October 25, 2019

Although China’s infant milk formula (IMF) sales experienced a period of rapid growth starting in 2000, there has been a slowdown in recent years. Despite this, premium products have been a bright spot, and their high growth may continue as there is a growing preference for them among Chinese consumers. We think lower-tier markets could also be a source of growth as they accounted for 80% of newborns in 2017 and make up the bulk of the total number of maternal and baby product stores.

Industry background: Four stages of China’s IMF industry

China’s IMF industry has undergone four main stages since the market started to open up.

Figure 1: China’s IMF industry
Source: Euromonitor, CICC Research

In the first and second stages, IMF sales nearly tripled from Rmb10bn in 2003 to Rmb27.96bn in 2007, while sales growth also picked up from 12.7% in 2001 to 36.2% in 2007. This may have been due to higher average spending on IMF products and increases in ASP, possibly on the back of a decline in the breastfeeding rate (as measured by the percentage of breast-fed babies that are less than 6 months of age).

Figure 2: Breastfeeding rate in China

Source: CDRF, National Health Commission, CICC Research

The third stage (2008–2013) saw growth slow for sales volume and ASP, while in the fourth stage (2014–2018), the growth rate of overall IMF sales declined to single digits due to a high base for average IMF spending, tighter regulations on prices and the decline in the number of newborns.

Current situation: Growing preference for premium products

While growth in average IMF spending has slowed, sales of premium and super-premium infant formulas have continued to rise. According to Frost & Sullivan, over 2014–2018, premium and super-premium infant formulas registered sales CAGRs of 39.5% and 20.5%, and their combined portion of total IMF sales rose from 22.0% to 37.9%. Given consumers’ growing preference for these products, we think their growth could continue for some time to come.

Figure 3: Sales of general, premium and super-premium infant formulas
Source: Frost & Sullivan, Feihe prospectus, CICC Research

Figure 4: Domestic ASP for all IMF products and for premium and super-premium products
Source: Frost & Sullivan, Feihe prospectus, CICC Research

Domestic IMF companies as well as those from abroad have rolled out super-premium products such as organic and goat infant formulas. Health & Happiness International bought American organic IMF brand Healthy Times in 2015, Wyeth launched its “Illuma” organic formula series in 2017, and Mengniu recently announced its acquisition of Australian organic infant formula maker Bellamy.

Figure 5: Sales of premium and super-premium products for major domestic brands (2018)
Source: Corporate filings, public information, CICC Research

Figure 6: Chinese consumers’ primary reasons for purchasing goat milk formula (2018)
Source: CASS, CICC Research

Figure 7: China’s goat milk formula market sales
Source: CASS, Frost & Sullivan, CICC Research

Potentially greater growth in lower-tier markets

According to data from market research firm Kantar, average spending on infant products in tier-3 and tier-4 cities is two thirds of that in tier-1 and tier-2 cities. We think there could be greater growth potential in lower-tier markets, given that there are more households as well as maternal and baby product stores in tier-3 and tier-4 cities; only 20% of the 17.58mn newborns in 2017 came from upper-tier cities; and disposable income and expenditure in tier-3 and tier-4 cities are growing rapidly. While foreign IMF brands mainly target tier-1 and tier-2 cities, domestic brands focus more on tier-3 and tier-4 markets.

Figure 8: Number of maternal and baby product stores
Source: Nielsen, CICC Research

Figure 9: Number of households (2018)
Source: Nielsen, Euromonitor, CICC Research

For more details, please see our report Domestic players likely to dominate China’s infant milk formula market published in October 2019.