Foreign food brands well set in China

09 January 2012

BEIJING: Global food companies like Nestlé and Danone stand to gain further ground in China, where concerns about the safety of products made by their indigenous rivals is growing.

Mengniu, China's biggest domestic dairy group, has recently been embroiled in controversy after unintentionally selling tainted milk, the latest in a series of scandals in the country.

"[Consumers] will immediately shift to foreign brands when they learn about the Mengniu incident because they have stronger trust in overseas companies," Tracy Sun, an analyst at CSC Securities HK, told Bloomberg.

Euromonitor, the research firm, predicts the Chinese milk sector will be worth $36.8bn in 2015. In 2010, Mengniu held a 24% market share, ahead of Yili on 20%, falling to 1.5% for Nestlé. Danone also took 1.5% of the yoghurt and sour milk drinks sector.

"Long-term, Mengniu's sales and market share will be affected by the frequent quality scandals," Jason Yuan, an analyst at UOB Kayhian Holdings, said.

Previously, 22 companies were found to have sold contaminated milk in 2008, with Sanlu, then one of the nation's biggest dairies, going bankrupt the same year.

A survey by the China Market Research Group, the insights provider, of 5,000 people in 15 cities found food safety was their biggest concern, a trend likely to be exacerbated by Mengniu's problems.

"They were more worried about that than paying for medical care or education costs. The food supply chain in China is a mess and smart companies will benefit by ensuring the best quality," said Jessica Lo, managing director, China Market Research Group.

"This scandal is another black mark on Chinese firms' reputation. Foreign food brands will benefit. Companies like Danone and Nestle should see a bump in sales."

The Chinese government closed 5,000 firms, arrested 2,000 people and even handed out a suspended death sentence last year as part of its efforts to improve food safety.

Jason Ding, vice president at the Beijing office of Roland Berger, the consultancy, suggested quality is a "secondary" issue for Chinese firms keen to drive sales at a time of economic growth.

"It's like wealth's curse," he added. "Local companies, even industry leaders, can't be protected."

Data sourced from Bloomberg; additional content by Warc staff