China Moms Key in Nestle Deal

Food giant Nestle plans to spend $11.9 billion to buy Pfizer’s nutrition unit, including baby formula brands SMA and Promil, both of which are popular in China. With a rising middle class, more Chinese mothers are opting to buy foreign brands of baby foods for their children. Despite a tightening of food safety regulations, netizens have called on the Director of the State Food and Drug Administration to resign, as concern over contaminated foods is still prevalent. The new deal is likely to improve Nestle’s position in the China market, which has suffered in recent years, partly because of product safety issues of their own. Reuters reports:

Foreign labels such as SMA, Promil and S-26 Gold, which Nestle will get with the Pfizer deal, have a definite edge. Nestle’s products include Nan, Gerber, Lactogen and Nestogen, but are less well known in China.

“I have no choice but to buy foreign brands,” said Liu Shuo, 30, who works for a foreign company in Beijing and has a two-year-old. “Chinese milk powder brands always have food safety scandals, I don’t trust them.”

Baby milk was the foundation of the world’s biggest food company, established in 1866 when German pharmacist Henri Nestle introduced a substitute for mothers who could not breast-feed.

Fuelled by 16 million new births a year, annual growth rates for China’s baby formula market have been as high as 20 percent over the last five years. The market is forecast to double to $16 billion by 2016.

China is a promising market for baby formula, which is one of the reasons why Nestle has decided to take one of the biggest deals in their history. The Economist adds:

Business in China is also lucrative. Because Chinese mothers only want the very best for their (in most cases) one child, they mainly buy products in what is known as the “super premium segment”, meaning the most expensive baby-food. And they prefer international brands: they still remember the baby food scandal in 2008, when at least six babies died because Chinese milk producers had added melamine, a chemical, to raw milk to make it appear higher in protein.

Nestlé has been an also-ran in China, whereas Pfizer Nutrition boasts a 7.4% market share. (Mead Johnson is market leader with 11.7%, followed by Danone.) What is more, Nestlé’s reputation in China had suffered in 2008 after Hong Kong authorities found traces of melamine in the firm’s Dairy Farm milk produced by a company subsidiary in Qingdao, a Chinese coastal city.

Nestlé is unlikely to be challenged by antitrust authorities in China, but there are potential clashes with regulators in countries where Nestlé and Pfizer Nutrition overlap. Warren Ackermann, an analyst at Société Générale, a bank, assumes that Nestlé will have to dispose of about 30% of Pfizer Nutrition’s business in a dozen markets, including the Philippines, Taiwan, Mexico, Colombia, Venezuela and some Middle Eastern countries. It won’t be difficult to find takers: Danone and Heinz, an American food firm, are eagerly waiting for these businesses to come to market.

With the takeover of Pfizer Nutrition Nestlé is not entering new terrain. Henri Nestlé, the founder of the Swiss multinational, was also the inventor of the first fully artificial infant milk formula. In 2007 Nestlé took over Gerber, an American baby-food maker. Mr Schmidt, Gerber’s boss, remained in charge of the business at Nestlé and will now run the newly acquired business too. An old hand in baby food, he is very excited about China. “That’s where the births are,” he says. And just imagine the opportunity if the Chinese government were really to relax the one-child policy.

Read more about food safety and milk contamination via CDT.


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