Danone said today (8 July) it will cut prices on some infant formula products in China by as much as 20% from tomorrow in response to the country’s anti-trust investigation into the sector.
The French food group this morning provided details on plans it first announced last week in the wake of Beijing’s decision to probe infant formula prices.
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Danone said its local Dumex arm would cut prices on its “main products” from “5-20%”. It added: “We will do our best to facilitate their implementation with retailers as soon as possible.”
Nestle and FrieslandCampina, two other companies that are seeing its pricing practices investigated, have also announced moves to cut prices on infant formula.
The probe, which has also taken in US firms Mead Johnson and Abbott Laboratories, was first revealed by Hong Kong-listed Biostime International Holdings, when it admitted it was under investigation.
“The main purpose of the investigation is in relation to an alleged violation of Article 14 of Anti-Monopoly Law of the People’s Republic of China by Biostime Guangzhou in managing the market sales prices at which the distributors and retail sales organisations sell our products,” Biostime said on 27 June.
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By GlobalDataArticle 14 of China’s anti-monopoly regulations prohibits agreements among business operators and their trading parties relating to “fixing the price of commodities for resale to a third party”; “restricting the minimum price of commodities for resale to a third party”; or “other monopoly agreements” as determined by the Anti-monopoly Authority.
Danone said its Dumex business had “fully co-operated with” the anti-trust investigation and reviewed its operations to ensure they “are in compliance with relevant law and regulations”.
The company said the price cuts covers the “full range” of Dumex products, including its “best-selling” product Youjie. Danone said the price cuts would stay in place “over the next year”.
Jon Cox, an analyst at equity broker Kepler Cheuvreux in Zurich, said he expected the cuts to be a mix of promotions. “Price cuts are unlikely to be on average across the whole portfolio.”
However, he added: “We assume that it will put pressure on margins. We assume China infant nutrition accounts for over 3% of the group portfolio with a 25% operating margin. Once cuts are implemented, we assume it will have an impact of some 10bp on the group’s overall operating margin. In addition, we see a risk of a fine, which could be up to 10% of annual sales or some EUR70m.”
Projections from Chinese analysts Research in China suggest the market is expected to grow by “over 15%” into 2015, when the sector is expected to reach a total value of around CNY370bn (US$60.29bn).
The price of infant formula in China has come under the spotlight recently, with Chinese consumers shipping in products from overseas, prompting rationing in markets in Europe and in Australia.
Figures from Euromonitor claim the average unit price of infant formula in 2012 totalled US$24.60, compared to an average price of $20.40 in western Europe and $16.30 in the UK.
For more of just-food’s coverage on this developing story, click here.
