Infant Milk — The Real Reasons why Prices Soared, and the Lesson for Marketers

May 19, 2017


Infant Formula Prices Soaring

In the past, the debate on infant formula mainly centred on breast-feeding versus bottle. Recently, more questions are being raised about the sharp increase in the average price of these products. This has been a hot topic in Singapore, where questions have been raised in parliament and authorities are expressing concern about the 120% increase in the average prices, over the past decade.

One of the key messages in today’s article in The Strait Times, titled HPB to launch campaign on kids’ nutritional needs, is that low cost, standard infant milks are as nutritious as premium infant milks. The article also stresses the importance of weaning and the consumption of complimentary foods for babies as they grow older.

Fuelled by the high rise in the average purchase price of infant milks, this debate has been simmering for over a week with articles such as Milk Powder Price Woes and No point in Buying Expensive Milk Powder.

The voices that have weighed in include government authorities such as the Health Promotion Board (HPB) and the Competition Commission of Singapore, spokespersons including mothers, journalists and politicians, as well as paediatricians, manufacturers, retailers and a number of other stakeholders.

For marketers, this is an interesting case that further highlights the hidden risks linked with pricing decisions. Infant milk manufacturers, who have made considerable efforts in R&D and marketing to develop premium products, need to protect their brands’ image and retain the trust of their consumers. They do not want to be in the news for the wrong reasons.

It is useful, therefore, to understand the real reasons why infant milk prices have gone up, a matter that the newspaper articles fail to explain. There are many underlying factors at play, and, so that we draw the right conclusions, it is useful to outline the market realities and the relevant market dynamics leading to the rise in infant milk prices.

It is equally important to highlight the lessons for marketers.

Good to educate mothers

Firstly, it is good to “educate” mothers informing them that the nutritional value in standard milk is as much as that in premium milk. The key message in the recent articles is that you do not need to pay more for infant milk, especially if you cannot afford it.

These messages are well intended because marketers tend to promote their premium products more, and communication supporting the less expensive infant milks is generally not as loud and clear.

As pointed out, there is little hard evidence to suggest that the special ingredients infused into premium milks aid mental and physical development.

Ingredients like AA and DHA, which are traced in mother’s milk, and some of the other ingredients, such as lutein, choline, taurine and nucleotides, are said to play a role in body functions such as eyesight, hearing and the functioning of the immune system. There is not much evidence though that their consumption through infant milks benefits the baby’s development.

Spokespersons have come forward to claim that they buy (or used to buy) the low cost standard formula, and are advising others to do so. This reinforces the message that standard milk formula adequately provides for the nutritional needs of the child.

However, from the marketer’s perspective, these spokespersons belong to the segment that represents 5% of the market, and has been dwindling over the past 20 years (source: report by the Competition Commission of Singapore). So, to be clear, for survival the manufacturers of infant formula do need to consider the premium market that has grown rapidly and represents 95% of this market in Singapore.

Marketers are aggressive

Marketers are often labelled as aggressive. They deserve that label, but that is not something they should feel guilty about.

Marketing is aggressive. It has to be that way. In the battlefield of consumer markets brands die, and companies fold up.

Let me digress a bit here. Not only marketers, on occasions, however frequent or rare, most people are aggressive. Mothers, for instance, can be aggressive when they feel a teacher has given their child one mark less than she deserves. And though we may not always realize it, we frequently make sales pitches.

So let us not complain if a sales person makes a sales pitch and gives a free sample at a paediatrician’s clinic.

What is more relevant is that we need to curtail unfair or illegal trade practices. This does not seem to be the case, though there is scope for improvement in the manner infant milk samples are distributed at the hospitals, and the authorities in Singapore are starting to address this.

The Market Reality

It is often assumed that marketers lead consumers, but it is actually the other way round.

Marketers, of course, do powerfully influence consumers, by means of a wide range of tactics and strategies.

Besides marketing, there are a host of other factors inducing mothers to buy premium milk formula. For instance, their desire in a competitive world to provide the best they can afford for their children.

Marketers constantly seek to understand and satisfy such desires, needs and preferences, and the efforts by the infant milk manufacturers to innovate and develop specialized products, stems partly from the reality that “the only profit centre is the customer” (Peter Drucker). They must follow the herd or they will be left behind.

The development of premium milks and the growing up milks by the infant milk manufacturers was a creative, intelligent and rewarding market growth strategy.

Faced with declining birth rate in most affluent markets across the globe, these companies found the route not only to stem any erosion in sales, but also to achieve stellar growth. They benefited in terms of increase in volume arising from the new growing up milks segment for babies above a year old and toddlers, as well as in value through the development of premium varieties.

The Real Reasons why Prices Soared

Mother, faced with so many choices, must be pondering what brand of infant formula they should buy.

The choice they make is their prerogative. They usually listen to the advice from their friends, paediatricians, marketers and other influencers … and make their decisions based on their needs, preferences and beliefs.

Marketers accordingly segment the market into groups of mothers with different preferences, needs, values and beliefs, and they target different segments of mothers with the products that they desire.

If we were to investigate the increase in the price of infant formula across the segments in Singapore, it is unlikely that the average price of products within the segments has gone up by as much as 120%.

Twenty years back, the vast majority of the sale of infant formula comprised standard milk formula. Many of the premium infant milks marketed today did not exist at that time.

The real reason why the average price paid by mothers has soared is because today they have the option to buy these expensive products, and most of them are choosing to do so. The price of standard infant formula may also have increased, but not to the same extent, and perhaps not entirely out of line with inflation.

Consider this example. If more motorists buy Lexus and proportionately fewer motorists buy Toyota, the average price of cars sold by the Toyota Motor Corporation (which also makes Lexus) will increase, even if the price of both brands remains the same.

In relatively affluent markets like Singapore, where per capita incomes have been rising, consumers are increasingly willing to purchase goods that are more expensive. This results in an increase in weighted average purchase price of consumer goods. (Which, for sake of clarity, is not the same as inflation).

What is disquieting though is the magnitude of the increase in the average price paid by consumers for infant milks. Over the past decade, the weighted average price has been increasing at the rate of 8.2% per annum.

This strongly suggests that mothers perceive the premium brands as superior quality, and are willing to pay the higher price for the what many of them believe will benefit their child.

Lesson for Marketers

While we ought not to blame marketers for developing and marketing products that consumers prefer to buy, there is reason to question the perceived lack of involvement by infant milk manufacturers in educating consumers about the benefits of the less expensive standard products.

That eyebrows were raised suggests that the circumstances leading to the dramatic rise in the average price of infant formula should have been better managed.

What is lacking, specifically in this context, is the social mission. Not so much in substance, as in perceptions.

Those who are better informed are aware of some of the many social activities that infant milk companies engage in. Yet none of these activities is registering in the current debate.

While it makes commercial sense to market the premium varieties, manufacturers need to also play a more active and visible role in educating consumers about the benefits of all types of infant milks, including the less expensive standard products. They need to be seen giving authentic advice so that consumers make better-informed purchasing decisions.

What we are seeing however is that government authorities in Singapore are stepping in to educate mothers because they feel the manufacturers are not doing enough.

The resulting loss of trust and the negative publicity is likely to erode their brands’ equity.

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