China Investigates Danone, Nestle on Milk-Powder Pricing

Chinese agency says it has evidence that foreign companies sold infant formula in China at overly high prices.

China is probing foreign milk-powder companies including Danone and Nestle SA for possibly violating anti-monopoly laws and setting prices too high, the official People’s Daily reported, citing a government agency.

The National Development and Reform Commission, the country’s top economic planning agency, started an investigation into the pricing of infant formula sold by companies also including Mead Johnson Nutrition Co., Abbott Laboratories, Dutch producer Royal FrieslandCampina NV, and local firm Biostime International Holdings Ltd., the newspaper reported today.

The NDRC has evidence the companies sold products at high prices in China and their pricing increased about 30 percent since 2008, according to today’s report, which cited the agency. Safety scares such as a melamine-tainted milk powder scandal in 2008 which killed at least six infants have increased Chinese consumers’ distrust of local milk and driven up their purchases of foreign brands at home and overseas.

"Prices of milk powder, particularly from foreign brands, have gone up because of the far greater trust Chinese consumers have in the brands," said James Roy, an analyst at China Market Research Group. "Chinese consumers see the higher price point partly as an assurance of the product safety."

The agency didn’t immediately respond to a fax seeking comment on its investigation.

Domestic Brands

The NDRC reviewed documents related to product pricing at Glenview, Illinois-based Mead Johnson’s China unit recently and the company is cooperating fully, it said in an e-mailed statement. Jonathan Dong, a Beijing-based spokesman for Nestle, Agnes Berthet-d’Anthonay, a Paris-based spokeswoman for Danone, and Scott Stoffel, a spokesman for Abbott Park, Illinois-based Abbott, said their companies are aware of the issue and are working with government authorities.

Jan-Willem ter Avest, a spokesman from Royal FrieslandCampina, said he has no information on the probe and will look into the matter. Biostime said in a statement today that the company hasn’t raised prices since 2008.

The investigation follows China’s attempt to consolidate its milk-formula industry and create strong domestic brands. China targets creating 10 large companies in the industry within two years, each with annual revenue of more than 2 billion yuan ($326 million), China National Radio reported last month, citing Gao Fu, an official at the Ministry of Industry and Information.

Industry Consolidation

Danone shares slipped 1.5 percent to 56.59 euros in Paris. Nestle fell less than 1 percent to 62.50 Swiss francs in Zurich.

China Mengniu Dairy Co., the country’s largest dairy producer, led gains by domestic dairy companies after the report from the newspaper, which is published by the Chinese Communist Party.

Mengniu shares surged 4.1 percent to HK$28.90 in Hong Kong trading today, the biggest gain since June 19. Inner Mongolia Yili Industrial Group Co. rose 1.7 percent in Shanghai trading.

Biostime’s Hong Kong-listed shares declined the most in almost two years on June 28 after the baby-care products provider said one of its units was under investigation for alleged anti-monopoly law violations. The company said last week that it will "actively cooperate" with the investigation.
The shares fell 1 percent to HK$43.05 in Hong Kong today.

Mengniu Dairy offered HK$12.5 billion ($1.6 billion) to buy local infant-formula maker Yashili International Holdings Ltd. on June 18. The acquisition was part of the government-led push for consolidation, Mengniu Chief Executive Officer Sun Yiping has said. COFCO, the state-backed agricultural and food industry supplier, owns 19 percent of Mengniu, according to data compiled by Bloomberg.

Mead Johnson had a 14 percent share of China’s 77.9 billion yuan milk-formula market last year, according to industry researcher Euromonitor International. Hangzhou Beingmate Group Co. was second with a 10 percent share, followed by Danone’s 9.2 percent and Yili’s 7.8 percent.