French formula fortunes hanging in the balance

Despite considerable discussion about the impact of the salmonella crisis on the French dairy company Lactalis, and increasingly upon the wider systems in place to ensure food safety within France, the potential impact upon the country’s baby food industry has been lost amidst more pressing concerns.

However, the lesson from the Chinese melamine scandal should not be forgotten. Just ten years ago the Chinese market was rocked to its core by the revelation that 22 baby food manufacturers had routinely been using milk adulterated with melamine to manufacture infant formula, a scandal which caused six fatalities and more than 300,000 babies becoming sick.

The Sanlu Group – the company first and most strongly identified with the scandal – was most immediately and severely affected, filing for bankruptcy just three months after the scandal first erupted. However, the knock-on effect on the entire domestic industry was immense, with dairy manufacturers forced to form mergers or consolidate their businesses. Demand for domestically-produced infant formula collapsed, with hundreds of western brands entering the market in response, and still accounting for the vast majority of the Chinese market.

Impact of the salmonella scandal

Globally, infant formula manufacturers have seen their sales rise by an extraordinary degree as products destined for sale in one market have been whipped off supermarket shelves and sent, or personally imported to China.

Given this context, the French infant formula industry must be seriously concerned about the revelations occurring in the wake of the Lactalis salmonella scandal. At the end of December 2017, the French Finance Minister announced that China was to approve more imports of French pork and infant formula products, both having passed food safety inspections.

This was good news as it would allow French producers to gain the immediate benefit from China’s decision to relax import taxes on a range of foods from 1 December.  But will this still be the case if all French infant formula becomes tarred by Lactalis’ contaminated brush?

There is a good deal at stake here. Since the melamine crisis in 2008 France has recorded a 2,617% increase in infant formula exports to China. In 2016 a total of 15,064.2 tons made their way into China, up from 554.5 tons in 2008 (UN Comtrade). The exports are worth in excess of US$100 million. France is regarded as a major producer of baby milks, and has strengthened its position in recent years mainly due to increased demand from China.

Leading formula companies in China

Four non-Chinese manufacturers were in the lead in the Chinese market in 2016: Nestlé (including Wyeth), Danone, Mead Johnson, and Abbott. Together these four companies accounted for approaching 50% of sales. Whilst, at first sight, it may seem that these would be the companies most concerned about the impact of the Lactalis crisis on the reputation of milk imported from France, their most likely response would be to switch production to another country without these unpleasant associations. Intriguingly the company which may well have most to lose is a Chinese manufacturer –Synutra.

According to the company itself, it is a leading infant formula company producing, marketing and selling its products through its operating subsidiaries under the “Shengyuan” or “Synutra” name, together with other complementary brands. It focuses on selling premium infant formula products, which are supplemented by more affordable infant formulas targeting the mass market and boasts an extensive nationwide sales and distribution network covering all provinces and provincial-level municipalities in mainland China.

In October 2016 the company was pleased to announce the completion of a new factory in France, at Carhaix in Finistère. The plant includes two drying towers and is said to be the largest baby milk factory in the world, and has a supply agreement for raw milk with French dairy cooperative Sodiaal.  Synutra is not alone in making such investments —  other Chinese producers have made similar arrangements with Western companies to manufacture infant formula, allowing them to offer the reassurance that their baby milk is safe.

Targeting the Chinese market

There are a number of smaller producers who have also tied their fortunes to the Chinese mast: From the start of 2015, the French cooperative Isigny Ste-Mère has been operating a new production facility, partially backed by Chinese money, with an annual capacity of 30,000 tons, dedicated entirely to baby milk. With its existing facilities, this will give the cooperative a capacity of 50,000 tons per year. The cooperative Laïta was also reported to be investing in new production facilities and €80 million in a drying tower with a capacity of 30,000 tons, due for completion in 2017.

Also with an eye on the Chinese market, Candia (Sodiaal) is currently expanding its production site at La Talaudière.  These producers do not have the luxury of outsourcing their production to another country, and alongside Synutra must be hoping that Chinese consumers do not extend their distrust of Lactalis to French milks in general.

Lactalis has now identified that the strain of salmonella that has caused the contamination was introduced at the Craon plant during renovation work in February 2017. In a recent interview, the beleaguered CEO announced that Lactalis was permanently closing part of the facility in the wake of the latest contamination, but this is possibly a little bit too little, and probably a lot too late.

The company has not yet been able to assess precisely how much the affair will cost the business but estimated the bill “will be very high, several hundred million euros”. It may even be worse than that – perhaps Sanlu may not be the only company to be driven into bankruptcy by being at the heart of an infant formula scandal, and maybe Lactalis may not go down alone.