By Lin Bai | May 18, 2010

Babies, Babies, and More Babies. China’s B-A-B-Y Market.

The other weekend, I went out to dinner with my good friend from college. Big reason why was because she was breaking the news to me that her and her fiancé were taking the big plunge and moving back to China for better career prospects.

Then she asks me, “Will you be able to ship baby formula for me in the future?” I can’t say that this caught me by total surprise – after all, she was the third person already who has asked me to do the same thing. Logically speaking, it does make perfect sense. Especially after the 2008 melamine contaminated milk scandal that killed six babies and sickened 300,000 others across China has possibly permanently ruined parents’ faith in domestic Chinese dairy products (I know it has for me).

Safety and Quality Concerns

Unlike the US market, the Chinese baby market is still underdeveloped. First main focus for any associated products is quality and safety. This is quite evident in the advertising industry for the baby market since the ads are focused on not the product benefits, but the product safety.

“If you look at international brands, their advertising is based around the fact that their milk powder is imported,” says Kelvin Gin, director of Synovate in Shanghai. “Local brands say their product is natural, and they have government certification. Consumers are looking for reassurance.”

According to a recent survey by Sina Baby channel, up to 81.1% of consumers are worried about product safety, 63.2% of the consumers cannot distinguish between good and bad quality of the product, and 34.6% of them feel the baby products currently in the market lack scientific guidance. Looking at these facts, it’s no wonder why the market is focusing so much on quality concerns above all else.

Market Overview

So the market has had a bad wrap for quite some time now, which is the bad news. The good news is that there is still an enormous opportunity for growth in this market as well. According to Beijing Answer Marketing Consulting, China is currently the world’s second largest consumer market for babies and children goods (after the United States). With annual growth of 30% since 2000, this market was worth RMB 750 billion ($110 billion) at the end of 2008, and is expected to reach RMB 1 trillion ($146 billion) by end of 2010.

Given China’s rising economic status, China’s “baby boom” has led to a massive development of goods and services related to babies and children. In 2009, 16 million new babies were born in China. Scholars believe that it is the fourth “baby boom” since the birth of New China (1949), and the number of newborn babies would peak in 2015. In other words, the Chinese baby market is forecasted to grow for the next 20 years or so.

Little Emperors’ Little Ones

The One Child Policy

The one child policy, though has many implications on Chinese culture today (see article “I am a ‘Gold Mine’, Memoirs of a Post-80s Chinese Girl.” for more on this), it does also play a role in China’s growing baby market today. The policy was first implemented to children born in 1979, so that children born after the 1980’s have no siblings to share (or contend) with and are doted on by parents and possibly four grandparents – considered today as little emperors and little princesses.

The first generation of little emperors are now in their twenties, so many of them already are or will soon become parents. With increases in living standards, education and income levels, these young parents naturally spoil their little ones – just like their parents doted on them. They have the financial capacity and are willing to buy better products for their babies even if the prices are higher.

The “4+2+1” structure has become the standard family structure in the cities nowadays, which means four grandparents, two parents and one child. As a result, the only child is the focal point and “hope” for the entire family, three generations. Chinese parents spend up to 50% of their total family income on their child, according to China Academy of Social Sciences.

Young Mothers

Young mothers born after the 1980’s usually follow the trends and have strong brand awareness since they grew up in a better environment than their parents. So, mid-to-high-end items are selling particularly well to them. They look for safety and quality when they buy items for their babies – and they don’t mind paying a bit more for the benefit of their children, which is opening up doors for foreign brands to enter the baby’s market.

In general, mothers trust foreign brands more than domestic ones. “Many affluent women were actually flying to Hong Kong or Korea to buy baby formula, even before the melamine scandals.” said Shaun Rein, MD of China Market Research Group (CMR).

In addition, young mothers are more technology savvy. In the past, young mothers went to their own parents or doctors to ask for information. But nowadays, they shop online and use the internet to learn about baby care and share tips with the other mothers. Brands should be aware of the importance of digital marketing to young mothers, and the outreach that these mothers can bring to a brand.

Beyond the One Child Policy

Truth be told, approximately 35.9% of China’s population is currently subject to the one child restriction. The market for the little emperors’ little ones will continue to grow however, because rich urban families can afford to have more than one child as they can give birth abroad or pay the fines associated with a second / third child. The government has in recent years also allowed for parents without siblings to have 2 children.

Lower Tier Cities and Rural Areas Cannot be Ignored

Back to the melamine contaminated milk scandal. According to Shaun Rein, Managing Director of China Market Research Group (CMR), the scandal did not come as a surprise to upper-middle class Chinese, who tended to look overseas for milk brands. “The hardest hit are those with lower incomes. Now they are the ones who are scared.”

After the scandal, many parents switched from standard to premium products and from local to international brands, and most noticeably in the lower tier cities. However, same as the people living in lower tier cities, there is another group pushing demand for quality products to the highest levels ever.

Thanks to increased urbanization and the Chinese government’s recent effort to stimulate the rural economy, rural consumers have more disposable income and are willing to spend, especially for their babies.

Another market opportunity: there is a void for branded infant products in rural areas, where “irregular vendors” are everywhere creating an informal market with questionable products. Typical Chinese parents would devote everything to their kids, would they buy those low quality products for their babies if they had alternatives? I don’t think so.

International brands can leverage their competitive advantages by offering better quality, safer, and affordable products to lower tier cities and rural areas.

Conclusion

Bottom line, urbanization and the baby boom are bringing the biggest market opportunities. The baby products sector in China has already become one of the most lucrative segments ever coveted by foreign and domestic marketers. However, as I must stress again, China’s baby market is still fairly underdeveloped, especially in the less urbanized areas.

Quality and safety are still the major concerns. International brands can make excellent use of their existing reputations by offering better quality and safer products since the demand is at an all-time high. Chinese companies will have their work cut out for them as they need to catch up given the enormous opportunities in this market, and it will take a long time before those changes take effect.

Lin Bai is a New Ventures Analyst at METAN Development Group. For comments/questions, email lin@metanmedia.com