China has slashed the number of permitted milk powder products by 1,400, to boost the market share of the bigger domestic brands damaged by a safety scandal a decade ago, which led overseas companies to dominate the $20bn market.
New regulations require factories to register with the Chinese Food and Drug Administration (CFDA) and pass safety inspections to sell in China. Plants that pass inspections are limited to marketing three brands.
All told, the eliminated brands will open up to 10 per cent of the market by sales volume, said Song Liang, an independent dairy analyst, driving sales to the most established names.
“Bigger brands will benefit, including imported brands,” he added.
Eight of the top 10 brands in China are foreign, according to consultancy Euromonitor. Danone’s Nutricia leads the pack with a 10 per cent market share, followed by Nestlé’s Illuma with 9 per cent.
“This legislation is really welcomed by us and leaders in the industry because it does represent a move forward in protecting consumers and giving them higher confidence and a higher peace of mind,” said Bridgette Heller, executive vice-president of Danone’s early life nutrition unit division.
So far the CFDA has approved about 950 formula products, a 60 per cent reduction from the 2,300 available as of last year. The regulations, which went into effect last week, are widely seen as an attempt to restore confidence in large domestic brands such as Feihe and Yili, by eliminating their smaller, less-trustworthy counterparts.
Overseas companies account for about three-quarters of milk powder sales in China following a 2008 scandal that saw a domestic brand tainted by melamine, an industrial chemical, killing several children and sickening tens of thousands of others.
The country’s formula market grew 8 per cent in value terms last year to $19.7bn in sales as consumers upgraded to more expensive varieties because of rising incomes, according to Euromonitor.
Most approved brands are from domestic manufacturers, with just 209 imported brands approved. With 54 products, New Zealand has the most registered formulas among all foreign countries.
The eliminated brands are mostly low-end varieties sold in poorer regions of China, where large domestic players will have the upper-hand in gaining market share because of their lower prices.
“Well-known domestic brands are more privileged to gain the share with their more prominent resources and capacity in the [lower-end] market,” said Cecilia Yang, an analyst at Euromonitor.
But analysts said the cut in brands could be positive for overseas companies. “It will benefit imported brands, as the gap between higher and low-income consumption is narrowing because of ecommerce,” said Mr Song.
Foreign brands are using internet platforms to reach the Chinese countryside. They also expect an uptick in sales as a result of more births following the abolition of China’s one-child policy in 2015.
China’s government has attempted to persuade consumers to buy domestic brands, with the main state-run broadcaster in September running a report that said local products were more nutritious — a broadcast that was met with derision online.
“In spite of all the attempts to invigorate the domestic industry, imported formulas remain strong,” Peter Peverelli, an industry analyst wrote in a note.