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China safety scandals represent advantage for foreign dairy firms – analyst

By Mark Astley , 21-Jun-2012

Western dairy firm food standards represent advantage in China

Western food safety standards represent a definite advantage to foreign firms attempting to enter the growing Chinese dairy market, an industry analyst has told DairyReporter.com.

China’s dairy industry, which is growing at a rate of around 10% per annum, has in recent years been blighted by a series of contamination scandals which have led to hundreds of thousands of cases of illness and dozens of deaths.

According to Euromonitor senior company analyst, Ildiko Szalai, an unscathed food safety record is a “strong marketing advantage” for any dairy firms attempting to enter the growing Chinese market, which is expected to overtake the US as the world’s largest dairy market by 2020.

Firms such as New Zealand dairy exporter, Fonterra and Swiss food and beverage giant Nestlé already have an established presence in China.

Earlier this month, Danish dairy co-operative Arla Foods announced that it had signed a deal with Chinese dairy giant Mengniu, which will in time see it increase its dairy offering in the country.

Since Arla’s announcement, some media outlets have suggested that multinational dairy firms are attempting to cash in on China’s poor food safety record - positioning themselves as a safe alternative to products manufactured in the country.

“It’s not a nice thing to say,” said Szalai. “I can see their point, but I wouldn’t say that myself.”

Marketing advantage

“Food safety is definitely an advantage for international dairy industry players such as Arla,” said Szalai.

“They may be able to offer consumers a safer product option, with less chance on contamination. It is a definite marketing advantage benefit for these multinational dairy industry players.”

The safety of dairy products has been a public concerns in China since 2008, when at least six babies died and 300,000 were sickened after consuming milk formula contaminated with melamine.

Earlier this week, Yili – one of China’s biggest dairy businesses – initiated a recall for six months’ worth of all ‘QuanYou’ infant formula products after elevated levels of toxic heavy metal, mercury, were detected.

“Big multinational players can offer safer products and are more active in innovation. They also have a wider portfolio of products to address trends,” Szalai said.

Wider portfolio

Through its deal with Mengniu, which involves an investment of DKK 1.7bn ($290m, €230m), Arla will gain access to additional sales and distribution channels – increasing its Chinese market offering from milk powder to a wider range of dairy products.

Arla expects Chinese turnover to increase five-fold as a result of the agreement – which will also see it hold an approximate 6% interest in the company.

“Arla is building on an existing relationship; they are extending into a wider range of product markets,” Szalai said.

“The Chinese market offers many opportunities to dairy firms from the West, but this is not without obstacles,” she added.

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