Dairy industry moves to rebrand amid crisis

China's dairy industry is attempting to rebrand itself due to plummeting consumer confidence and competition from foreign brands.

Chinese consumers have been purchasing increasing amounts of milk powder from foreign countries due to decreased confidence in domestic brands caused by a 2008 food safety scandal.

Several countries, including Australia, New Zealand and Germany, have introduced quota measures to cope with China's growing demand for milk powder, the Shanghai Securities News reported.

Dairy industry expert Wang Dingmian attributed the increased foreign purchases to lower prices and weakened confidence in the domestic dairy industry.

The industry lost consumers' trust after the Sanlu Group was found to have adulterated its infant formula with melamine, a chemical compound used to create plastic, in 2008. Six children died from drinking the milk, while 300,000 were sickened.

The Sanlu Group subsequently went bankrupt. The profits of other Chinese dairy companies suffered greatly in 2008.

Wang said the industry must rebuild consumer confidence before it can be revived.

With confidence in domestic companies flagging, foreign companies have moved to fill the void, with 100 foreign dairy brands entering the Chinese market in 2009.

A 2012 report by AC Nielsen said that four foreign brands, namely MeadJohnson, Dumex, Wyeth and Abbott, had taken over nearly half of the Chinese market, with sales totaling 38.52 billion yuan ($6.25 billion).

Wang said foreign brands are expanding from high-end markets in large cities to smaller markets throughout China, making it even more difficult for their domestic counterparts to rebound.

Song Liang, a dairy industry analyst at the Distribution Productivity Promotion Center of China Commerce, said foreign companies have even raised their prices due to shattered consumer confidence in domestic companies.

Data from the Ministry of Commerce showed that the average retail price of foreign milk powder stands at 200.71 yuan per kg, while that of domestic brands is just 153.79 yuan per kg.

The Dairy Association of China (DAC) has said that finding "clean" milk sources for domestic companies through the construction of new pastures will be key to regaining consumer confidence.

Yang Wenjun, former president of Mengniu Dairy, a company that was also implicated in the 2008 scandal, agreed that Chinese dairy companies should construct their own pastures to ensure a clean and high-quality source for their milk.

The National Development and Reform Commission is expected to allocate 1 billion yuan this year for the construction of new milk sources, said Gu Jicheng, DAC secretary-general.

However, Li Hui, an analyst at Southwest Securities, said the construction will require a great deal of time and funding, which may cause the domestic dairy industry's production and operation costs to rise.

Mengniu and other domestic companies have already spent large amounts of money to build new milk production centers in order to tackle the crisis. They are also building more production centers in foreign countries, as the origin of milk products is important to Chinese consumers.

Synutra International Inc. spent about 700 million yuan to build an infant formula production plant in France last year. Yili Dairy plans to build a similar plant in New Zealand.

Building plants overseas will help domestic companies lower their costs and rebuild trust, Wang said.