The baby food market in China is riding the wave of growing demand for mom and baby products and food products, both of which have started to lose momentum. The baby food sector has become vital for the expansion of the category amid growing demand 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 booming domestic baby food market
Baby foods, including infant formula (0-36 months), complementary foods (6-36 months) and snacks for children (3-12 years), according to the Dietary Guidelines for Chinese Residents, a document published by the National Health Commission, is the main market for baby products. Frequently consumed and enjoying loyal customers, baby food accounted for more than a third of all baby products, and this figure is expected to grow.
Meanwhile, its market growth has picked up since 2020, following the upgrading of consumption and demand for niche products. It fluctuated in 2017, with the number of newborns in China decreasing year by year. In 2021, the market was valued at CNY 336.3 billion (USD 52.835 billion), and this figure is expected to exceed CNY 500 billion after China rolls out the three-child policy and timely support measures.
Given the bright market prospects, domestic brands are eager to seize the opportunity. For a long time, foreign brands dominated the industry due to Chinese consumers’ concerns about domestic products, but as the government tightened its regulations and new technologies and brands began to emerge, the market share of players nationals has gradually increased.
Specifically, among the top 10 baby food companies, which accounted for 72.6% of the market in 2021, the market share of domestic companies increased from 19% in 2016 to 38.8% in 2021. Chinese Feihe (06186: HK) (Chinese: 飞鹤) overtook Nestlé (NSRGY: OTCMKTS) in 2021, becoming the company with the highest domestic market share.
Chinese companies making baby food have also become the darling of venture capitalists. The year 2021 saw 15 funding events, making this sector one of the main niche markets.
2. Three major sectors of the Chinese baby food market
China’s baby food industry consists of infant formula, complementary foods and children’s snacks. Competition in the infant formula market has intensified in 2021, with the reform of the registration system increasing the entry threshold and the falling birth rate reducing demand. As a result, the thriving and comparatively more profitable markets for infant complementary foods and children’s snacks are attracting more laggards.
2.1 Baby formula
The size of the Chinese infant formula market reached almost CNY 130 billion in 2021. Its growth rate decreased from 25% in 2018 to 0.3% in 2020 due to the decrease in the number of newborn babies. In 2020, the market received a boost from an increase in the number of newborns and upgrading of the industrial structure, and the market volume will reach about 173.7 billion yuan in 2025.
High-end and ultra-high-end infant formula at high prices is the main driver of China’s infant formula market. High-end brands put forward stricter quality requirements and gain more added value and better awareness for the products.
The data showed that rising domestic infant formula retail prices fueled the increase in market share of premium and ultra-premium products. On the other hand, this upward trend may not last, as the unit price of Chinese infant formula has exceeded the level of developed countries, especially the United States and Japan.
Some smaller markets like lamb’s milk substitutes and medical formulas have also seen growth. The expansion of the lamb’s milk formula market is remarkably faster than that of typical infant formula from 2016 to 2019.
2.2 Complementary foods
Consumption of complementary foods is almost the same as that of infant formula in developed countries like the UK and the US, while consumption of complementary foods in China is only one-seventh of that of milk preparations. In this sense, the Chinese supplementary feeding market has great potential, as user demands are far from being met.
Despite the decrease in the number of newborns, the market size will exceed the estimated 100 billion yuan in 2025, thanks to the cultivation of consumer habits and government advertising.
Foreign-funded enterprises play a leading role in China’s complementary food market. US baby food giants Gerber (GK: NYSE) and KraftHeinz (KHC: Nasdaq) dominate the domestic market, both recording sales of over CNY 2 billion in 2021.
Traditional Chinese brands like Fangguang (Chinese: 方广) and Eastwes (Chinese: 伊威) perform well in offline sales but are relatively weak in terms of branding and marketing.
Chinese complementary food startups are catching up, challenging foreign and traditional domestic brands amid new consumption patterns and 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 Snacks for children
Kid’s snacks target 150 million children aged 3 to 12 in China, with a market volume of nearly CNY 150 billion in 2021. The market size could reach around CNY 244.2 billion in 2025 with the improved consumer perception of the industry. .
Parents’ focus on children’s snacks has shifted to nutrition, emphasizing ingredients more than price or taste. In response to demands, snack companies have placed more emphasis on product function while expanding their market to a younger age group.
China’s children’s snack market stems from the 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).
The snack giants have strengths in supply chain and brand building, which makes it difficult for startups to challenge existing players in the short term due to the high homogeneity of the industry.
3. Risks and potential in the simmering industry
The three categories of baby food are at different stages of development, which in turn determines their divergent chances. The infant formula market in general is mature. Its smaller segments, such as powdered lamb’s milk and medical preparations, continue to grow. Meanwhile, the complementary food and children’s snack markets continue to grow rapidly, with various segments booming. Overall, the infant snack looks more promising than complementary feeding, followed by infant formula.
But challenges and opportunities always go hand in hand. What accompanies the best prospects for the children’s complementary foods and snacks market are unestablished standards, immature industries, and unimpressed consumers. Even for the nearly saturated infant formula market, product quality issues, regulatory oversight and lack of consumer confidence in national brands still exist.
For the baby food industry, products, channels, prices and brands are the four main competitive advantages in a fiercely competitive market. Specifically, products are the foundation, channels are key, prices impact sales, and brand affects market share.
Competence of the above aspects varies from company to company. Foreign and traditional baby food companies enjoy higher brand awareness, but they lack online channels and marketing methods. Newer brands are better at innovation and marketing, but they are low key and cannot maintain the qualities of their products. In short, all companies still have room to grow.
Digitization also provides more opportunities for the baby food market as the industry evolves in the ways of interacting with consumers. Under the impact of the Covid-19 outbreak, baby food startups are struggling to acquire customers and start preliminary digital exploration. This can help businesses target potential consumers, shifting from the traditional interaction where “people search for products” to the model where “goods are presented to people”. Digitization efforts will effectively improve the number of users, increase user lifetime value (LTV), and ultimately promote overall growth.
This article contains only excerpts from the report. For more details, please click to download the full report here.