E-Commerce in China Could Boom after New Zealand Infant Formula Poison Threat
Over the last few years Internet retailing for baby food has soared in China after several baby food scares caused parents to turn to the online channel to order “trusted” European brands that were sold out in-store. One of the latest threats in New Zealand could boost Internet retailing even more.
New Zealand’s largest dairy producer, Fonterra, as well as Federated Farmers, are making efforts to reassure consumers that their products are safe after a blackmail threat was received to poison both companies’ infant formula. The letters threatened to contaminate infant formula with a poison known as 1080, used in pest control, as a protest to stop the country from using it. Biodegradable 1080 poison is the only toxin currently registered for use on mainland New Zealand as suitable for aerial targeting of possums – a major conservation and agricultural pest.
New Zealand’s economy is very reliant on the dairy industry and Fonterra itself accounts for a quarter of New Zealand’s goods’ exports, with China its largest market. That reliance could result in a serious glitch in sales if Chinese consumers become aware of this news and take it seriously. Seeing that by directly ordering online the product undergoes fewer stops (e.g. no retailer), it has less chance of being contaminated and is therefore considered safer. As such, online retailing could soar again.
A scare is all it takes for sales to take a huge hit
In 2013 the Chinese infant formula market took yet another blow with Fonterra’s botulism scare, which turned out to be a false alarm. One of the companies that took a big hit was Danone, which was forced to issue a recall of its Dumex brand. Despite persistent reassurances that the quality is of the highest standard and the scare was unfounded, the brand’s sales plummeted and its market share declined from 9.0% in 2012 to just 3.6% in 2014.
Learning from past occurrences such as these, whilst this New Zealand poison threat might be a hoax, the consequences can be severe as Chinese distrust is already high. Last week, New Zealand Police revealed that a number of calls were received concerning “possible infant formula product tampering such as possible pinpricks in packaging lids.”
China has the largest share of baby food sold through e-commerce in the world
The Internet is becoming a channel of great importance in China for baby food given the high demand for foreign brands that are seen as trusted and of high quality. As a result of large shortages in-store in the past, consumers have been going online to find their preferred brands as well as benefiting from the convenience offered by the channel, as milk formula is bulky and heavy. As such, the online retail channel for baby food has seen unusually rapid growth, from a 0.2% share in 2008 (before the melamine scandal) to 12% in 2014. When comparing this with other countries, China in fact has the largest share of baby food sold via Internet retailing in the world.
Distribution of sales of the top 10 baby food markets, 2014
Source: Euromonitor International
Companies should invest in traceability systems….
Weather or not the New Zealand poison scare is a hoax, the past tells us that even a scare can cause significant damage to infant formula brands given the sensitive nature of Chinese consumers in this particular matter. From a wider industry perspective, this threat underlines the importance of setting up traceability systems at both source and destination levels. Certification of international brands highlighting the full traceability of the ingredients used would not only reduce the time needed to withdraw the affected batch from the market, it would also reassure consumers regarding the safety of the product and significantly diminish the impact of future scares on consumer confidence.
…..and in E-commerce
In the context of China being the greatest future income generator for baby food players with US$21 billion in new sales expected over 2014-2019, new channels including e-commerce have become an area of focus for multinationals such as Nestlé, Mead Johnson and Danone – the largest foreign baby food players in China. Danone has reportedly seen a jump in online sales of its European-made infant formula in China, and according to Mead Johnson’s CEO the company has seen a “tremendous explosion” of online sales since it opened an e-store on Tmall, the Alibaba-hosted online site. Yet of these big three, Nestlé admitted it has “failed to recognise the importance of e-commerce and needs to reconnect with its consumers.”
Regardless, the online channel will gain even greater importance and companies should make investment in e-commerce a top priority. Even a small gain of 1% in distribution share equates to over US$190 million – as large as Spain’s entire baby food market.
Learn about China’s retailing market and more in our free white paper “Cities in China: Economic and Consumer Dynamics for Successful Business.”