Will These Dairy Suppliers Be Spoiled by China?

Overcoming scandal, these global infant dairy producers look to make big gains in their biggest market.

May 7, 2014 at 8:06PM


Source: Mead Johnson Nutrition.

From poor quality and negligence to contamination and price fixing, the Chinese dairy market has witnessed the gamut of impropriety for this essential nutrition source. Worse, the lapses and criminality have led to numerous deaths of infants and adults and the sickening of thousands more.

Last summer's botulism scare at New Zealand's Fonterra facilities was just the latest, but it may have been the one with the broadest implications, as China enacted sweeping reforms that touch on all infant formula importers, including those from the European divisions of Abbott Labs (NYSE:ABT), Mead Johnson Nutrition (NYSE:MJN), and Nestle (NASDAQOTH:NSRGY), requiring they register with the government their products, manufacturing, and storage facilities before bringing the products to market.

Foreign formula and dairy producers rode the wave of fear that followed in the wake of the scandals. Brands of international producers saw their share of the market soar from 30% in 2008 to 50% in 2012 with international manufacturers enjoying a 70% share in the high-end powdered milk market. According to Beijing Orient Agribusiness Consultants, New Zealand accounts for up to 80% of China's imports of milk powder, much of it used in infant formula. Fonterra, the world's biggest dairy exporter, has caused an upheaval that is having a big impact on its peers as the dairy industry accounts for about one-fourth of the country's total exports.

The New Zealand Infant Formula Exporters Association says less than half of the country's infant formula suppliers were approved by China, meaning exports to the country may be halted at port. New Zealand has about 60 milk powder makers and over 100 brands, but only a handful have made the cut. With some 41 suppliers from 13 countries registering so far, that may give global rivals a chance to gain even more ground, the recent price-fixing scandal notwithstanding.

Chinese consumers have proved willing to pay as much as three times the cost of locally produced dairy products, going so far as having relatives in foreign countries buy cases of formula and ship them back to China. Analysts say gross margins on global brands sold in China can run as much as 50%.

Nestle, though, is spending $396 million to expand its capacity in Shuangcheng to produce formula, along with creating a dairy farming institute to educate farmers and modernize methods with the goal of becoming the premier infant nutrition company on the mainland. In 2010, it had just a 2% share, well behind Mead Johnson at 12% and Danone's 10%. But the market was expected to continue to grow at a torrid pace, reaching 136 billion yuan by 2015, or around $860 million.

Mead Johnson is also looking to capitalize on the situation and build on its leading market share, which has since grown to 16%. Like Nestle, Abbott, and others, it was fined by the Chinese government for its role in the price-fixing scheme, paying $33 million in penalties. It intends on expanding from the tier 1 cities it currently focuses on to tier 2 and tier 3 cities, with immediate prospects best for cities such as Hangzhou, Nanjing, Chongqing, and Wuhan.

For its part, Abbott was tainted by Fonterra's contamination even though it didn't use any of the whey powder that was recalled, but out of an abundance of caution, it recalled some of its own product last year. That was reflected in its earnings report last month where infant formula sales tumbled 7% to $909 million. Like its rivals, it also expects to increase its global capacity by opening new manufacturing facilities in China by the end of the second quarter.

The dairy producers can't cry over spilled milk but need to look ahead. While analysts say parents in major cities in China continue to limit the number of children they're having to just one because of high costs, those in outlying cities and towns are now having more children. That means China is still a major growth opportunity, and for those like Mead Johnson that specifically target those regions, it's a chance to gain ground on New Zealand's lead.

Warren Buffett just bought nearly 9 million shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling "OPEC's Worst Nightmare." Just click HERE to uncover the name of this industry-leading stock and join Buffett in his quest for a veritable LANDSLIDE of profits!

Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers