Farm Ireland

Saturday 23 June 2018

Irish dairy brands set for take off in China

Minister Simon Coveney with Mr Sam Xie of the Beingmate baby food distribution company which will handle Kerry Group’s new line of infant milk formula products in China
Minister Simon Coveney with Mr Sam Xie of the Beingmate baby food distribution company which will handle Kerry Group’s new line of infant milk formula products in China
Darragh McCullough

Darragh McCullough

The progress and confidence of the Irish dairy presence in China today is a reflection of the amount of work and effort the sector has invested in the market.

During the week-long food trade mission, Irish dairy champions such as Kerry, Glanbia and the Irish Dairy Board (IDB) launched a series of products that showcased just how far the industry has come.

It is not so long ago that Irish dairy concerns relied on selling everything in bulk commodity outside these shores. Today, the likes of Glanbia and the IDB have enough confidence in their Avonmore and Kerrygold brands that they expect Chinese customers to latch on to them even though they may not have the slightest idea where Ireland even is.

The competition is tough. As Deloitte's head of commercial strategy and research in Shanghai, Alan MacCharles, told the delegates on the first day of their whistle-stop tour, China is not for the faint-hearted.

"If you're not the best domestically, you've no business in China. You need to be world class to compete here because everyone who's anyone is here," he said.

Our best dairy companies know that they have the wind at their backs. A perfect storm of declining domestic production (despite milk prices of around 50c/l), 13pc annual consumption growth and a paranoia about the safety of local produce has left dairy exporters into China free to command what can only be described as extortionate rates for their produce.

UHT milk is a good example. While logic tells us that shipping a litre of what is effectively 90pc water halfway around the world is inefficient, it misses the crucial dynamic that is driving the Chinese dairy market at the moment.

Wave after wave of food scandals have severely damaged confidence among the Chinese in their local brands. Melamine was the mother of all scandals, with many believing that the official statistic of six infant deaths from the widespread contamination of milk with industrial protein is a gross under-estimation of the real death toll.

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Combined with the fact that many children in China carry the hopes and dreams of six adults (two parents and four quite young grandparents) - because of the one-child policy - mothers who can afford imported infant formula will not risk local produce.

This means imported brands of infant formula cost four or five times more than local produce.

For example, Kerry's new Green Love+ infant formula that was launched through Beingmate's distribution chain last week will sell at €43/tin in China. If the same product was on Irish shelves it would struggle to make more than €10/tin.

But the legacy of the melamine scandal has spread far beyond the infant formula category, and UHT imports are experiencing similar phenomenal annual growth rates of close to 30pc. And because companies such as Glanbia, Lakeland Dairies and the IDB are able to sell their product at €2.50 per litre, they can absorb the additional freight costs associated with the eight-week trip that it typically takes to get milk to the likes of Shanghai.

But to say that inflated prices are the only reason that these companies are doing business in China would be to do them a disservice. The likes of Glanbia have perfected a bactofuge technique that reduces the bacterial load in milk, which in turn allows them to reduce the temperature that they need to 'cook' the milk so as to achieve a twelve-month shelf life.

Likewise, the development of industry leading membrane technology at Moorepark has allowed the likes of Kerry to develop top of the range dairy products such as infant milk formula. While they are still one step away from having their own retail brand for the mix, they have taken a serious step up the value chain, especially when you consider that the typical 10pc margin for ingredient suppliers jumps to 50pc for brand owners.

How long will the massive price gap between imported dairy and domestic dairy suppliers remain? Who knows.

We do know that the Chinese government have offered the equivalent of €600m of a grant to any Chinese company that buys a controlling stake in a significant foreign infant formula manufacturer.

They have also forced a massive consolidation of domestic players in an effort to create a national champion.

But the reality is that China will never be a low-cost producer of milk, with neither the climate nor the land to do so. In addition, demand is projected to continue growing well into the future. Brands and businesses that become well established there now should reap dividends for many years to come.

Dairy giant Yili looking for an Irish partner

China's biggest dairy company, Yili, are said to be actively looking for strategic partnerships with dairy companies in Ireland.

While industry sources said that it is unlikely that any co-op would contemplate a joint venture with the €5.4bn Chinese giant, the possibility of Yili establishing packing facilities within Ireland would hold several attractions for the company.

It would give them direct access to some of the biggest sources of infant milk formula ingrediants in the world. It would also give any finished product exported from Ireland the imported status desired by Chinese consumers.

Yili representatives expressed their desire to invest in Ireland at the high level meetings with the Irish delegation.

Smaller Irish companies secure deals

Tipperary semen cooperative, Dovea, set to become the first Irish company to export beef bull semen to China. The co-op expects to supply 20,000 doses of frozen semen from next January.

"We realised that sales were going to hit a ceiling in Ireland fairly soon so we've decided to look further afield," said the company's Conor Ryan.

"They want mainly Simmental, Charolais and Limousin breeds because they are looking for bigger carcases closer to the 400kg mark," explained Mr Ryan.

Limerick machinery manufacturer, Samco, also signed a deal to sell their maize planting system with biodegradeable plastic to a major farm contractor in Inner Mongolia.

The customer will plant close to 1,500ac with the Samco technology.

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