The Effect of Birth Rates on the Chinese IMF Market
China’s latest official data shows child births at 15.2m in 2018, a 12% YOY decline. This is not surprising to independent demographers, but it is a sharp contrast to the government expectation of over 20m child births in the peak years following the 2015 birth relaxation policy. This is not good news for the infant formula (IMF) market, but not an end to growth seekers in the sector.
Child births down further, despite relaxed birth policy
The Chinese government recently announced that the number of child births in 2018 amounted to 15.23m. This is down by at least 2m (or -12% YOY) compared with 2017.
As discussed in ‘China’s IMF Market After Registration: Risks Exist, Shifts Ahead’, risks to forecast growth of child births in China are on the downside, as independent demographers in China attributed the likely fall to aging, and therefore the declining number of women at the peak of the childbearing age – a trend likely to be sustained in the years to come. The number of first-child births also fell below 50% for the first time in 2017.
Other key considerations like housing, child education, employment, career development of women, and the overall cost of raising children weigh heavily on the intention of having a second child. As such, the effect of the ‘one family, two kids’ policy now only appears to prevent a major decline in birth rates over the next few years.
Figure 1: Declining child births since implementation of the 'one family, two kids' policy in 2016
Source: National Bureau of Statistics, Rabobank 2019
Volume growth losing steam, value growth now more important
The disappointing birth number has a negative implication for volume growth in the infant milk formula market in China. However, China will remain the largest infant milk formula market in the years to come, and, in our view, there are still opportunities for industry players to extract growth.
Market share gains
In a market where the outlook for volume growth is dented, market share gains would the most direct approach to deriving growth. Rabobank believes that the formula registration requirement, that became effective at the beginning of 2018, should present an opportunity for well-established players to find near-term growth through restocking and by picking up market shares left by weaker players.
Ensuring food safety is a minimum consumers requirement but unique selling points need to be developed to attract their attention. As with other consumer food categories, there has been a clear trend of trading up seen among Chinese consumers.
Paths to follow may involve carving out a niche that embraces the trend rather than a fad. These could include a matrix of super-premium IMF, organic milk formula, goat milk formula, and, probably, liquid milk formula. This also puts IMF players' R&D capabilities to the test. The ability to add niche products to an existing portfolio reinforces the strategic value of owning a Chinese-certified plant.
In the case of organic milk formula and goat milk formula, supply availability remains a challenge for most players. It takes time and commitment to invest in building the supply chain.
Engaging the new generation of Chinese consumers
Chinese consumer needs are constantly evolving and, as we enter into 2019, the core target buyers of IMF products have shifted toward mothers/would-be mothers who were themselves born between 1985 and 1999 (the theoretical peak of childbearing age of 20-34). Understanding these young consumers, identifying how they obtain information, how they make decisions and how and where they make purchases is of paramount importance. This has implications for the allocation of marketing spend, the most effective forms of media, and the selection of distributors and retail partners (online and offline).
Foreign players, while enjoying a relatively easy ride with Chinese consumers in the past decade, are not in a position to be complacent. Chinese consumers show great national pride and domestic players are building offshore supply chains, upgrading product quality and mix, are better able to penetrate lower tier cities, and have strong media (and government) support. These forces should not be underestimated.
Potential diversification into adjacent areas
With the rising consciousness of the need for balanced nutrition, increasing sports participation, and the aging of the Chinese population, the importance of health foods and nutritional supplements is growing in China. Players purely focused on infant nutrition may find growth in adjacent categories, be it dairy or non-dairy-based nutrition for adults.
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Sandy ChenSenior Analyst - Dairy
RaboResearch Food & AgribusinessPO Box 17100 (UC 053) 3500 HG Utrecht, The Netherlands