Parallel trading

Can restricting exports on milk formula prove best for Hong Kong's babies?

Curbing formula milk exports clashes with the ubiquitous free market ethos, but has the move resolved problems of supply?

PUBLISHED : Monday, 27 May, 2013, 12:00am
UPDATED : Monday, 27 May, 2013, 9:04am

"There was only one tin left at home, but we could not buy another tin of the same brand for a whole week," says Snowy, the mother of a 10-month-old girl, as she recalls the scramble for milk powder she and her husband went through during the Lunar New Year holiday.

"It was out of stock in every retailer we went to. Do you know how frustrating it is when you are being troubled by the same problem again and again? "

The 19-year-old mother and her husband drove around the city, to places as far apart as Tseung Kwan O, North Point and Tsuen Wan, but they left empty-handed. They had to ask their relatives to look out for them.

"Such a simple thing has taken so much of our time and has bothered so many people, just because the mainlanders emptied all our shelves and left us with nothing. Their visits have disrupted our daily life. The local government has a responsibility to guarantee local parents can buy the formula they want for their babies."

She is typical of many Hong Kong mothers who have scrambled to secure stocks of baby milk, which have become an increasingly popular purchase for "parallel traders" - those who buy large quantities of a product in Hong Kong to sell on the mainland, evading taxes and duties.

Widespread cross-border trading led the government to bar outbound travellers from taking more than two tins of formula out of the city in March.

Snowy's comments come despite claims the manufacturers of baby milk, who say they are importing more formula to the city than ever before - a claim backed by statistics.

They say the limit is unnecessary and should be scrapped, and the crisis has been "over-publicised and exaggerated", arguing the shortage was limited to a few popular overseas brands including Mead Johnson and Friso, which account for about 60 per cent of the local market. Other brands remained little affected.

Mothers like Snowy, however, say they vastly prefer to keep their children on the same brand. While doctors say it is safe to switch between different brands of milk formula, parents fear that their children will fall ill if they switch, or believe that certain brands have particular properties that cannot be found in other kinds of formula.

The whole debate raises two questions: why were local parents unable to purchase what they thought was best for their own children under a free market? What has gone wrong and where does all this milk formula go? Miscalculation of local demand is unlikely. The city's birth rate has remained relatively steady and in fact fell by five per cent to 91,600 last year as the government dissuaded mainland women without local partners from giving birth in the city.

But formula supplies have increased sharply since 2008, when mainland consumers were put off local supplies by the news that formula had been tainted by the industrial chemical melamine, used to bolster substandard milk so it would pass tests on protein levels. The tainting scandal left 300,000 babies ill and at least six dead. While a supply of 13.2 million tins of milk should be enough to feed every child in the city under the age of three, imports grew to 37 million tins of formula last year, up 38 per cent year on year. Fewer than 13 million tins were imported in 2008.

Mead Johnson and Friso have admitted that parallel trading complicated their calculation of demand for milk powder within Hong Kong.

"Mainlanders tend to have a misconception that the Hong Kong product is more guaranteed," said Mead Johnson Nutrition's Charles Urbain. He acknowledged Hong Kong was a unique market and admitted it was difficult to plan the delivery of supplies from the Netherlands.

Arnoud van den Berg, the general manager of Frisland Campina - the manufacturer of Friso products - agreed and said the sale had been unpredictable as most of it was driven by mainland visitors, especially during national holidays such as the Lunar New Year.

In response to the government's restrictions on supplies, Van den Berg said: "I respect the government's attention on the matter; however, it was based upon a mistake that it was a supply problem."

Since 2009, Mead Johnson has built a production plant on the mainland and Frisco has started exporting its Dutch-made product to the country, but both companies say that many mainland customers still prefer the ones on sale in Hong Kong and other countries.

The level of demand on the mainland gives some indication as to why mainland shoppers cause such problems when they shop for baby formula elsewhere - not just in Hong Kong, but also in countries such as Britain, Germany and Australia, were stores have also slapped limits on formula sales.

According to a study by Great Wall Securities, China is one of the world's largest consumer markets for dairy products. Despite the one child policy, between 16 and 17 million babies are born in the world's most populous country each year.

Milk powder consumption in China reached 37.8 million tonnes last year.

The huge demand for milk formula is split between domestic brands and overseas labels.

Foreign brands have greatly increased their share of the market in the years since the melamine scandal.

Before the tainted-milk story broke in 2008, they accounted for just 40 per cent of the market, but by 2011 the share had reached 55 per cent, according to a report by Citic Securities.

And the trend of mainlanders snapping up milk formula on their travels is unlikely to slow down in the near future - because the safety of the product is by no means their only concern.

Taxes make up a significant chunk of the cost of milk powder on the mainland, meaning traders can make big profits by carrying their wares across the border while claiming the product is for personal use.

Great Wall financial researchers estimate that parallel imports used to take up six to 10 per cent of the milk formula market, meaning sales revenues could reach up to 7 billion yuan (HK$8.8 billion).

While a local export limit has triggered much debate, it has created an immediate effect in resuming local formula supply.

Secretary for Food and Health, Dr Ko Wing-man, said the government had acted to implement the ban because "there was no alternative".

The trade has significantly diminished in size since the export ban was implemented. But the big profits mean it will not die out. Frequent visitors to border points say it is common for dealers to approach anyone carrying milk formula and offer to pay them HK$35 for a can.

Milk manufacturers, retailers and supplier groups all say the restriction is "too extreme".

"It is not a solution to the problem," said Hong Kong Suppliers Association chairman Albert Tang, who says the temporary shortage in certain geographic areas may be "a commercial or logistical issue".

"It is unthinkable that our administration cannot resolve the short supply problem with a handful of milk formula suppliers and has to resort to export restriction," he said.

Cheung Tak-wing, an executive committee member of the Hong Kong General Chamber of Pharmacy, agreed.

"There was never a time when milk formulas were completely wiped out in the city. Instead, there have been shortages here and there where pharmacies have failed to replenish supplies from milk formula brands," he said.

He believes the problem will diminish if manufacturers increase supplies at peak periods.

"Smaller pharmacies receive new supplies once per week, while bigger ones get them twice," he said.

In the face of surging demand before the Lunar New Year holiday, stocks had run out by the end of a week. Although people prefer to shop in the small shops due to their lower prices, the shortage was more acute in pharmacies as they had less stock.

"According to our estimation, milk formula manufacturers allocate three cans out of 10 to pharmacies. The remainder go to chain stores or supermarkets," he said. The chamber said local pharmacies had seen a drop of 30 per cent in sales since the export limit took effect.

The Hong Kong Infant and Young Child Nutrition Association, formed by the six major milk brands in the city, has urged the government to lift restrictions.

But mothers like Snowy are keen to see the formula ban stay in place - for as long as it takes.

"There are people attacking the milk ban and saying it has affected Hong Kong's business and reputation," she said.

"But as an ordinary citizen, it is my humble wish that we can buy what we want for our children. I only know that, after the ban, we have not needed to fight over a can. There is abundant supply in the market. The result has been very remarkable."