China’s three-child policy unlikely to bolster infant formula consumption despite rapid value growth

08 Jun 2021 --- Growth in China’s infant nutrition industry is currently being driven by value and premiumization rather than volume, meaning that the country’s recent shift toward allowing couples to have up to three children is unlikely to have a significant impact on the infant nutrition sector. 

NutritionInsight takes a closer look at the latest moves in this space, which include Reckitt Benckiser Group’s sale of its Infant Formula and Child Nutrition (IFCN) business in China at a £2.5 billion (US$3.5 billion) loss. China-based Primavera Capital Group will buy the business for an implied enterprise value of US$2.2 billion.

At present, China’s CNY150 billion (US$23 billion) infant milk formula market is the largest in the world, according to Primavera. 

In 2019, Innova Market Insights forecasted a 16.4 percent CAGR of value sales of Chinese infant nutrition (2010 to 2022). In contrast, volume gains are set to be around 11.4 percent. 

Formula specifically is driving value growth, recording a CAGR of 17 percent over 2010 to 2022 (forecasted), compared to 5 to 6 percent each for baby cereals and baby meals.In 2019, Innova Market Insights predicted that the Chinese infant nutrition market would be worth over US$77 billion by 2022. 

Driving volume
For decades, most couples in China were limited to having just one child. In 2016, this was loosened to two children, and last week it was further expanded to allow for three children. However, China’s birth rate has continued to fall.

“The Chinese infant formula market has been growing more on value than volume in the past years. The two-child policy is a volume-driver, but it had very little effect on infant formula consumption as parents tend still to have only one child,” Jakob Madsen Pedersen, head of global sales pediatric, Arla Foods Ingredients, tells NutritionInsight.

Currently, China is the company’s largest focus market, and the new three-child policy is not anticipated to change that. However, Arla Foods Ingredients hopes that it can stimulate further development of the market in terms of IF consumption and development of milk powder products for all stages of life.

China infant nutrition goes premium
While the two-child policy did not increase volume sales, Pedersen notes that there was positive business development driven by need for differentiation in the infant formula market and demand for value-added ingredients. “Parents are trading up when choosing infant formula brands.”

He continues that the market is up for further consolidation and volume growth rate is not two-digit anymore, which makes the market very competitive.

Last month, other industry experts also flagged the Chinese infant nutrition market’s potential for everything from allergies and medical purposes to supplementary snacks. 

In its launch of a premium demineralized whey ingredient last week, FrieslandCampina Ingredients flagged Chinese demand for organic offerings. 

Additionally, China has begun its process for allowing human milk oligosaccharides (HMOs), which could create even more industry opportunities in the next few years.Subject to consultation, the Reckitt deal is expected to be completed in the second half of this year. 

Reckitt faces losses 
Reckitt had initially acquired IFCN China as part of its US$16.6 billion acquisition of Mead Johnson in 2017. In February, the company announced it would carry out a comprehensive strategic review of IFCN China. 

Following the definitive agreement to sell IFCN China, Reckitt’s IFCN net assets have been separated geographically for accounting purposes, with £3.4 billion (US$4.8 billion) allocated to China and £5.4 billion (US$7.6 billion) allocated to North America and the rest of the world. 

As a result of the sale, Reckitt expects to incur a net loss of around £2.5 billion (US$3.5 billion), principally relating to the re-measurement of goodwill and intangible assets for IFCN China.

“As a result of this transaction, our Nutrition business going forward will have better and more consistent growth and margin profile. We are market leaders in infant nutrition in North America, ASEAN and Latin America, and we have a strong vitamins, minerals and supplements portfolio,” says Reckitt CEO Laxman Narasimhan. 

“This, combined with our focus on execution, brand building and productivity, our investment in R&D and innovation, and our expertise in e-commerce, gives us a solid foundation from which to grow.”

Meanwhile, Primavera aims to support Mead Johnson’s growth in China through innovation, operational improvement, channel optimization and digital transformation.

Retaining brands globally
Reckitt will retain a shareholding in IFCN China of 8 percent and anticipates net cash proceeds to be approximately US$1.3 billion. 

The transaction is structured as a sale of the entirety of IFCN China, including the manufacturing plants in Nijmegen, the Netherlands, and Guangzhou, China. 

It includes a royalty-free perpetual and exclusive license of the Mead Johnson and Enfa family of brands in China, such as Mead Johnson Nutrition, Enfamil, Enfagrow, Enfa Gentlease, Enfaschool, MultiGrow, NutriPower, Enfinitas Mama, Enfa Mama and Enfinitas. 

Following completion of the transaction, Reckitt will continue to own the Mead Johnson and Enfa family of brands globally and will operate those brands in the rest of the world.

By Katherine Durrell