China is a land of opportunity – and a minefield of risks. That was all too clear again on Saturday when Chinese health officials ordered a recall of some milk shipments from Fonterra, the New Zealand dairy co-operative that listed its shares last November. Fonterra found traces of a harmful bacteria in some products; among the banned items is whey protein used to manufacture infant milk formula. A series of food scares has left Chinese consumers sensitive over food safety. Reputation is central to the ability of one food company to gain share over another.
China accounts for a third of the revenue of the world’s $32bn infant milk formula market, according to Euromonitor. And sales in the country are growing by more than a fifth annually, almost twice the pace of the world average. Foreign dairy groups have profited handsomely as a result of China’s melamine milk scandal in 2008, which killed at least six infants. Mead Johnson, Nestlé and Danone now make up a third of China’s milk formula market. Danone has been implicated in Fonterra’s problems as a buyer of its whey powder products.
Foreign food groups cannot afford to have their reputations tainted in China. A fifth of Fonterra’s New Zealand dairy products end up in the country. Although Danone derives barely 6 per cent of its revenues from China, those sales are growing at almost 14 per cent annually. And the experience of food groups such as Yum Brands shows how it takes time to overcome a dented image. Shares in the US restaurant company behind brands such as KFC and Pizza Hut have only just recovered since a poultry safety scare came to light last December.