http://www.businessweek.com/news/2013-07-03/nestle-s-wyeth-to-cut-china-milk-prices-after-government-probe

Bloomberg News

Danone Joins Nestle in Cutting China Prices Amid State Probe

July 03, 2013

Danone Joins Nestle in Cutting China Prices Amid State Probe

Shoppers walk past cans of Wyeth's baby formula displayed in a pharmacy in the Causeway Bay area of Hong Kong. Wyeth said the price cuts would save consumers an estimated 450 million yuan ($73 million) in the next 12 months. Photographer: Lam Yik Fei/Bloomberg

Nestle SA (NESN) and Danone’s (BN) infant-nutrition units will cut prices of key products in China after the government started investigating possible pricing and anti-monopoly violations by overseas companies.

Wyeth, which Vevey, Switzerland-based Nestle acquired from Pfizer Inc. (PFE:US) in April 2012, will lower the prices of certain infant-formula products by 6 percent to 20 percent, and promised not to raise prices of new products for a year, it said yesterday in a statement. The average reduction will be 11 percent. Danone’s Dumex unit is preparing a price cut and will disclose details later, the company said in an e-mailed response to questions.

“It was a bit of a surprise, and it may trigger further pressure on prices for all of the players in that market,” Jon Cox, head of Swiss equities at Kepler, said by phone. “That’s probably going to have an impact on the profitability of these companies. It’s not positive, that’s for sure.”

China’s National Development and Reform Commission, the nation’s top economic planning agency, has started an investigation into the pricing of infant formula sold by Wyeth and other foreign companies including Danone and Mead Johnson Nutrition Co. (MJN:US), the People’s Daily newspaper reported on July 2.

The NDRC has evidence that the companies sold goods at high prices in China and their pricing increased about 30 percent since 2008, according to the report, which cited the agency. Melamine-tainted milk powder killed at least six infants that year, fanning distrust among Chinese consumers of local milk and driving them toward foreign brands at home and overseas.

‘Damage Limitation’

Wyeth’s price cut “looks like damage limitation, and I’d imagine others will follow,” said James Targett, an analyst at Berenberg Bank in London. “The question is whether this will make the consumer aware it is being overcharged, or whether it will boost volumes.”

The NDRC didn’t answer at least five calls or respond to a fax seeking comment on its investigation.

Wyeth conducted its own checks and discovered some distributors and resellers had undertaken some “price control measures,” it said in the statement. The Nestle unit immediately adjusted its marketing practices to make sure its operations complied with laws, Wyeth said.

In a separate statement yesterday, Wyeth said it would cancel a plan announced in May to raise the prices of its S-26 range of infant-formula products sold in China by 4 percent. The price increase had been designed to cover higher costs of raw materials and formula upgrades. Wyeth will absorb the increase in raw-material prices instead, the company said yesterday.

Price Cuts

Wyeth said the price cuts would save consumers an estimated 450 million yuan ($73 million) in the next 12 months.

“I was surprised they are reacting so quickly,” Richard Withagen, an analyst at SNS Securities NV, said by phone. “Prices are likely to come down across the board.”

Nestle’s Chinese infant milk formula business accounts for about 1.7 percent of sales, according to estimates from Jeff Stent, an analyst at Exane BNP Paribas.

Nestle, the Swiss owner of the Gerber brand, agreed to buy Pfizer’s baby-food business for $11.9 billion in April last year to expand into faster-growing emerging markets.

Abbott Laboratories (ABT:US), Dutch producer Royal FrieslandCampina NV and local company Biostime International Holdings Ltd. (1112) are also being probed, according to the People’s Daily. The companies subject to investigation may face fines of 1 percent to 10 percent of their revenue if found guilty by the NDRC, the China Securities Journal reported yesterday, citing unidentified experts on the anti-monopoly law.

Biostime Slumps

Biostime hasn’t received any official feedback or information on possible penalties from the NDRC, Jason Xu, the company’s assistant chief financial officer, said by phone yesterday.

Biostime’s Hong Kong-listed shares declined for the third day yesterday, falling 13 percent to close at HK$37.45. Danone declined 2.8 percent to 55 euros in Paris trading and Nestle shares slipped 1.1 percent to 61.80 Swiss francs in Zurich.

“If we assume that there is a 20 percent enforced price reduction, Danone would need to increase volumes 25 percent to stand still,” Guillaume Delmas, an analyst at Nomura, wrote in a report on July 2. “That is, would need to find an additional 250,000 babies or 0.4 percent of the baby population.”

Royal FrieslandCampina has no update on the issue, spokesman Jan-Willem ter Avest said yesterday.

Mead Johnson said in an e-mailed statement that no additional information is available.

To contact Bloomberg News staff for this story: Liza Lin in Shanghai at llin15@bloomberg.net; Julie Cruz in Frankfurt at jcruz6@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net


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