For over two years now, the media has featured regular stories about Australian parents not being able to find their favourite infant formula. Many of the brands have been disappearing from supermarket and pharmacy shelves almost as soon as they are put there.
The answer to this “disappearance” is by now well-established. The tins of formula are being snapped up by daigou – Chinese purchasing agents (students and others) based in Australia who can sell it online back home for more than twice the Australian retail price; and, in the process, earn themselves an amazing average annual pay packet of around $100,000.
While this phenomenon continues to prove frustrating for Australian parents, not much has been done about it. Retailers have limited sales per customer, but the view of the Government (and most commentators) is that the market will solve the problem. Correctly, most say that as Chinese demand continues, Australian manufacturers will find ways to send more formula to China and everyone will be happy.
The good news is that progress is being made. For example, in late April Bubs Australia, a maker of premium baby food and goat milk-based formula signed a distribution deal with QianJiaWanPu Co, China’s largest distributor of infant nutrition products. As a result, Bubs’ products will be available in 80,000 Mother & Baby Stores (MBS) in China.
The signing took place in Sydney at the Aus-China Infant Nutrition Roundtable, an event sponsored by Wattle Hill RHC Funds. Speaking at the event Kristy Carr founder and director of Bubs Australia pointed out that the daigou account for a relatively small proportion of the infant formula market. She said it is a complex landscape with three routes to market – the daigou, cross border e-commerce (CBEC) platforms like Alibaba, and the MBS.
“The e-commerce sector of the market [including daigou and established platforms] is probably around 32 per cent, while the MBS are about 52 per cent,” she said.
Australian products are sold via all three routes. Each has its benefits and each suits different types of businesses.
The importance of e-commerce
Keynote speaker at the Roundtable, John O’Loghlen, director of business development for Australia and New Zealand at Alibaba Group, said the belief that cross border e-commerce into China has a limited life is incorrect. He offered three reasons for this.
“Firstly, it’s critical for the Chinese and Australian authorities to have full transparency and be able to analyse imports and exports out of China and tax product appropriately at both ends.
“Making sure you have product direct from the factory, or its source to a bonded warehouse, and then with one logistics carrier taking it to the consumer again is an important solution to food safety concerns and other areas like tampering with product, counterfeit products and other challenges that can take place in the supply chain.”
Secondly, he pointed to “a simple reading of the tea leaves” and said that, despite the naysayers, both the Chinese Government and major e-commerce companies have continued to talk up this method of business. In addition, the first ever state-sponsored conference will take place in Shanghai in November.
“When something gets alleviated to that level and Beijing is supporting it, we can be quite confidant in saying the industry is headed in the right direction,” said O’Loghlen.
Thirdly, he said, e-commerce gives importers a real opportunity to test the Chinese market. “Getting onto e-commerce platforms, selling product, even in small volumes, gives you amazing transparency on consumer feedback,” he said.
Eva Zhang, CEO of Ecargo, the only ASX listed e-commerce service provider, reinforces this point of view.
“Cross border e-commerce is a very important channel for emerging Australian brands because it’s probably the most efficient way to test your products in China before you set up your physical distribution. That process can be very time consuming,” she said.
Different “tiers”, different markets
Unlike in Australia, Chinese cities are categorised into a “tier” system. These tiers measure things like population, consumer behaviour, income level, politics, and local trends. As Michelle Zhao, Founder CEO of Rui Ai, one of the largest MBS chains in China’s Sichuan province points out, in China, markets and consumer behaviour vary according to what Tier the city is.
Speaking at the conference through a translator, Zhao said, “The online business is popular among Tier 1 cities. And the brands and products that are appropriate for that channel are large and well-known brands.
“Most MBS stores operate out of 3rd and 4th tier cities. These customers look forward to service and the actual interface. There’s also a reliability when dealing with the source.” She said that MBS can offer mothers services (like day-care or even swimming lessons) that online businesses can’t). These stores represent a good opportunity for less well-known foreign brands like Bubs to sell their products.
Famously, Chinese consumers are drawn to the “clean, green” image of Australian food products and are prepared to pay a premium for them. In the case of infant formula sold in the MBS, parents have to pay even more than the already inflated prices found online.
According to Zhao, this does not affect sales in the MBS. “If there’s a difference between online and in stores, it shouldn’t be a problem. The store will always sell more even though the price is higher than online.
“If we look at the industry average price in China it’s about $49. In western markets its about $24. There’s a very large gap, but great opportunities for Australian products in China.”
Infant formula regulations in China
The Chinese Government has introduced regulation to the infant formula industry. All suppliers now have to be registered to sell their products. However, at this stage, there is still no regulation of cross border e-commerce sales.
Given the food safety concerns that are driving Chinese parents to seek out high-quality food products for their children in the first place, regulation is understandable. The worldwide prevalence of food fraud makes it is easy to take Beijing at its word when it says it wants to encourage reputable food manufacturers (both local and foreign-based).
Still, the move to registration has caused some anxiety among importers. Many smaller brands, in particular, were not prepared for registration.
Samuel Liu, Secretary General of China Nutrition and Health Food Association (CNHFA) and regulatory expert with China’s CFDA and CNCA, told the roundtable that if importers are nervous about regulation changes they should lobby the Chinese Government with their concerns.
However, he underplayed the significance of these fears and pointed out that, as of February 23 this year, a total of 148 facilities (both domestic and international) had been certified by CNCA and CFDA and that 136 brands (102 domestic and 46 international) of infant formula had been registered. In addition, as of that same date, 13 Australian companies had been registered (up five from the previous year).
He suggested Beijing has an open mind when it comes to regulation of food imports. “Registration for the Chinese Government is the most appropriate for the time to manage the industry but it may not be a continuous or long-term policy,” he said.