Dairy scandal creates opportunities

Sinogie Consulting, a research and consulting company with offices in Hong Kong and Shanghai, has conducted a survey to establish how the Chinese milk contamination scandal is likely to affect those involved in the FMCG sector.

Sinogie interviewed primary food buyers for households in Beijing, Shanghai and Guangzhou, to examine how their buying habits had changed in light of the recent food scares.

The results show that faith in Chinese infant formula has been badly undermined by the scandal. The reputation of the Chinese dairy industry, as a whole, has been damaged almost as badly as that of the infant formula sector. Even foreign brands of infant formula arouse some suspicion, but they do attract more trust than domestic brands.

Given the opportunity, many of the respondents said that they would be happy to pay a premium for foreign-branded food. Despite the involvement of Fonterra in the scandal, Chinese consumers still see NZ as one of the most trustworthy sources of food.

While most consumers expect more food scandals to arise in the future, there is a surprising level of faith that the government will be able to deal with the issue of food contamination, with the proportion of people who expect that the government will be able to solve the current problems at almost the same level as it was after the last round of contamination scandals in August 2007.

Infant formula

Buyers of infant formula are obviously very concerned about the melamine contamination which has dominated the news in China since the scandal erupted.

Unsurprisingly, the vast majority of the respondents were worried about the quality of products made by companies which have been named in the scandal. However, the concern is not limited to these brands: almost as many people are worried about all Chinese brands of infant formula. Perhaps because of Fonterra’s involvement in the original Sanlu scandal, a significant majority are concerned about both Chinese and foreign brands of formula.

The scandals have caused buyers of infant formula to change their buying habits, and foreign brands are likely to benefit from this. Around 40% of respondents said that they had stopped buying Chinese brands of baby formula, but almost 65% of them said that they would go back to Chinese brands in future.

Similarly, of the 75% of respondents who said that they have changed the formula brands that they buy, only 40% said that the change would be permanent.

However, three quarters of respondents said that they would now consider buying foreign brands of formula, and 93% of those people said that they would be willing to pay a premium. Even though there is some concern over the potential for contamination in foreign formula, it seems that consumers do have more faith in foreign brands than in Chinese brands.

Dairy and other food

Just before the survey began, the scandal started to spread from infant formula to the rest of the dairy industry. This is reflected in the results of the survey: levels of trust in Chinese dairy brands have plummeted, while trust in the whole of the food industry has also suffered, with 81.1% of respondents saying that they now trust Chinese-branded dairy products less than they did before the scandal, and 63.9% saying the same about other Chinese-branded food products.

People are so wary of dairy products that they have reduced their purchases. Here again, foreign companies are benefiting, with 56.2% of respondents saying that they have increased the amount of foreign-branded dairy produce that they buy since the scandal broke.

While consumers are clearly very worried about the possibility of contamination in the dairy sector, they are less concerned about the packaged food industry as a whole. Only 51% of respondents trust Chinese non-dairy packaged products less now than before the scandal broke, and 63.9% trust all Chinese food brands less than before. However, 67% of respondents said that the scandal had made them more likely to consider buying foreign brands of all types of food.

Foreign brands

Of those willing to consider shifting to foreign brands for formula, dairy or other food, an overwhelming majority, of up to 97.8%, said that they would be willing to pay more for the luxury

Food from NZ has always enjoyed a very strong reputation in China, being seen as pure, safe, and trustworthy. Although Fonterra was a 43% investor in Sanlu, this reputation does not appear to have suffered as much as was expected so far. Only 51.2% of respondents said that they now trust NZ dairy produce less than they did before the scandal.

Surprisingly consumers do still trust the government and food manufacturers to resolve the problems, and there is strong faith that the situation will improve.

In August 2007, during the last spate of food scares, when consumers were asked whether they thought that the food contamination crisis would be resolved by the government, only 20.5% thought that the situation would not be resolved in the near future.

In the September 2008 survey, a similar question was asked. 16.3% said that they did not think that the dairy contamination problems would be resolved within the next two years and 13.5% did not think that new government regulation would reduce the risk of food contamination.

Although Chinese consumers are being hit repeatedly with new food scandals, there is still a remarkable level of faith that the government will solve the problem eventually, although few people expect this scandal to be the last.

Foreign food manufacturers are still trusted by Chinese consumers, even in the dairy sector. Overseas infant formula manufacturers in particular are likely to see a spike in sales in the wake of the scandal, but some consumers may go back to their old brands as the furore dies down.

In the dairy sector, consumers have had their confidence shaken, and would quickly take to a new brand if it could prove itself trustworthy. A company – either Chinese or foreign – that could demonstrate that it had fully integrated its farming, manufacturing and processes, and that could clearly show that it had all of the necessary quality control processes in place, could build an extremely strong market position.

At present, the dairy industry is far too fragmented, with long, uncontrollable supply chains and opportunities for contamination at every stage. If the government moves to consolidate the dairy industry – which it must, if it is to restore consumer confidence – there may well be great opportunities for well-run Chinese or foreign firms to build a presence.

Bruce McLaughlin is the CEO of Sinogie.

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