Consumer Staples Author: Yijuan Li, Yifan Zhang Editor: Tao Ni Apr 25, 2022 01:43 PM (GMT+8)

This is the Chinese version of the report released by EqualOcean Intelligence

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The baby food market in China rides on the wave of surging demand for mom & baby products and the food, both of which have started to lose their momentum. The baby food sector has become vital to category expansion amid increasing demands for niche products. 

On March 31, 2022, EqualOcean unveiled a Chinese report titled "China's Baby Food Industry in 2022." Here is the synopsis.

1. The Burgeoning Market of Domestic Baby Food

Baby food, including baby formula (0-36 months old), complementary food (6-36 months old), and children’s snacks (3-12 years old), according to Dietary Guidelines for Chinese Residents, a document pubished by the National Health Commission, is the core market of baby products. Frequently consumed and boasting loyal customers, baby food accounted for more than a third of all baby products, and the figure is expected to rise. 

Meanwhile, its market growth has recovered since 2020, following consumption upgrade and demands for niche products. It fluctuated in 2017 as the number of China's newborns decreased year by year. In 2021, the market was valued at CNY 336.3 billion (USD 52.835 billion), and the figure is expected to exceed CNY 500 billion after China rolled out the three-child policy and, in due time, its supporting measures.

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In view of the bright market prospects, domestic brands are eager to seize the chance. For a long time, foreign brands dominated the sector due to Chinese consumers' safety concerns over domestic products, but as the government tightened its regulation and new technologies and brands began to emerge, the market share of domestic players gradually increased. 

Specifically, among the top 10 baby food companies, which made up 72.6% of the market in 2021, the market share of domestic enterprises rose from 19% in 2016 to 38.8% in 2021. China's Feihe (06186: HK) (Chinese: 飞鹤) overtook Nestle (NSRGY: OTCMKTS) in 2021, becoming the firm with the highest domestic market share.

Chinese companies making baby food have also become a darling of venture capitalists. The year 2021 witnessed 15 financing events, making this sector one of the top niche markets. 

2. Three Major Sectors of China's Baby Food Market

China's baby food industry consists of baby formula, complementary food, and children’s snacks. Competition in the milk formula market has grown intense in 2021, as the reform of the registration system raised the entry threshold and the decrease of the birth rate cut the demand. As a result, the thriving and comparatively more profitable markets of infant supplementary food and children’s snacks attract more latecomers.

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2.1 Baby Formula

Chinese baby formula market size reached nearly CNY 130 billion in 2021. Its growth rate dropped from 25% in 2018 to 0.3 % in 2020 due to fewer newborn babies. In 2020, the market received a boost through an increase in the number of newborns and upgrading of industrial structure, and the market volume will rise to an estimated CNY 173.7 billion in 2025.

High-end and ultra-high-end milk formula with premium prices is the main driving force behind China's baby formula market. High-end brands put forward stricter requirements for quality and win more added value and a better reputation for the products.  

Data showed that the rising retail prices of domestic baby formula have fueled the increase in market share of high-end and ultra-high-end products. On the other hand, this upward tendency may not last, as the unit price of Chinese baby formula has exceeded the level in developed countries, including the US and Japan.

Some smaller markets like lamb milk replacer and medical formula have also witnessed growth. The expansion of the lamb milk formula market is remarkably faster than that of typical infant formula from 2016 to 2019.

2.2 Complementary Food

The consumption of complementary food is nearly the same as baby formula in developed countries like the UK and the US, while China's consumption of complementary food is only one-seventh that of milk formula. In this sense, the Chinese market for complementary food has great potential, as users' demands are far from being satisfied.

Despite the decrease in newborn babies, the market size will grow beyond an estimated CNY 100 billion in 2025, with the cultivation of consumers' habits and government publicity. 

Foreign-capital enterprises play a leading role in China's complementary food market. American baby food giants Gerber (GK: NYSE) and KraftHeinz (KHC: Nasdaq) lead the domestic market, both posting a revenue of over CNY 2 billion in 2021. 

Traditional Chinese brands like Fangguang (Chinese: 方广) and Eastwes (Chinese: 伊威) perform well in off-line sales but are relatively weak in branding and marketing. 

China's complementary food startups are playing catch-up, challenging foreign and traditional domestic brands amid new consumption patterns and the Chinese style (Chinese: 国潮). Statistics showed that the market share of the top five brands has been diluted. 

According to their gross profit margin data, the complementary food market is more profitable than the infant formula market, indicating a lower entry threshold for new players.

2.3 Children Snacks

Children’s snacks target 150 million 3- to 12-year-olds in China, with a market volume of nearly CNY 150 billion in 2021. The market size may rise to an estimated CNY 244.2 billion in 2025 with the consumers' improving perception of the industry.

Parents' focus on children's snacks has shifted to nutrition, emphasizing ingredients more than price or taste. In response to the demands, snack companies have attached more importance to the function of the products while expanding their market to a younger age group.

China's children’s snack market comes from expanded services of established adult snack companies, including Bestore (603719) (Chinese: 良品铺子), Three Squirrels (300783) (Chinese: 三只松鼠), and Be & Cheery (Chinese: 百草味). 

Snack giants possess supply chain and brand building strengths, making it hard for startups to challenge the existing players in the short term due to the severe homogeneity of the industry. 

3. Risks and Potential in the Simmering Industry

The three categories of baby food are at different development stages, which in turn determine their divergent chances. The baby formula market in general is mature. Its smaller segments, such as powdered lamb milk and medical formula, are still growing. Meanwhile, the complementary food and children snacks markets still grow rapidly, with various segments flourishing. Overall, children’s snack seems more promising than complementary food, followed by baby formula. 

But challenges and chances always go hand in hand. What accompanies the brighter market prospects of complementary food and children snacks are unestablished standards, immature industries and unimpressed consumers. Even for the almost saturated baby formula market,  product quality issues, regulatory oversight, and lack of consumer trust in domestic brands still exist.

For baby food industry, products, channels, prices and brands are the four core competitive edges amid a fiercely competitive market. Specifically, products are the basis, channels are the key, pricing impacts sales, and branding affects market share.

The competency of the above aspects varies from firm to firm. Foreign and traditional baby food companies boast higher brand awareness, but they lack online channels and marketing methods. New brands are better at innovation and marketing, but they are inconspicuous and can't sustain the qualities of their products. In short, all companies still have space to grow.

Digitalization also offers more opportunities for the baby food market, as the industry shifts in ways of consumer interaction. Under the impact of the Covid-19 epidemic, baby food startups find it hard to acquire customers and start the preliminary digital exploration. This can help companies target potential consumers, transforming from the traditional interaction where "people seek products" to the pattern where "goods are presented to people." The efforts toward digitalization will effectively improve user numbers, enlarge the user life time value (LTV), and eventually promote overall growth.

This article contains only excerpts from the report. For more details, please click to download the full report here.