces in their own facilities in China.  Abbott imports from Singapore. Neither are selling raw ingredients to Chinese buyers.  and there is a very simple reason for this.  the ingredients in China, even those that are domestically sourced, are not the problem.  the quality and safety problems are in the processing.  for the milk contamination issues that have plagued the industry since 2008, it is in the consolidators, but it is also in the brands themselves, as quality is often cut when a margin can be made.

2) These “imported ingredient” brands are NEVER going to compete against the imported brands.  EVER.  It is only the middle market that would consider the domestically branded “premium” products, and I am not entirely convinced that these brands would find much premium in an “imported ingredient” product as even domestically produced foreign brands take second place to imported foreign brands.

3) If there is a problem with this line of products. ANY problem.  These products would see a very ugly response.  One that could potentially be a bigger problem for the foreign ingredient supplier than the domestic brand as the domestic brand would almost certainly blame the ingredients than their own process, and suppliers would be largely unable to defend themselves.  Something Hero Group recently experienced.

Hero Group’s sole authorized China dealer, based in Suzhou, Jiangsu Province, was busted by that city’s quality watchdog in December for blending expired milk powder and an unknown milk source into Hero Nutradefense products, changing production and expiry dates and repackaging them, CCTV reported today.

Which leads me to a few points.

In the original article, Shaun Rein is quoted as seeing a huge market here, and I would agree.  there is a huge market.  a market’s whose size is only matched by the size of the risk that many firms are opening themselves up to… and the only way to avoid this risk, is to make a decision BEFORE entering the market about the level of investment that the firm is willing to make. Firms who decide to passively enter into these agreements are going to end up like Hero.  the product will be compromised in the process, and their market will go to zero.  Firms who will want to mitigate this risk will accept that they have a responsibility for the way their clients use the product, and will demand that their people must be embedded into the process.  Firms who want to terminate the risk, firms can either (1) stay of of China or (2) launch their own operations in China.   Depending on the interests of the group, there is more than enough publicly available support to come to either conclusion, but for me entering the market is something I believe more firms should take seriously.

Second, Chinese firms, and more widely the government, are desperate to rebuild consumer confidence, and in the short term will do anything to rebuild that  There is no long term to these arrangements.  NONE.  Because once trust is built, the “need” for foreign suppliers of ingredients will disappear. Which leaves little long term upside for these firms if they are only entering as an ingredient supplier.  something the successful foreign brands like Danone, Nestle, and Abbott prove. Which means that firms who enter China through ingredient arrangements need to be thinking far beyond their trading arrangements, and invest into a long term plan that would place their own products in the market as well.

Finally, while  I would agree that there is a large opportunity for firms in this market (and many others), that does not mean that all firms need to be here.  Staying put, and selling product to the Chinese in existing markets may actually be the best strategy of all, and there are some firms who I have seen (and advise) who are doing just that.  For them, entering the China market would provide for a short term pop, but given the current practice of Chinese importing large quantities of products, that pop is already being felt.

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