DAIRY SCANDAL UNDERMINES
DOMESTIC BRANDS ACROSS CHINA
SHANGHAI, September 28, 2008. As the Chinese milk contamination scandal continues to grow, Sinogie Consulting, a research and consulting company with offices in Hong Kong and Shanghai, has conducted a survey to establish how the scares are likely to affect its clients, many of whom are involved in the FMCG sector in China.
Sinogie commissioned locally-licensed market researchers to interview the primary food buyers for households in Beijing, Shanghai and Guangzhou, to examine how their buying habits had changed in the light of the recent food scares. Parts of the survey addressed the infant formula market specifically, while other parts looked at the effect that the scandal has had on the wider dairy industry, and on the food market in general. Half of our respondents currently buy infant formula, and answered questions on this. All of our respondents answered questions on other types of food.
The results show that faith in Chinese infant formula has been badly undermined by the scandal. The reputation of the Chinese dairy industry has a whole has been damaged almost as badly as that of the infant formula sector. Even foreign brands of infant formula arouse some suspicion, but they do attract more trust than domestic brands.
Given the opportunity, many of our respondents said that they would be happy to pay a premium for foreign-branded food. Despite the involvement of Fonterra in the scandal, Chinese consumers still see New Zealand as one of the most trustworthy sources of food.
While most consumers expect more food scandals to arise in future, there is a surprising level of faith that the government will be able to deal with the issue of food contamination: the proportion of people who expect that the government will be able to solve the current problems is almost the same as it was after the last round of contamination scandals in August 2007.
Highlights of the survey include the following:
Section 1: buyers of infant formula
All respondents to this section of the survey had children in their households who drink infant formula. Respondents were responsible for buying formula and other food for the household.
Infant formula buyers are very concerned about the contamination scandal.
The infant formula scandal has dominated the news in China over the past two weeks, and has left consumers extremely worried.
Buyers are concerned about the risk of contamination in all formula, not just the brands hit by the scandal.
Unsurprisingly, the vast majority of respondents were worried about the quality of products made by companies which have been named in the scandal. However, the concern is not limited to these brands: almost as many people are worried about all Chinese brands of infant formula, and – perhaps because of Fonterra’s involvement in the original Sanlu scandal – a significant majority are concerned about both Chinese and foreign brands of formula.
The scandals have caused buyers of infant formula to change their buying habits. Foreign brands are likely to benefit from this.
People who buy infant formula are changing the brands that they buy, but not in the volumes that one might expect. Around 40% of respondents said that they had stopped buying Chinese brands of baby formula, but almost 65% of them said that they would go back to Chinese brands in future.
Similarly, of the 75% of respondents who said that that they have changed the formula brands that they buy, only 40% said that the change would be permanent.
However, 75% of respondents said that they would now consider buying foreign brands of formula, and 93% of those people said that they would be willing to pay a premium. Even though there is some concern over the potential for contamination in foreign formula, it seems that consumers do have more faith in foreign brands than in Chinese brands.
Section 2: dairy and other food
Respondents to this section include the buyers of formula who responded to Section 1 of the survey, as well as the primary food buyers for other households who do not buy infant formula.
The infant formula scandal has hit trust in the whole Chinese dairy industry, and across the food sector
Just before our survey began, the scandal started to spread from infant formula to the rest of the dairy industry. This is reflected in the results of the survey: levels of trust in Chinese dairy brands have plummeted, while trust in the whole of the food industry has suffered.
People are so wary of dairy products that they have reduced their purchases. But foreign companies are benefiting.
Trust in dairy products has fallen to such an extent that many of our respondents said that they had cut back on dairy purchases in general, and have cut back even further on Chinese-branded dairy purchases.
Foreign companies do stand to benefit from the concerns. 56.2% of respondents said that they had increased the amount of foreign-branded dairy produce that they buy since the scandal broke.
Damage to the rest of the Chinese food industry is less severe, but foreign brands can still benefit
While consumers are clearly very worried about the possibility of contamination in the dairy sector, they are less concerned about the packaged food industry as a whole. Only 51% of respondents said that they trusted Chinese non-dairy packaged less now than before the scandal broke, and 63.9% trusted all Chinese food brands less than before.
However, 67% of respondents said that the scandal had made them more likely to consider buying foreign brands of all types of food.
People are willing to pay a premium for foreign brands
Of respondents who said that they were willing to consider shifting to foreign brands for formula, dairy or other food, a huge majority said that they would be willing to pay more for foreign-branded products.
New Zealand’s reputation has suffered a bit, but less than we expected.
Food from New Zealand has always enjoyed a very strong reputation in China: it is seen as pure, safe, and trustworthy. Although Fonterra was a 43% investor in Sanlu, this reputation does not appear to have suffered as much as we expected so far. Only 51.2% of respondents said that they now trust New Zealand dairy produce less than they did before the scandal.
Foreign brands are seen as far more trustworthy than Chinese brands.
We asked our respondents to rank food from selected markets in terms of trustworthiness. Scores were given from 1 to 10, with 10 the most trustworthy. Perhaps surprisingly, the European Union came out on top, closely followed by New Zealand. Australia lags behind the US and Canada, and China came a resounding last. Rankings are below.
1) European Union 7.19
2) New Zealand 7.02
3) USA 6.94
4) Canada 6.88
5) Australia 6.85
6) Japan 5.99
7) China 5.17
There is strong faith that the situation will improve.
We were surprised to find that our respondents still trust the government and food manufacturers to resolve these problems.
In August 2007, during the last spate of food scares, we asked whether respondents thought that the food contamination crisis would be resolved by the government. Only 20.5% thought that the situation would not be resolved in the near future.
In our September 2008 survey, we asked similar questions. 16.3% said that they did not think that the dairy contamination problems would be resolved within the next two years, 13.5% did not think that new government regulation would reduce the risk of food contamination.
Although Chinese consumers are being hit repeatedly with new food scandals, there still seems to be a remarkable level of faith that the government will solve the problem eventually.
While people do trust the government to deal with these crises: few people expect this scandal to be the last. 73.4% of respondents expect more large food scandals in China over the next two years.
The latest food safety scandal has hit some of China’s most well-respected brands. Chinese consumers’ trust in the domestic dairy industry has taken a severe beating, but there is faith that the problems will be resolved eventually.
Foreign food manufacturers are still trusted by Chinese consumers, even in the dairy sector. Foreign infant formula manufacturers in particular are likely to see a spike in sales in the wake of the scandal, but some consumers may go back to their old brands as the furore dies down.
In the dairy sector, consumers have had their confidence shaken, and would quickly take to a new brand if it could prove itself trustworthy. A company – either Chinese or foreign – that could demonstrate that it had fully integrated its farming, manufacturing and processes, and that could clearly show that it had all of the necessary quality control processes in place, could build an extremely strong market position.
At present, the dairy industry is far too fragmented, with long, uncontrollable supply chains and opportunities for contamination at every stage. If the government moves to consolidate the dairy industry – which it must, if it is to restore consumer confidence – there may well be great opportunities for well-run Chinese or foreign firms to build a presence.
Sinogie Consulting is a research and consulting company with offices in Hong Kong and Shanghai. It provides a wide range of information-related services to foreign companies planning to do business in and with China. Sinogie’s core services include market research, corporate investigation, industry research, policy analysis, intellectual property protection, partner searches and media monitoring. For more information on Sinogie, please visit our website at www.sinogie.com.
For more information on this report, please contact Sinogie’s CEO, Bruce McLaughlin. Bruce is normally based in the Sydney office, at the following address:
Sinogie Consulting Australia Pty Ltd
16-18 Grosvenor Street
Sydney, NSW 2000
Tel: +61 2 8705 5435