Foreign baby formula manufacturers are under pressure to lower prices after the National Development and Reform Commission (NDRC) launched an investigation into possible price-fixing and anti-competitive behaviour in the sector.
A spate of food-safety scandals have fuelled frenzied demand for foreign formula from nervous mainland Chinese mothers, whose bulk purchases have opened the way for the top four international producers to control more than a third of the industry. At stake is an almost US$16 billion infant formula market that Mintel Group estimates is more than four times the size of the US sector. International companies are likely to suffer even if price cuts result in higher sales.
The investigation offers a window into how government scrutiny in China can create a sudden roadblock for foreign companies expanding there.
Checks by Bloomberg News and Mintel data show price jumps of between 25 per cent to more than 40 per cent on some foreign brands in China since 2008. Annual food inflation averaged about 7.8 per cent in China from 2008 to 2012.
The troubles for milk manufacturers started this month as state-controlled media reported the government was investigating them and other overseas competitors for possible price-fixing. Within days, Danone and Nestle slashed some prices by as much as 20 per cent. Mead Johnson, the country's largest infant formula seller, announced its own cuts on Wednesday.
The price of S-26 Progress Gold infant formula, produced by Wyeth, fell to 158 yuan (HK$198) - a reduction of 40 yuan - in one Guangzhou supermarket within 48 hours of news of the NDRC probe.
"The price has indeed dropped significantly but not many people buy it. It's made in Suzhou," explained a sales representative at the supermarket.
"Wyeth's Progress Gold has had its price cut but they are just trying to clear old stocks. I heard this product is going to be replaced with new packaging and new marketing soon so the price might again be different later."
Another Wyeth line, the Illuma series made in Ireland, is still 360 yuan per can.
Mead Johnson Nutrition said it would cut the price of its infant milk formula in China as of July 16 by 7 to 15 per cent in the wake of the investigation. A sales agent for Mead, the maker of the Enfamil brand of baby formula, told customers to come back after July 20 when the price might drop by 20 yuan a unit, from 220 yuan.
Xinhua described the investigation as a probe into "possible price fixing". Citing the NDRC, Xinhua said the brands have been accused of "violating anti-monopoly laws via high prices and limited market competition". The companies have said they are co-operating with the NDRC and all have cut prices.
China has targeted foreign brand pricing in the past. Unilever, the world's second-largest consumer-goods maker, was fined two million yuan in 2011 for telling the media about plans to raise prices, which the Chinese government said led to hoarding in some cities. The exact allegations and scope of this month's milk-powder investigation are hard to pin down, said Kent Kedl, managing director for Greater China and North Asia at global risk consultancy Control Risks.
Xinhua reported yesterday that Biostime Pharmaceuticals had confessed to signing contracts with distributors that might have violated the country's anti-monopoly law.
Mainland parents are expected to still prefer infant formula sold in Hong Kong even if the price drops further on the mainland.
Wendy Ma, 27, has a one-month old son in Guangzhou. She first fed her baby with Enfamil but switched to Cow & Gate after being discharged from a local hospital.
"I fed him Enfamil because it was a freebie from the hospital but I switched after doing some research," she said.
Wendy has a friend who travels across to Hong Kong on a weekly basis and has become the family's regular milk powder shopping agent.
"It's HK$210, I don't know how much it costs on the mainland. I didn't even bother to check. It's not an option for me to consider. Most mothers who I know have done their research either buy from Hong Kong or go to the trouble of getting shopping agents from overseas to source infant formula," Ma said.
May Zhang, 27, is four months pregnant and plans to use a formula for mothers imported from New Zealand that costs Zhang and her husband Alex Yang around 180 yuan in Guangzhou stores and HK$176 in Hong Kong.
"Both are imported from New Zealand but the one we bought in Guangzhou is not as creamy as the one we bought in Hong Kong," Zhang said.
The formula bought in Guangzhou is packaged in Taiwan, but the Hong Kong versions were directly made and packaged in New Zealand.
Another mother in Guangzhou who declined to be named, has a son who is two-and-a-half-years old. She is a loyal buyer of Cow & Gate infant formula in Hong Kong, which costs her HK$155 yuan a unit. The brand is not commonly available on the mainland except in online shops selling parallel Cow & Gate infant formula at 210 yuan a unit.
"It's very troublesome to buy it in Hong Kong so I would consider buying it on the mainland if the price has dropped significantly," the mother said.