Babyfood Market Analysis

Babyfood Market Analysis
PuJun July 8, 2007
Contents
Babyfood Market Overview

Market Size and Trends Manufacturer Analysis Consumer Analysis
Analysis across Supply Chain
Pu Jun | YGP Babyfood Market Analysis.- PPT 2007 Capgemini - All rights reserved 1
Executive Summary
The potential Babyfood market space in China is very large

There are about 70 million of 0-3 year-old babies in China The statistics of newborns in China is about 17.5 million per year, representing 13% of the world newborns
High-End Babyfood market is the focus of competition Multinational companies have advantages in market share
Multinational Babyfood take up more than 50% of the whole market share especially in the highend market
After the Inferior Milk Powder Incident, market is becoming more regulated Babyfood companies are seeking cooperation for better marketing performance Parents are willing to pay more money on the babyfood
Parents are more concerned about the quality and nutrition combination
Manufacturers have categorized their products into different age group
Baby has different nutrition requirement in different age group
Mothers milk and baby milk powder are main nutrition resources for infants at 0-6 months With the increasing of the age, milk powder is not sufficient enough to meet babies nutrition requirements supplementary baby food is mainly designed for baby above 6 months
Product Category
Manufacturers have designed different products according to the various market demand
Vegetable Powder
Vegetable Puree
Baby Cereal
Baby Cereal
Milk Powder
Milk Powder
Meat Puree
0-6 Months
6-12 Months
1-3 Years
The potential Babyfood market space in China is very large

There are about 70 million of 0-3 year-old babies in China among which 10.7 million are urban ones.
Market Demand
The annual demand of baby milk powder is about 300 thousand tons but the producing capacity is only about 100 thousand tons in China per year. The potential market space is thus quite large.
With the steady development of economy and population, China has become the second largest Babyfood consumption country next to USA and will be number one by 2010.
13%
The statistics of newborns in China is about 17.5 million per year, representing 13% of the world newborns
87%
Birthrate
Economic growth and population increase is the main reason for market demand expansion
Source: National Bureau of Statistics of China
High-End Babyfood market is the focus of competition

Economic & Social Background
Industry Background
With the rising of the domestic living standard, the demand for high-quality babyfood is expanding rapidly Parents are not very knowledgeable, but they tend to believe the recommendation of experts China is one of the largest babyfood consumption countries. The annual market growth rate is about 20%. Last year the total sale figures of baby milk powder is about 5 billion RMB
The profit margin of high-end market can reach 20-30% Developing of the high-end market can help promote the upgrading of the products, improve the industrial structure and segment the market to meet the customers needs Can help enterprises optimize the layout of the brand and bolster the corporate image
The potential High-end market attracts a large number of enterprises
High-End products is the main growth point in the future market

The Market Growth of Different Grades Products in Price Level in China
80.00% 60.00%
46.10%
Market Trend
Consumers have higher demand on products quality High-end products have the highest level of technology, the most advanced formula, and the most balanced nutrition combination, represented the developing trends of the market

40.00%
23%
20.00%
2.30% 2.40%
0.00% <=30 -20.00% -40.00% -60.00%

-64.50%
30-50
-19.50%
50-70
70-100
>100
Total (RMB)
The demand of High-End market is quite large
Quality Nutrition Taste Package Formula
-80.00% Growth Rate of Sale Volumn

Source: ACNielsen Market Analysis Statistics
Growth Rate of Sale Figures
Contents

Market Size and Trends Manufacturer Analysis
Key Players of the Market Market Share Competition and Cooperation
Consumer Analysis
Analysis across Supply Chain
Economically advanced regions are main markets
Harbin Shuangcheng
Hohhot
Tsingtao
Shanghai
Guangzhou
Multinational companies have advantages in market share
Multinational Babyfood take up more than 50% of the whole market share especially in the high-end market

2006 Babyfood Market Share
High quality products High level services, including presale and after-sale services High brand influence
1.75% 2.16% 2.46% 2.88% 3.93% 5.53% 6.22%
14.55%
MeadJohnson 15.95%
Dumex 13.05%
Domestic brands have their advantages in cost control and prices
Play a more important role in the low-end market Raw material supply is a merit for domestic babyfood companies Can reuse the current dairy distribution network
Wyeth 12.32% 8.35% Abbott 10.85%
MeadJohnson Abbott Nestle Beingmate Others

Source: 2006 Dairy Market Analysis Report
Dumex Synutra Sanlu Scient
Wyeth Yili Yashili Morinaga
After the Inferior Milk Powder Incident, market is becoming more regulated
After the Inferior Milk Powder Incident, Government strengthened the supervision and control of the market and enacted a series of laws to prevent a similar incident from happening again
Supervision in the entire production process from raw material to finished products Enterprises relying on low-price penetration and unreal propaganda are gradually disappearing Enterprises are improving quality through the introduction of new technology The self-discipline of companies and transparency of the market has greatly improved China's Babyfood industry has entered a new competition stage
Market is becoming more and more regulated

After the market reshuffle, there is a gap in the rural market
Due to the strengthening of market regulation, some inferior-product producers have been eliminated Due to the low consumption standard in rural areas, it is more suitable for the development of domestic brands
Under the supervision of the government, market competition will become more and more regulated
Babyfood companies are seeking cooperation for better marketing performance
Cooperation between enterprises can help further optimize the Allocation of Resources and make up for their deficiencies
Cooperation between domestic enterprises and multinational enterprises can bring domestic raw material and channel advantages into full play. Meanwhile, domestic enterprises can use foreign companies technology and service edge
Sanlu has cooperated with New Zealand dairy company Fonterra and set up a large modern dairy plant in Tangshan
Mengniu has collaborated with Denmark famous dairy company ArlaFoods for further development Taiwan dairy company UNI-PRESIDENT has subscribed 15% stake of Wandashan and total subscription amount is 300 million RMB
Cooperation between enterprises is a good way for market entrance
Contents

Market Size and Trends Manufacturer Analysis Consumer Analysis
Consumer Attitude
Analysis Across Supply Chain
Parents are willing to pay more money on the Babyfood

Less Developed Regions
Monthly Average Household Spending on Babyfood (RMB)
5.20% 26.30%
Due to the one-child policy, parents are willing to pay more attention on the only child
68.50%
Less Developed Regions
Economically Advanced Regions

100-300
300-500
500+ (RMB)
Economically Advanced Regions
Parents pay more attention on the nutrition, quality and added value of the products
19.60% 43.30%
With the Development of economy and citizen income, parents are prone to spend more money on the bobyfood
37.10%
100-300
300-500
500+ (RMB)
Economic growth Stimulates the rising of consumption level

Source: www.kanbaby.cn
Parents are more concerned about the quality and nutrition combination
Questionnaire of 3005 parents on ranking of buying criteria
Nutrition Baby's Acceptance Brand Reputation Reasonable Price Imported Products Long Guarantee Period Good Package 12.00% 5.50% 5.40% 42.40% 33.60% 25.60% 76.80%
Products with the function of immuneenhancing and mental-developing are more popular
What parents concern mostly is the quality and nutrition of the products
Parents prefer foreign brands for better quality and services

The most often consumed baby milk powder brands for infants
Ranking
MeadJohnson Nestle Wyeth Dumex Yili Wondersun Abbott Weichuan Morinaga Synutra Friso Meiji
10
11
12
MeadJohnson, Nestle, Wyeth and Dumex are the Top 4 brands which customers are willing to choose
Better quality and taste is the main reason for consumers choice of foreign brands
Consumers attitudes are quite emotional

To lay a solid foundation for children is so important. I am more concern about the quality of the products
Taking good care of baby is the responsibility of parents. So I will buy top-quality milk powder
I can not let my child lose at the scratch line. The expensive products may have better effect
From Consumers view, quality and brand influence is more important than price
Source: Questionnaire of consumer psychology
Contents
Babyfood Market Overview Analysis Across Supply Chain

Raw Material Products Distribution Retail Service
Executive Summary
Domestic brands have raw material advantages.

They have their own cattle farms and processing plants Many dairy companies can use the existing resources and devices for further babyfood producing without huge amount of investments
Lack of adequate production bases is the key issue to multinational Babyfood Companies
Customer requirements oriented products development is a key success factor

Foreign BabyFood brands have successfully made use of medical channels to market and sell their products in China Baby food companies are intensifying their advertising efforts in China to capture the market
Internet channel will become another important way for product sale
Communication is more important than promotion in the Babyfood market Improving the satisfaction degree of customers will add value to the brand
Value Chain Analysis
Raw Material
Products
Distribution
Retail
Service
ELEMENT
The Source of the Raw Material Package Materials
Technology
Product Category
Product Positioning
Distribution Channel Internet Channel Propaganda
Consumption Guide Promotion Training of Salesperson
Presale Services
Hospital Channel Product Display
After-sale Services
ACTORS
Cattle Farm Raw Material Supplier
Production Bases Nutrition Delegate Product Designer Advertiser Distributor Prolocutor
Salesperson Trade Assistant Marketing Department
Nutrition Consultant Quality Consultant Doctor
Domestic brands have raw material advantages
Raw Material
Many domestic companies have dairy related products. They can use the current resources to produce babyfood without investing a lot.

Many domestic companies have their own cattle farms and processing plants Many dairy companies can use the existing resources and devices for further babyfood producing without huge amount of investments Due to the drought in the milk powder raw material main exporter Australia , the purchase price soared upward.
Yili has established 4 milk powder production bases in Hohhot Inner Mongolia, Durbat Heilongjiang, Shihezi Xinjiang and Wuhan Hubei. Yili has become the largest milk powder producer in China. The 4 bases of Yili has covered four strategic region including northern, northeastern, northwestern and central china
How to bring raw material advantages into full play is a key success factor
Lack of adequate production bases is the key issue to multinational Babyfood companies
Raw Material
High cost of raw materials has become the Achilles heel of multinational babyfood companies

Dont have adequate milk powder production bases Cost is highly affected by the international price of raw material They are seeking cooperation with domestic companies or though merger and acquisition
In the milk powder producing area, Nestle only has one production base located in Shuangcheng Heilongjiang in China
Nestle had attempted to merge Yunnan Diequan Dairy Company but ended in failure
Dumex has one production base in Shanghai and plans to construct the second base in Nanhui district to expand production capacity
Customer requirements oriented products development is a key success factor

4P
Products
4C
The traditional 1P+3P market theory in the babyfood field has become outdated

1C+3C market theory is more suitable in the current competitive market

Product Price Place Promotion
Customer Cost Convenience Communication
Product-Oriented
Customer-Oriented
Better Babyfood positioning will lead to market success
Products
Successful Babyfood products stand for meeting the requirements of consumers. While designing new products, the following factors must be considered

What the customers want The products category depending on different customer needs Using of new technology to produce high quality products Carefully design the package to cater for popular demand Different products positioning to different region
Quality
Technology
Nutrition
Baby Food
Positioning
Dumex Dupro and MeadJohnson Enfapro are mainly designed for Hign-End market with better nutrition combination and higher price
Package
Region
Positioning: High-End market Foreign brands are mainly positioned at the high-end market
Foreign BabyFood brands have successfully made use of medical channels to market and sell their products in China
Distribution
Multinational babyfood companies have successful experiences in establishing medicals channel to promote the sale of their products
MeadJohnson and Wyeth have a pharmaceutical background. They use medical channels to promote the sales A doctors recommendation is an important reference frame for parents brand selection Doctors recommendations, medical lectures and one-to-one customer profiling are key success factors for multinational babyfood companies, especially in the high-end market
World-class babyfood leader Heinz has established its Heinz Food Experts Panel which consists of experts in the fields of food, nutrition and medicine Nestle is the first company to establish the medical channel in China.
Nestle has a large group of nutrition delegates to maintain its medical channel in a smooth and steady developing condition
The use of medical channel is a competitive advantage for multinational brand.
Baby food companies are intensifying their advertising efforts in China to capture the market
2005VS2006 1-8 China Top 5 City of Babyfood Advertisement Investment (Million RMB)
200 180 160 140 120 100 80 60 40 20 0

Guangzhou Changsha Chengdu Shanghai Chongqing 63.6 62.5 64.2 67 121.2 136.8 122.2 121.4 99.9 187.5
Distribution
Advertisement Investment
The strong growth momentum of the China baby food market drives the increment of advertisement investments Baby food advertisement investments are mainly in the densely populated cities

More than 50%
Guangzhou Shanghai
2005 1-8
2006 1-8
2005 vs 2006 1-8 China Babyfood Advertisement Investment Increment Rate

Abbott
Market Opportunity
302.70% 226.40% 55.80% 47.70% 46.90% 25.40%

50.00% 100.00% 150.00% 200.00% 250.00% 300.00% 350.00%
2007 is called the Year of the Golden Pig which is considered a prosperous year for having children Big advertising efforts this year are expected to attract more (new) customers The potential market is very big and offers lots of opportunities for baby food companies
Wyeth
Yashili
Dumex
Others
Scient 0.00%
Source: CRT 2005 Market Analysis Statistics
rate of increment
Internet channels will become another important way for product sales in China
Distribution
Women of reproductive age are mainly at the age range from 25-35. They are mostly born in the 1980s, raised during the rise of Internet They are well educated and eager to accept new things. Their salaries are mainly distributed between 1500-3500 RMB
2006 Internet transaction figures of China are 26.65 billion RMB, representing 0.85% of the consumer goods sales figures. In the year 2002, it only took up 0.04% The phenomenon reflects the high speed development of Internet transaction
The transaction figures of Taobao in the 1st quarter 2007 has exceeded 7 billion RMB and the total number of registered members has reached 35.1million RMB From Dec 2006 to Jan 2007, the total sales figures of milk powder on Taobao was nearly 300,000 RMB
How to make good use of internet channel is the problem domestic companies face
Strengths
B2C, C2C Channel Taobao Ebay
Adequate distribution entities Better logistics system
Distribution
Opportunities
The Internet marketing of multinational companies in China is not mature enough Internet Sales Channel
Threats
Share of the baby food market and the impact of the brand are the advantages of multinational companies Difficulty in coherent price control
Weaknesses
Lack of experience in website operation Lack of scientific Investment income analysis system Not enough brand charisma
B2B Channel Alibaba
Communication is more important than promotion in the Babyfood market
Retail
What the parents want from the products is the sense of satisfaction

The quality of the products The nutrition combination of the products including two main functions, immune-enhancing and mental-development
Baby food is a high-risk food and once the consumers are satisfied with the product, they will show high level loyalty
In the sales process, expressing the key features and added value of the products according to the customers requirements is rather important. It will arouse the consumers purchasing desire
Price reduction may boost the sales volume but does not help to increase the value of the brand
Price reducing may give the consumers feeling of lower quality Price reducing will cause the decrement of profit margin.
How to express the key features of the products to the customers is a key success factor
Value=Customers Sense of Satisfaction/Price
Service
Improving the satisfaction degree of customers will add value to the brand and decrease the impact of high price

Better service including presales and after-sales services Customer guidance helping to learn baby-nurturing knowledge Regular social useful activities to add value to the brand
Establish comprehensive presale and after-sale service mechanism to improve the satisfaction degree of customers

Set up specialized service hotline and service department Provide experts lecture and free child rearing consulting services Regular Journal of Nutrition and some baby nurturing guide
Dumex Gold Club and MeadJohnson A+ Club provide many Human-based services such as product consulting, baby nurturing and nutrition consulting services
Improving customers satisfaction degree will add brand value
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PuJun July 8, 2007

Babyfood Market Overview

Analysis across Supply Chain

The potential Babyfood market space in China is very large

Manufacturers have categorized their products into different age group

Baby has different nutrition requirement in different age group

The potential Babyfood market space in China is very large

High-End Babyfood market is the focus of competition

The potential High-end market attracts a large number of enterprises

High-End products is the main growth point in the future market

0.00% <=30 -20.00% -40.00% -60.00%

The demand of High-End market is quite large

Quality Nutrition Taste Package Formula

-80.00% Growth Rate of Sale Volumn

Growth Rate of Sale Figures

Babyfood Market Overview

Analysis across Supply Chain

Economically advanced regions are main markets

Multinational companies have advantages in market share

2006 Babyfood Market Share

1.75% 2.16% 2.46% 2.88% 3.93% 5.53% 6.22%

Domestic brands have their advantages in cost control and prices

Wyeth 12.32% 8.35% Abbott 10.85%

MeadJohnson Abbott Nestle Beingmate Others

Dumex Synutra Sanlu Scient

Wyeth Yili Yashili Morinaga

Market is becoming more and more regulated

After the market reshuffle, there is a gap in the rural market

Babyfood companies are seeking cooperation for better marketing performance

Cooperation between enterprises is a good way for market entrance

Babyfood Market Overview

Analysis Across Supply Chain

Parents are willing to pay more money on the Babyfood

Monthly Average Household Spending on Babyfood (RMB)

Economically Advanced Regions

Economically Advanced Regions

Economic growth Stimulates the rising of consumption level

Parents prefer foreign brands for better quality and services

Consumers attitudes are quite emotional

Babyfood Market Overview Analysis Across Supply Chain

Domestic brands have raw material advantages.

Customer requirements oriented products development is a key success factor

Value Chain Analysis

The Source of the Raw Material Package Materials

Distribution Channel Internet Channel Propaganda

Consumption Guide Promotion Training of Salesperson

Hospital Channel Product Display

Cattle Farm Raw Material Supplier

Production Bases Nutrition Delegate Product Designer Advertiser Distributor Prolocutor

Salesperson Trade Assistant Marketing Department

Nutrition Consultant Quality Consultant Doctor

Domestic brands have raw material advantages

Customer requirements oriented products development is a key success factor

1C+3C market theory is more suitable in the current competitive market

Product Price Place Promotion

Customer Cost Convenience Communication

Better Babyfood positioning will lead to market success

The use of medical channel is a competitive advantage for multinational brand.

200 180 160 140 120 100 80 60 40 20 0

More than 50%

2005 vs 2006 1-8 China Babyfood Advertisement Investment Increment Rate