China food safety

Beijing tightens oversight over baby formula makers scarred by safety scandals

New regulations are set to be a game changer in the 60 billion yuan infant formula market

PUBLISHED : Tuesday, 08 December, 2015, 4:19pm
UPDATED : Tuesday, 08 December, 2015, 4:36pm

Proposed new regulations that will tighten controls on infant formula producers, dubbed as the toughest-ever in the industry, are likely to spark a wave of consolidation in the sector, according to analysts.

Under the rules, which have been released for public comment, infant formula makers will face limits on the number of unique formulations they can sell. Each producer will be allowed to register a maximum of five instant formula brands, with only a single formulation allowed per brand, according to a top official at the China Food and Drug Administration, quoted by the China Business Journal.

In addition, regulators planned to conduct more spot checks on the 176 formula manufacturers in Chinese markets, including 103 domestic producers and 73 foreign firms, he added.

Measures could include eliminating any companies making products whose quality cannot be guaranteed on a long-term basis and ordering a mandatory recall of any substandard products found in random spot-test sampling.

“The so-called toughest baby formula policy is going to lead to a dramatic decrease of brands in the market and a major shuffle of the sector,” said Ma Haobo, an analyst for Soochow Securities. “It signals the start of China’s winding-down of overcapacity in the industry.”

Chinese consumers of baby formula have been overwhelmed by the rise of huge number of brands, in part due to the rise of baby speciality stores from 2008 and a boom in online shopping that began in 2013.

Currently, more than 2,000 infant formula products are available in China, produced by more than 100 companies, according to data from Soochow Securities. On average, one company has about a dozen infant formula brands.

The proliferation of baby nutritional products is very different from that in developed markets, such as the United States, where a small number of producers offer a limited range to consumers.

“The industry faces a severe overcapacity problem,” said Ma. “The profitability of formula makers has been declining significantly in recent years.”

MORE REPORT: Chinese government places new limits on infant formula makers

Food safety concerns became a nationwide issue in China following a number of scares over contaminated formula, which resulted in the deaths of several infants.

The market chaos, alongside with several nationwide food safety scares involving contaminated infant formula, have prompted Chinese authorities to toughen the regulations .

The new proposals are in addition to a comprehensive new food safety law in April that included a requirement for formula producers to register the formulations of their products, instead of simply ensuring the formulations were on record.

The industry faces a severe overcapacity problem. The profitability of formula makers has been declining significantly in recent years
Ma Haobo, analyst, Soochow Securities

Calling the current market “disorderly”, the official from the regulator said the proposals were designed to trigger industry consolidation and bolster Chinese formula makers, so as to improve their efficiency and enhance the quality of their products.

If they went into effect, about 80 per cent of existing formula brands could be wiped out, Ma said.

Given the current inventory level, the industry’s capacity could be reduced by 50 per cent in the next year, making room for the growth of surviving formula producers.

Ma predicted China’s formula market would grow 40 per cent to 100 billion yuan in the next few years, up from its current size of 60 billion yuan.

Other analysts believe the policy will be more favourable to big players, as smaller companies and less known brands will be forced out.

Domestic brands like Yili Group, Yashili and Beingmate Baby & Child Food would have to streamline their product lines and improve their brands to cope in the new market, analysts from China International Capital Group said on Monday in a research report.