By Adam Jourdan ,Reuters
SHANGHAI — A crackdown on corruption in China’s infant milk formula sector has made sales representatives and hospital doctors fearful of talking to each other, putting a brake on marketing and possibly hitting revenue growth for foreign firms. Chinese media have repeatedly accused foreign milk powder makers, notably France’s Danone SA, of paying bribes to medical staff in return for recommending their brands to new and expectant mothers. The French food maker said this week it will appoint new management at its Dumex infant formula operation in China following a bribery scandal at hospitals in the country’s north. China is a magnet for foreign infant milk formula makers, with the US$12.4 billion market expected to double by 2017. But investigations by Chinese authorities and reports in state media, often quoting whistleblowers, have curtailed marketing activity at hospitals. “Since the ‘First Drop of Milk’ expose, no matter what brand of milk powder, none of the reps have been coming,” said a nurse at a top Shanghai hospital. The nurse, who declined to be identified, was referring to a recent report by official China Central Television (CCTV) that claimed milk powder firms were bribing doctors to recommend their brands as the first milk substitute a baby tastes. While hospitals only account for 3 percent of overall infant formula sales in China, they are key for companies trying to get parents to buy their brand, according to a Chinese research firm, Beijing Shennong Kexin Agribusiness Consulting. “A doctor’s recommendation has the biggest impact,” the firm said in a recent report. “Once a patient has chosen a product, the likelihood of them changing to another brand is very small.”
Much of the scrutiny has been on Danone. Besides Dumex, its Nutricia advanced nutrition unit has also been accused in state media of bribing doctors to boost milk formula sales. Danone has said it was investigating that report. Danone’s woes in China are likely to feature when it announces third-quarter results on Wednesday. A Reuters poll of six analysts showed like-for-like baby food sales to fall 3 percent in the quarter, reversing a 15.2 percent jump in the first-half. It’s unclear how much China will account for this reversal. But China is an important market for Danone’s baby food division, which accounts for 20 percent of group sales, making it the No. 2 contributor after dairy. Indeed, the impact on foreign milk powder makers mirrors that of global pharmaceutical firms, with many doctors at Chinese hospitals refusing to also see drug reps for fear of being caught up in a widening graft scandal in that sector. “Milk powder firms now have to change their marketing and communications strategy. They can’t focus on hospitals so much, which is going to hurt,” said the head of a marketing firm that works with foreign milk powder makers in China. The executive asked not to be identified because Chinese officials recently audited his firm, looking for irregularities that could be tied to bribery. Many marketing firms work with foreign companies on their sales strategies.