Infant formula, pop-up shops and the future of Australian food

A few months ago, one of the little Chinese owned green grocers on Anzac Parade in Kingsford closed down. For those who do not know Australia, Kingsford is a Sydney suburb adjoining the University of New South Wales. It's a very large university, over 50,000 students, many of them Chinese who live in (the suburb's population is now 22% Chinese) or shop at Kingsford. Along the main restaurant and shop strip, the street traffic is 80% Asian, mainly Chinese. It's quite fun and there is some good food.

I said that one of the Chinese owned green grocers closed. It's place was taken by a pop-up shops trading as Amazing Health and Beauty. I said pop up shop, for this was an odd store. There were no displays in the window, nor much in the way of shop-fittings beyond some shelves of tins. Instead there were stacks of cardboard boxes waiting to be assembled and dispatched along with trestle tables. The place was always crowded with customers waiting for their boxes. Around the corner, I frequently saw a van being unloaded, with tins in particular being carted by trolley into the store. I hadn't seen anything like it before.

Over the next two months, five equivalent shops appeared, although none were as popular as the original. It took me a little while to work out what was going on. They were baby food shops, although they did sell more than that. Their customers were all buying to send to China.

I was actually in China when the tainted milk scandal broke in 2008. It would have been a scandal anywhere, but in a country with a one child policy the damage done to children through tainted infant formula was especially horrid. This led Chinese parents to look for new sources of supply  that they  knew were safe. With more scandals, demand spread to other products that was seen as safe and sensible. This process was assisted by the internet because this created new ways of sourcing product outside the conventional supply chains.

The growth in Chinese demand along with distrust of existing supply chains had considerable effect. Chinese parents wanted to buy premium product that they saw as safe. In doing so, they were as much influenced by branding and perception as anyone else.

The consequence was a demand surge for particular brands, along with a very large price differential between China and the source countries. This price differential was so great that you could buy supermarket retail in Australia and then sell it into China at a considerable profit. The profit was even larger if you could buy at wholesale and then shift.

The Australian pop-up shops were one outcome. This is a Melbourne example.

As demand surged, Australian mothers found themselves unable to buy their favourite brands in supermarkets because Chinese customers or those wishing to sell into China were plucking the product of the shelves for resale. This led to some outrage: here, here, here and here are examples.

You can understand the complaints. It's forced the big supermarkets into a degree of rationing. Mind you, the supermarkets have effectively been acting as wholesalers for some time for small stores and restaurants since they are generally the cheapest source for things like soft drinks. Each time there is a special, you will see trolley loads departing. But infant formula and especially the prestige brands is something new.

The impact of Chinese demand for high quality safe products is not limited to Australia, nor to infant formula.  In Ireland, Chinese demand for safe milk products has fueled dairy demand, with some infant formulas selling in China at up to four times the Irish price. In Australia, vitamin and health supplements company Blackmores saw its business (and share price) explode under the impact of Chinese demand. Now the company has entered the infant formula market..

This burst of Chinese demand will ease. The Chinese Government, for example, is already campaigning for breast feeding. New supply will enter the marketplace. Chinese producers will emerge with sufficient market standing and quality to meet local needs. However, baby formula remains an interesting case study of just what can happen when you get a sudden demand shift.

Australia is in an odd position. Australian customers have been buying imported product, food and other, because it is cheaper. This has adversely affected both Australian farmers and food processors. At the same time, the country's reputation for safety and quality is also creating premium product. Australia is not alone here, of course, for it is in competition with other advanced countries including New Zealand and European suppliers. Still, we have the situation where significant parts of our agricultural sector have been struggling while other parts display growth.

Both Australian and New Zealand have traditionally been exporters of bulk commodities. New Zealand made the shift to more specialisation and product differentiation before Australia, but Australia is now following that route. The process is not an easy one. It's easy to forget, for example, that not so many years ago diary products were a low growth area. Nobody foresaw the boom that would follow, nor can we assume that that boom will last. Just the opposite, in fact. There may be a boom in infant formula, but the overall dairy market is well down from its peak.

In Australia, the supermarket wars have given us cheap bulk milk, but at the cost of reduced Australian production. Further, faced with reduced margins, all the diary companies have been looking to diversify, to reduce their reliance on bulk milk. In a way, both the supermarkets and consumers have been sowing the whirlwind. In forcing diversification, the supermarket chains are in fact destroying the monopsony on which their market power has rested.

Australians have been used to cheap foodstuffs. That age is coming to an end. Lamb, for example, has already become a luxury foodstuff for many households. Beef is following the same route. Only mass produced chicken remains a cheap meat.

I suspect that the women presently complaining about the shortages and prices of infant formula should regard this not as an immediate outrage, but as a symptom of what will happen across food as Australian prices come to be set by the global market rather than local production.