Those are two of the conclusions in a new report on the infant formula value chain by Coriolis consultancy in Auckland for the NZ board of the Pacific Economic Co-operation Council.
The council commissioned the research to understand the global value chain better and the commercial realities and implications for companies and government policies.
Coriolis observed that NZ was an early starter in the infant nutrition business when Glaxo was founded in Bunnythorpe in the early 20th century.
“The future looks set to be a battle between the multinational leaders and the primarily Chinese newcomers for control of Asia.”
Coriolis infant formula report
It has become the pharmaceutical multinational GlaxoSmithKline, but stopped making baby products in NZ about the middle of last century.
NZ produced comparatively little infant formula in the intervening years until 2003, when Fonterra invested in upgraded processing and packaging facilities at its Canpac plant in Hamilton.
Over the past decade Fonterra has invested heavily in moving up the value chain, from ingredient milk powder to bulk base infant formula powder and contract packing of retail products for others like Nestle to Fonterra-branded products for retail.
Fonterra’s success has inspired others, such as Westland, Synlait, Sutton Group, and New Image, while three of China’s four largest dairy companies have invested in infant formula plants in NZ – Yili and Mengniu on greenfields sites and Bright through Synlait.
The availability of bulk base powder has led to the rapid emergence of a nimble and efficient group of contract packers – fewer than 20 in all – Coriolis said.
And China’s “Wild West” market for canned infant formula has led to more than 100 “pure play” firms, specialising in selling and marketing infant formula from NZ, it said.
All this added up to perhaps $1 billion investment over the past decade.
In addition, the world’s largest infant nutrition companies buy copious quantities of raw material from NZ, because this country is the biggest exporter of milk powder.
Because infant formula is a complex product designed to mimic human breast milk as closely as possible, the market was dominated historically by pharmaceutical companies, such as Abbott, Wyeth, BristolMyersSquibb, GlaxoSmithKline, and Numico.
Their positions were well-defended because of product complexity, economies of scale, patents and other intellectual property, the importance of doctors in the sales process, and health regulations such as bans on advertising.
Even today, parents seeking information from companies through the Infant Nutrition Council or NZ Infant Formula Exporters Association websites have to click through the “breast is best” message for access.
Most countries have only a few key players, typically a subset of the multinationals, and some smaller brands.
The big boys have also consolidated into Nestle-Pfizer-Wyeth and Danone-Nutricia-Numico.
The main exception to this market concentration has been China, where all the multinationals slug it out with domestic companies like Mengniu and Yili, some regional start-ups and a huge range of smaller firms.
But the Chinese Government has a policy to reduce the number of manufacturers to three to five by 2018.
It has also begun an inspection, auditing and licensing programme in NZ, the biggest foreign supplier to the Chinese market, which NZ exporters fear might lead to similar enforced rationalisation.
“As product innovation has slowed and as production technology has diffused more widely, the industry is becoming more similar to other foods and barriers to entry are falling,” Coriolis said.
“The future looks set to be a battle between the multinational leaders and the primarily Chinese newcomers for control of Asia.”
Other aspects of the report include the market shares of multinationals in different countries, NZ’s business relationships with the multinationals and with the emerging Chinese players, and the complexity of the infant formula value chain.
It said in the NZ market Danone (Nutricia) had 64% of sales, Heinz 20%, and Nestle 12%. Only Danone has a plant, while the rest supply imported or contract-packed goods.
In China Nestle leads with 12%, followed by Mead Johnson and Danone on 10% each, Abbott 4%, Heinz 3%, and Friesland 1%, giving the multinationals 40% of market share.
Coriolis identified 20 Chinese companies with measurable market shares, accounting for a further 40% of total sales, and then a host of brands too small to list, many of them NZ “pure play” origin.
“The market there is still highly fragmented and much of the action and excitement in the NZ infant formula industry is as a result of this situation,” it said.
