Mengniu fall out will not indefinitely benefit Nestlé or Danone

09-Jan-2012 - Last updated on 09-Jan-2012 at 16:56 GMT

Chinese dairy players to benefit from Mengniu fall out

China’s latest milk contamination scandal involving local player Mengniu will cause consumers to switch to other brands in the short-term, but not necessarily to Nestlé or Danone, says an analyst.

Following a batch of Mengniu milk found contaminated with aflatoxin, food safety concerns were relit with consumers quickly turning to other brands; a shift with the potential to benefit the two European dairy giants who recently closed down ice cream operations in Shanghai.

But Kevin Der Arslanian, associate business analyst at China Market Research (CMR), told FoodNavigator-Asia it is not a given that the scandal will benefit the companies.

“This scandal will certainly damage Mengniu’s reputation, and loyal consumers will in the short-term at least shift to buying other brands while there are still questions about Mengniu,” Arslanian said.

He noted that other large domestic players will profit; “Yili, which has established a strong reputation for quality through its premium pricing, larger product range and better distribution, will likely benefit.”

Shaun Rein, founder of CMR, added that local producers Mengniu and Yili have been and continue to be stronger than Nestlé and Danone in China’s dairy market.

International strategy

Arslanian explained however, that the wake of the scandal would be a good time for the companies to push their presence and “move up-market and emphasise their foreign origin, which the majority of consumers still associate with better safety standards.”

He said that Nestlé and Danone should “focus on expanding their current product range to poorer and more price-sensitive regions, in order to expand their market presence and be in a stronger position when Mengniu recovers,” something Nestlé seems focused on already.

Jonathan Dong, corporate affairs spokesperson for Nestlé China, told FoodNavigator-Asia that Shanghai remains an important market for the company and that investments will continue to be made, but that investments are being made elsewhere.

“The company decided to reinforce its focus in the south and north regions where the ice cream business has been very successful,” Dong said.

Rein added that this is a good strategy, but one that “they will have to evolve and go more upmarket once consumers get wealthier.”

Mengniu trust

“Rebuilding trust could take some time,” Arslanian said, “however, if Mengniu manages to communicate effectively about this scandal and how they will deal with it, they should be able to recover eventually.”