Why Baby-food makers are eyeing small cities in China

When it is about kick-starting a new venture or expanding a big one, the lower-tier cities always hold enormous promising opportunities. Though it is widely known how e-commerce companies developed last-mile delivery strategies to scale their businesses, the same strategy seems to be in making its way for international baby food-makers too.

As per a news report, the world’s largest packaged food company Nestle is planning to launch a new line of baby formula in China this year. The new product will be branched under an existing brand and will be targeted at smaller cities. The company’s move in China is a clear move to lengthen its lead in the world’s biggest baby milk market.

Apparently, Chinese ground has been ripe for the larger play of the premium brands in the baby formula products after theChinese Milk Scandal in 2008. The food adulteration scandal involved melamine-tainted milk and formula that killed at least six infants and caused hospitalization of 54,000 infants.

But when the baby milk units of Nestle, Reckitt Benckiser, and France’s Danone have enjoyed prosperity by mainly targeting the consumers in big cities like Beijing and Shanghai, why is it that the same brands are now heading to smaller cities to market their pricey premium formulas?

Why lower-tier cities

It is not the first time when a new product is planning to focus on smaller cities. Producers of many staple-items like soap and soft drinks have sought growth in the less-profitable western provincial cities of China as the richer markets located in the east are becoming matured and saturated.

Despite the challenges of greater-shipping and lower incomes, some imported brands are heading to smaller cities to grow their customer base. Slowing growth has made the geographic expansion inevitable, and the new distribution models have made the expansion feasible.

Last but not the least, the wealth in smaller cities has also grown considerably.

Baby food in China

But the western companies are losing their old game when it comes to playing in the China’s $25 billion baby-food industry.

These companies are facing intense competition from the dominance of local players in the smaller cities. The local manufacturers also enjoy the local trust and hence are able to penetrate the market better. 

Besides, the local brands are much more cost effective than the premium western brands. The baby food is already quite expensive in China due to the consumers’ unique concerns around food safety and quality. For example, while one 800 grams pack of baby formula in China costs $30, a similar pack costs just $13 in Britain.

This is why over 55% users prefer domestic brands over the western ones. Pricing is a major point due to which, the local brands are gaining traction among the new parents in China.

Local players

Chinese formula makers include local companies like Feihe International, China Mengniu Dairy and Inner Mongolia Yili Industrial Group. The local players have grown stronger amid a host of marketplace shifts that includes government registration requirements.  This has dramatically reduced the number of brands on the market.

At the same time, domestic players are investing in premium brands and special formulations to overcome safety concerns. The Chinese brands could reach 53 percent market share by 2022, up from 40 percent in 2015.

In fact where the total market has grown by 7%, the domestic brands have grown 11 percent and foreign brands have grown by only 4 percent.

Yili Group, China’s largest dairy company, is working on various fronts to improve its product offering through more scientific research, as well as its route to market using big data, real-time analysis and artificial intelligence.