The tainted milk scandal that has claimed the lives of four children and sickened thousands more risks having a long lasting effect on the “Made in China” brand, especially with regards to the food industry. In fact, it is not the first time that the country has witnessed food related scandals1 – in 2004, milk contaminated with urea, soap powder, starch and high levels of antibiotic residue was found on the market – and it is still unclear who is to blame this time for having allowed poisoned milk to be fed to infants.

Even though authorities have promptly intervened to enforce new quality tests and the brands involved have withdrawn poisoned products from the market, it will not be easy to convince Chinese consumers, along with the rest of the world, that quality standards will really be met from now on and that nothing like this will happen again in the future.

Now the biggest problem dairy brands have to face in order to survive the scandal is to recapture consumers’ trust. In fact, whereas the general public seems to think that quality standards tests cannot be accountable for real quality, a consistent delivery on a brand’s promise can be the only means that brands can use to recapture and build long lasting relationships with customers.

Whereas some of the brands involved in the crisis are damaged beyond repair – Sanlu is the first on the list - it could be argued that the crisis has created an opportunity for those brands that are able to meet the challenge and prove themselves to consumers and eventually gain a significant advantage ahead of the competition.

Naturally, it is quite disheartening to talk about market opportunities when infants have lost their lives, but it seems likely that the Chinese dairy market will see a heated fight between bigger and smaller dairy companies aiming to conquer betrayed loyalists abandoning other brands involved in the scandal. Indeed, big brands like Mengniu and Yili will certainly try their best to retain their own customers while smaller brands like China Green or San Yuan might exploit the moment to conquer spillage from their market share.

So what are Chinese dairy companies doing to protect their brand’s equity in the midst of this crisis? How are they planning to recapture consumer trust?

Labbrand has set to look at Mengniu, the biggest dairy brand in China at the outset of the crisis, ranked among the top 25 Chinese brands in terms of brand value.

Mengniu (蒙牛) was founded in 1999 by Niu Gensheng together with a group of dairy market professionals previously employed by the state-owned Yili Dairy. Although just a young company, Mengniu already counts 26,000 employees, netting more than USD 3 billion in annual revenue.
Last year, Mengniu raked as the largest dairy group in China by market share with 16%, right ahead of Yili (伊利), which occupied 15% of the market, and Sanlu (三鹿), with just 8%.

With a startling growth rate in terms of market share and revenue flow, Mengniu also accounts for one of the fastest growing brands in China. The dairy giant began trading on the Hong Kong Stock Exchange in June 2004, when it also registered an increase in annual revenue of 77%. Then, in both 2005 and 2006, the company registered an annual revenue increase of 50%. In 2007, revenues increased another 31%, while net profits increased 29%. Earnings results for the first six months of 2008 witnessed a stunning 37% increase in annual revenue and a 20% increase in net profit2.
 
Mengniu has based its impressive growth on four main factors:

1. deep understanding of the market
2. product innovation
3. capillary distribution and strategic alliances
4. consistent investments in brand building

 

1. Despite China’s per capita milk consumption being one of the lowest in the world, Mengniu has rightly foreseen the fast growth of the dairy market - 10% annual market growth since 2003 to be more precise – due partly by increasing domestic consumption, as well as by the growing popularity of Western food. Indeed, Mengniu has been a forerunner in the market in terms of answering different consumer segment needs and discerning tastes.

2. In fact, in 2006 Mengniu had already been given the top innovation award by the International Dairy Federation (IDF), the most authoritative institution in the world's dairy industry. Mengniu was the first Chinese dairy brand to beat rivals from Australia and England - where the industry is much more developed - to win this top award.

In reality, Mengniu has put product innovation and development at the very basis of its brand and has continuously emphasized R&D initiatives to develop more innovative, high-quality and nutritious dairy products. Among these, the new "Fruit Milk Drink" which involved three invention property rights, and the upgraded yogurt drink "Suan Suan Ru" developed to be more nutritious and more easily absorbed by the human body.

3. Moreover, Mengniu has built strategic alliances and partnership with both local and foreign players. Wuhan Frealth, Arla, and Danone are the most famous examples among these. On one hand, local alliances have helped Mengniu establish a capillary distribution system and secure a position as sole supplier for KFC and Starbucks outlets throughout the country. On the other hand, international alliances have given Mengniu access to the international market and its expertise, undoubtedly both of great interest to the Chinese dairy brand given its intention to move up the value chain and expand overseas.

4. The driving force of Mengniu’s overall growth has always been its consistent efforts in brand building. In the very beginning, Mengniu had put one third of its initial capital in branding and advertising and kept investments high even after having secured a leading position in the market. Moreover, in order to better engage consumers, Mengniu has sponsored nationwide events - like the famous “Super Girl” contest - and has set strategic partnerships such as the one with the NBA aimed at promoting a healthy lifestyle to young people throughout China. As part of this effort, Mengniu has also promoted its green image, bearing the national green food logo and also insisting on the high quality standard of its production and packaging facilities.

When Mengniu products tested positive for melamine, a large part of the equity that the brand had accumulated in the 9 years of rapid growth were basically wiped out overnight.

Trading in Mengniu shares on the Hong Kong Stock Exchange was suspended on the 17th of September and reinstated only on the 23rd when they faced tremendous selling pressure throughout the entire session before ending at 7.95 Hong Kong dollars ($1.02), down 60.25% from its previous closing price of 20.00 Hong Kong dollars ($2.56).

 

Indeed, Mengniu was stripped of its status as a “Chinese national brand”3.

As a direct consequence of the melamine scandal, Mengniu has lost many of its brand loyalists. In a recent study, "Tainted Brands"4 Mengniu was named as tainted by about 60% of milk buyers. Indeed nearly two-thirds of shoppers formerly loyal to Mengniu said they were on the move, looking for alternatives.

The following graph shows a change of Mengniu buyer attitudes in Beijing and Shanghai. Brand loyalists’ changing attitudes regarding Mengniu are compared to another dairy brand involved in the scandal (Bright Milk):

In comparison to smaller brand Bright Milk, Mengniu seems to have been hit harder by the scandal. It is likely that the more people are affectionate to a brand, the more they are likely to remember and be outraged by the fact that it was implicated in a scandal.

Shanghainese Bright, quite famous in the south but less in the north of China, lost almost all of its loyal customers in Shanghai but actually acquired some in Beijing. On the other hand, Mengniu has suffered heavy losses on all markets.

From this observations, a few conclusions can be drawn:

1. In terms of strategy, Mengniu needs to consider the upcoming competitive pressure from the part of smaller players that are now in the “fortunate” position to attract customers who are moving away from other bigger brands.

2. It is vital for Mengniu to continue investing in its brand – not only in terms of communication but also in terms of innovative products and processes. Smaller dairy companies are not likely to be able to lift the volume and standard of their own marketing capabilities overnight. Similarly they will not be able to make any fast changes to their product offerings or distribution. Mengniu, instead, has the organizational capabilities, financial resources and accumulated expertise to implement the standards, PR and marketing campaigns that will help restore public trust.

Unfortunately, Mengniu has done some PR mishandling in the management of this crisis.

1. Mengniu's CFO statement regarding export products of higher quality caused consumers outrage as the company was accused of adopting preferential export policies because it thought Chinese lives were cheaper than foreigners'5.

2. Cutting prices after the crisis did not seem to be a good idea either. Even though discounting can boost purchases on the short term, on the long term consumers are going to expect the same prices, otherwise they may doubt the quality of the products, especially since melamine had been added to the milk in order to cut costs.

3. Trying to capitalize on nationalist sentiment by releasing a web letter calling out to the nation to protect national brands has proved to be counterproductive. Actually, several blogs have collected the comments of netizens calling out to others to NOT buy national brands if really faithful to their motherland6.

On the bright side, Mengniu has recently corrected its strategic direction:

1. By reorganizing the milk stations supply system.

2. By ensuring transparency in the production and packaging process thanks to the institution of a third party review mechanism; but also by allowing media (both domestic and foreign) to check on the milk production process.

3. By communicating directly with consumers: releasing videos about milk production, inviting students to develop activities in milk factory, and first and foremost by being accountable and responsible. In fact, whereas other brands involved in the scandal bought out Baidu to clean their image by not allowing the search engine to show scandal related articles, Mengniu admitted its responsibilities. Indeed, Mengniu CEO Niu Gensheng opened his personal blog to communicate with customers. He also published the blog post “When responsibility stares us in the face, we have no choice but to live up to our responsibility.” He offered his excuses and made his promises. Based upon the almost 35,000 comments, this piece of communication definitely provided some defense for Mengniu7.

In conclusion in order to regain its prominent market position, re-build and protect its brand equity, Mengniu should:

1. Identify remaining and potential new loyalists. Go through market research
to understand what they love or hate about Mengniu and find the right way
to talk to them and eventually keep them loyal to the brand.

2. Continue to invest in branding and innovations. At the end of the day, a
brand that has registered an average revenue growth of 46% for the past 4.5
years should have a solid base to rebound, even after such a scandal

3. Guarantee transparency. Now that Mengniu has failed its customers, in order
to regain their trust, it needs to be absolutely infallible, not only in
regards to production processes but also in all other parts of their
business.

1. Chaney, J., 2007, The “Green” and Hopefully Clean, Produce of China, Boston Globe, 29 March.
China Factfile, 2006, Development, GOV.cn, Beijing.
2.http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?capId=10732426

3. Yili, Mengniu, Bright Dairy lose their status as 'national brands', China Central Television (22 September 2008)
4. http://www.allmediacount.com/uploads/file2/Tainted%20Brands%20Basic%20(look%20inside)%20081010.pdf
5. Jasmine Wang, "Export milk less likely to be tainted, says mainland firm", Page A2, South China Morning Post (20 September 2008)
6.http://globalvoicesonline.org/2008/09/17/china-crisis-on-made-in-china/
7.http://zonaeuropa.com/20081117_1.htm