Tuesday, March 8, 2016

The white gold rush: Why Chinese shoppers are going all-out for foreign formula

I'm lucky enough to live in a neighborhood that is attractive and interesting enough for people to actually pay to come and visit it (i.e. Tourist Central). Japan has seen almost uninterrupted growth in its tourist trade in recent years, especially Chinese visitors. Chinese tourists tend to be quite serious shoppers and the tills are ringing from dawn till dusk in the massive Don Quixote (*1) store that was built here last year in anticipation of growing numbers of tourists. Don Quixote is a.... well, rather quixotic store selling consumer goods of all kind and designed to look like a kind of shopping jungle; very much a store that says Buy Buy Buy! Except, interestingly, in the case of baby goods: the shelves of nappies and formula have signs saying "One pack only per shopper," and the tins of formula now have little security beepers sealed in with tough plastic which the checkout assistant has to remove with a Stanley knife.

Middle-class Chinese families have been going out of their way to avoid Chinese-made formula ever since the melamine scandal of 2008, in which some babies were killed and many more hospitalized after a shady manufacturer decided to doctor its formula mix with melamine to disguise the low protein levels. The fact that Chinese tourists are eager to buy Japanese formula in spite of worries a few years back about radioactive contamination in the wake of the 3/11 earthquake tells you something about just how bad the reputation of Chinese formula is. Meanwhile, many middle-class women prefer not to breastfeed or find it difficult; they may want to get back to to work as soon as possible to fund their children's education, and there is a lack of provision for pumping in most Chinese workplaces. Hence the development of a sizable "grey market" in which Chinese students, tourists and ad hoc entrepreneurs sweep the shelves for formula in places like Hong Kong, Australia and Japan, and then sell the tins in China for several times the price originally paid for them; at the more informal level, many visiting Chinese like to pick up formula as a gift for friends who have babies.

The thing about China is that the sheer, steamroller-like volume of people we are talking about means that a shortage of pretty much anything in that country (whether it's brides or baby milk) is likely to have repercussions for the rest of the world, and parents in Australia, New Zealand and Europe have been taking to social media to vent about being confronted with empty formula shelves and Chinese shoppers toting baskets crammed with tins and tins to take back to China. Chinese parents' desperation to acquire any formula that isn't Chinese is understandable; so, however, is the frustration of parents in countries which have done a better job at ensuring food safety. Last year in Japan, a punch-up developed in an Akachan Hompo between two groups of Chinese tourists who were trying to buy up as many diapers as possible (*2), while other Japanese stores are now rationing formula/nappies and even interrogating foreign-looking women at the till ("What are you buying these diapers for?"). In Australia and Europe, women of East Asian background are increasingly reporting hostile reactions from shop assistants if they try to buy several tins of formula at a time. Tensions are running high.

My first thought upon hearing of this trade was "Why don't the manufacturers just export formula to China?" However, it appears that there is a distinct ranking in terms of formula desirability: formula purchased overseas is top, followed by imported foreign formula purchased at an import store in China, and then, finally, formula manufactured in China by a foreign-affiliated company. Given the extremely high prices that are being charged for foreign formula and China's perennial issues with fake stuff, I suspect there are concerns that someone somewhere may have just slapped a foreign label onto a can of Chinese formula, while China's very serious pollution problems make many Chinese feel that even formula manufactured within a foreign-owned factory located in China is risky. Plus, when it comes to gifts I suppose there is a special value in receiving something that you know someone has dragged through customs and carried back home in a suitcase on a bouncing bus: "This is special and limited in supply, and I made the effort just for you." In any case, I guess that Australian or Japanese formula manufacturers have to limit the amount they export if they do not want to face a social media backlash from parents frustrated at shortages in their local supermarkets.

"Well, why not just produce more formula?" is the obvious response to all this. Long-run, I think that is the plan, and dairy industries in Australia and other countries have been enthusiastically gearing themselves up for expansion over the next couple of decades to meet Chinese demand for high-end milk products.

In the short-run however, it's not quite as simple as that. Formula is not just plain old cow's milk and contains an ever-increasing number of complex ingredients, which must be sourced according to rigid and complicated guidelines. The rules governing infant formula production are (not surprisingly) very strict indeed, and a producer would have to be pretty daft to risk cutting corners; the lesson of China's infant formula debacle is that for formula manufacturers, if you slip up even once, you will probably never win parents' trust again. Finally, cow's milk-based formula production requires specialist equipment, such as spray dryers (to dry the milk into powder). Australia's stray dryers are working at maximum capacity and constructing new ones requires huge amounts of investment. Meanwhile, Japan's dairy industry is in no situation to increase output; we can't even guarantee domestic butter supplies. The crux of the problem lies in the extremely high standards that parents (understandably) have for the milk they feed to their babies; these standards lead Chinese parents to do whatever they can to avoid Chinese formula, but they also make it hard to greatly increase the formula supply in a hurry. This article here has more.

Ultimately, the answer is for China to clear up its pollution issues, lack of pumping rights in the workplace and food safety frameworks so that a) Chinese families are able to trust Chinese-made formula again, and b) more babies can be fed breastmilk for longer, which will help to take the edge off China's exploding demand for foreign-made formula. In the meantime, let's hope that the dairy industries of Australia, Japan and elsewhere succeed in ramping up supply so that parents in these countries do not face empty shelves when they go to the store for milk to feed to their babies.

(*1) Do try Don Quixote if you ever come to Japan--it's crazy, tremendously fun and the products and customer service are top-notch. And the signs are all hand-made. The shop is deliberately designed to display all sorts of things at random, kind of bursting out of every corner--novelty penknives next to cosplay costumes etcKitKats, that kind of thing.
. It is also a good place to pick up snacks with weird flavors, like green tea caramels and peach-flavored

(*2) As someone who has used Japanese nappies, I can confirm that they are very, very good indeed, especially Merries which are apparently the most sought-after brand among the Chinese. Chinese nappies are said to be pretty dire, and there are worries about dodgy chemicals reacting with the skin on babies' behinds (Alternatively, maybe the parents are sensitive to Sino-Japanese political tensions and are enjoying the idea of Japan getting crapped on... who knows?).