As Chinese consumers fret about whether locally produced infant formula is safe, the Dutch postal service has a burgeoning new line of business: exporting milk powder to China.
Dried milk has become one of the main items customers send to China via PostNL NV, helping drive a 13 percent increase in fourth-quarter parcel shipments, The Hague, Netherlands-based mail delivery company said Feb. 23. Danone makes infant formula under the Nutrilon brand in that country, while Mead Johnson Nutrition Co. has been increasing Dutch production to help supply China, which consumed a third of the industry’s $62 billion in global sales last year.
PostNL’s success is emblematic of a worldwide boom in the flow of baby food to China in quantities that range from single cans sold via Amazon.com Inc. to 25 metric-ton orders through suppliers on Alibaba.com. Since a 2008 infant formula scandal that hospitalized 50,000 babies, the Chinese have sought out foreign-made brands. That’s accelerating now with the development of online marketplace sites such as Alibaba Group Holding Ltd.’s Tmall.com and Taobao. Bpost SA, the Belgian postal service, has also reported growth in milk powder.
“There are so many safety issues about milk powder and my baby needs it everyday,” said Vina Chen, a 31-year-old mother of a 15-month old girl in Nanjing. She orders online, through a shopping agent, or has it sent by an aunt in Sydney, preferring Bellamy’s Organic from Australia because it’s less well-known, limiting the risk of receiving fakes. “We are extremely cautious.”
Just as many consumers in emerging markets skipped fixed lines and leapfrogged to mobile phones, e-commerce may play a bigger role in countries that don’t have very developed retail industries, Nestle SA Chief Executive Officer Paul Bulcke said at a Feb. 19 press conference in Vevey, Switzerland. The owner of the Gerber brand aims to work with big e-commerce sites to boost sales.
China consumes about $19 billion of baby food annually, making it the biggest market for such products after sales more than doubled in five years, according to Euromonitor. About 30 percent of baby formula consumed there is ordered via the Internet, following a “very, very quick shift” in purchasing patterns, according to Danone CEO Emmanuel Faber.
“The consumer in China -- mothers, pediatricians -- consider the best-quality milk in the world comes from Europe,” Faber told reporters in Paris on Feb. 20. Most of Danone’s European sales growth in the fourth quarter came from exporting products to Asia.
A gray market for foreign infant formula has sprouted since melamine-tainted milk killed six infants in China in 2008. The substance, used to make plastics and in tanning leather, can disguise diluted milk by making it appear to contain more protein.
“If you think of the scandals, the reality is that we in the West hear about the worst, but there’s stuff going on all the time,” said Robert Waldschmidt, an analyst at Liberum Capital in London. In 2011, China Mengniu Dairy Co. said moldy cattle feed led to excessive toxins in its milk.
The practice of buying products abroad has become known as “haitao,” and sometimes it’s done through middlemen who help handle payment and delivery. Duty isn’t paid on about $1.5 billion of infant formula sold online, according to Mead Johnson Chief Executive Officer Peter Kasper Jakobsen.
Last year, customs authorities tightened rules by requiring importers to inform them of orders and payments beforehand, according to Fung Business Intelligence Centre. The government will probably take further measures, said Kasper Jakobsen, who recently met Chinese Vice Premier Wang Yang in Chicago to discuss the matter.
“China is acutely aware of the fact that they must get a grip on all of the different sales channels,” he said at a Feb. 17 investor presentation.
To be sure, PostNL isn’t banking on the milk-powder delivery business continuing as it has been for the long-term. Milk powder is one reason for the Dutch package shipper’s forecast of mid-single-digit parcel growth this year, though it could drop off, Chief Executive Officer Herna Verhagen told investors on Feb. 23.
“The reason for mentioning it over here is because we do think it’s rather incidental than sustainable,” she said.
However the trade develops, Danone plans to adapt and expand its export business to China.
“This channel will exist in a big way in the future,” CEO Faber said. “And possibly not only for infant nutrition.”