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Press
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Surveillance and investigation |
DAIRY SCANDAL
UNDERMINES DOMESTIC BRANDS
ACROSS CHINA INTRODUCTION SHANGHAI,
September 28, 2008. As the Chinese
milk contamination scandal continues to grow, Sinogie Consulting, a research and
consulting company with offices in Hong Kong and Shanghai, has conducted a
survey to establish how the scares are likely to affect its clients, many of
whom are involved in the FMCG sector in China. Sinogie
commissioned locally-licensed market researchers to interview the primary
food buyers for households in Beijing, Shanghai and Guangzhou, to examine how
their buying habits had changed in the light of the recent food scares. Parts of the survey addressed the infant
formula market specifically, while other parts looked at the effect that the
scandal has had on the wider dairy industry, and on the food market in
general. Half of our respondents
currently buy infant formula, and answered questions on this. All of our respondents answered questions on
other types of food. The
results show that faith in Chinese infant formula has been badly undermined
by the scandal. The reputation of the
Chinese dairy industry has a whole has been damaged almost as badly as that
of the infant formula sector. Even foreign
brands of infant formula arouse some suspicion, but they do attract more
trust than domestic brands. Given
the opportunity, many of our respondents said that they would be happy to pay
a premium for foreign-branded food.
Despite the involvement of Fonterra in the scandal, Chinese consumers
still see New Zealand as one of the most trustworthy sources of food. While
most consumers expect more food scandals to arise in future, there is a
surprising level of faith that the government will be able to deal with the
issue of food contamination: the proportion of people who expect that the
government will be able to solve the current problems is almost the same as
it was after the last round of contamination scandals in August 2007.
SURVEY HIGHLIGHTS Highlights
of the survey include the following: Section 1: buyers of infant formula All
respondents to this section of the survey had children in their households
who drink infant formula. Respondents
were responsible for buying formula and other food for the household. Infant
formula buyers are very concerned about the contamination scandal. The
infant formula scandal has dominated the news in China over the past two
weeks, and has left consumers extremely worried.
Buyers
are concerned about the risk of contamination in all formula, not just the
brands hit by the scandal. Unsurprisingly,
the vast majority of respondents were worried about the quality of products
made by companies which have been named in the scandal. However, the concern is not limited to
these brands: almost as many people are worried about all Chinese brands of
infant formula, and – perhaps because of Fonterra’s involvement in the
original Sanlu scandal – a significant majority are concerned about both
Chinese and foreign brands of formula.
The
scandals have caused buyers of infant formula to change their buying
habits. Foreign brands are likely to
benefit from this. People
who buy infant formula are changing the brands that they buy, but not in the
volumes that one might expect. Around
40% of respondents said that they had stopped buying Chinese brands of baby
formula, but almost 65% of them said that they would go back to Chinese
brands in future. Similarly,
of the 75% of respondents who said that that they have changed the formula
brands that they buy, only 40% said that the change would be permanent. However,
75% of respondents said that they would now consider buying foreign brands of
formula, and 93% of those people said that they would be willing to pay a
premium. Even though there is some
concern over the potential for contamination in foreign formula, it seems
that consumers do have more faith in
foreign brands than in Chinese brands. Section 2: dairy and other food Respondents
to this section include the buyers of formula who responded to Section 1 of
the survey, as well as the primary food buyers for other households who do
not buy infant formula. The
infant formula scandal has hit trust in the whole Chinese dairy industry, and
across the food sector Just
before our survey began, the scandal started to spread from infant formula to
the rest of the dairy industry. This
is reflected in the results of the survey: levels of trust in Chinese dairy
brands have plummeted, while trust in the whole of the food industry has
suffered.
People
are so wary of dairy products that they have reduced their purchases. But foreign companies are benefiting. Trust
in dairy products has fallen to such an extent that many of our respondents
said that they had cut back on dairy purchases in general, and have cut back
even further on Chinese-branded dairy purchases.
Foreign
companies do stand to benefit from the concerns. 56.2% of respondents said that they had
increased the amount of foreign-branded dairy produce that they buy since the
scandal broke. Damage
to the rest of the Chinese food industry is less severe, but foreign brands
can still benefit While
consumers are clearly very worried about the possibility of contamination in
the dairy sector, they are less concerned about the packaged food industry as
a whole. Only 51% of respondents said
that they trusted Chinese non-dairy packaged less now than before the scandal
broke, and 63.9% trusted all Chinese food brands less than before. However,
67% of respondents said that the scandal had made them more likely to
consider buying foreign brands of all types of food. People
are willing to pay a premium for foreign brands Of
respondents who said that they were willing to consider shifting to foreign
brands for formula, dairy or other food, a huge majority said that they would
be willing to pay more for foreign-branded products.
New
Zealand’s reputation has suffered a bit, but less than we expected. Food
from New Zealand has always enjoyed a very strong reputation in China: it is
seen as pure, safe, and trustworthy.
Although Fonterra was a 43% investor in Sanlu, this reputation does
not appear to have suffered as much as we expected so far. Only 51.2% of respondents said that they
now trust New Zealand dairy produce less than they did before the
scandal. Foreign
brands are seen as far more trustworthy than Chinese brands. We
asked our respondents to rank food from selected markets in terms of trustworthiness. Scores were given from 1 to 10, with 10 the
most trustworthy. Perhaps
surprisingly, the European Union came out on top, closely followed by New
Zealand. Australia lags behind the US
and Canada, and China came a resounding last.
Rankings are below. 1)
European
Union 7.19 2)
New
Zealand 7.02 3)
USA 6.94 4)
Canada 6.88 5)
Australia 6.85 6)
Japan 5.99 7)
China 5.17 There is strong faith that the
situation will improve. We
were surprised to find that our respondents still trust the government and food
manufacturers to resolve these problems.
In
August 2007, during the last spate of food scares, we asked whether
respondents thought that the food contamination crisis would be resolved by
the government. Only 20.5% thought
that the situation would not be resolved in the near future. In
our September 2008 survey, we asked similar questions. 16.3% said that they did not think that the
dairy contamination problems would be resolved within the next two years,
13.5% did not think that new government regulation would reduce the risk of
food contamination. Although
Chinese consumers are being hit repeatedly with new food scandals, there
still seems to be a remarkable level of faith that the government will solve
the problem eventually. While
people do trust the government to deal with these crises: few people expect
this scandal to be the last. 73.4% of
respondents expect more large food scandals in China over the next two years.
CONCLUSION The
latest food safety scandal has hit some of China’s most well-respected
brands. Chinese consumers’ trust in
the domestic dairy industry has taken a severe beating, but there is faith
that the problems will be resolved eventually. Foreign
food manufacturers are still trusted by Chinese consumers, even in the dairy
sector. Foreign infant formula
manufacturers in particular are likely to see a spike in sales in the wake of
the scandal, but some consumers may go back to their old brands as the furore
dies down. In
the dairy sector, consumers have had their confidence shaken, and would
quickly take to a new brand if it could prove itself trustworthy. A company – either Chinese or foreign –
that could demonstrate that it had fully integrated its farming, manufacturing
and processes, and that could clearly show that it had all of the necessary
quality control processes in place, could build an extremely strong market
position. At
present, the dairy industry is far too fragmented, with long, uncontrollable
supply chains and opportunities for contamination at every stage. If the government moves to consolidate the
dairy industry – which it must, if it is to restore consumer confidence –
there may well be great opportunities for well-run Chinese or foreign firms
to build a presence. ABOUT SINOGIE Sinogie
Consulting is a research and consulting company with offices in Hong Kong and
Shanghai. It provides a wide range of
information-related services to foreign companies planning to do business in
and with China. Sinogie’s core
services include market research, corporate investigation, industry research,
policy analysis, intellectual property protection, partner searches and media
monitoring. For more information on
Sinogie, please visit our website at www.sinogie.com. CONTACTS For
more information on this report, please contact Sinogie’s CEO, Bruce
McLaughlin. Bruce is normally based in the Sydney office, at the following
address: Sinogie Consulting Australia Pty Ltd 16-18 Grosvenor Street Sydney, NSW 2000 Australia Tel: +61 2 8705 5435 e-mail: bruce@sinogie.com |
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