China's Mengniu Dairy Recovers

Mengnuu Dairy Co, a onetime stock market darling that was at the center of one of China’s worst food scandals, announced Thursday that it is once again distributing milk products in Hong Kong after a three-year absence.

The company says its products have passed stringent heat preservation and other tests and have obtained quality hygiene certificates from mainland authorities. The Hong Kong Food and Environmental Hygiene Department are also responsible for assuring quality and safety, according to a news release.

Hong Kong's Center for Food Safety (CFS) said in an email that permission had been granted in October for the import of two Mengniu products and that imported consignments hadbeen inspected and released in November.

In 2008, the Inner Mongolia-based Mengniu, which is privately owned and publicly traded, as well as some of China’s other biggest dairy companies including the state-owned Yili and Yahsli were found to be distributing milk and infant formula and other food products adulterated with melamine, an industrial resin used in a wide variety of laminates, glues, adhesives, molding compounds and other substances.

Mengniu, which paid some of China’s highest prices for raw products, was buying from dairies that were adulterating the milk with melamine in a bid to boost protein content. By November of 2008, an estimated 300,000 children were victims, with six dying from kidney stones and other kidney damage and another 860 babies hospitalized.

The resultant scandal caused a crisis of confidence in China’s food distribution system from which the country still is attempting to recover. Authorities were accused of covering up the scandal for months to avoid national embarrassment in advance of the 2008 Olympic Games.

Three years later, middle-class Chinese consumers still tend to shy away from domestic milk products, instead looking for safety in western products, according to a study by Synovate Global Market Research. Indeed, as late as July 2010, authorities said they were still seizing melamine-contaminated products in some provinces. It was unclear, however, whether the contaminations were new or resulting from illegal resale of products from the 2008 scandal.

A wide variety of western chains stopped buying Chinese milk products including KFC, McDonalds and Starbucks, which replaced its Mengniu product with soy milk. The market share of foreign brands including Meadjohnson, Dumex, Abbott, and Wyeth soared. A US baby milk powder brand called Bright Beginnings reported sales volume had rise by 600 percent during the first week after the scandal was reported. Eleven countries announced they were stopping all imports of Chinese food products.

A dairy farmer who added the substance to the milk and a salesman who peddled it were executed, three were given life sentences and two more were given 15-year sentences. However, in many cases the families of the children who were affected are still trying to win redress. Officials of Sanlu, the biggest distributor selling milk products to the retail dairy operations, have never been charged or arrested despite the fact that melatonin levels found were among the highest. That has awakened charges that the company was being protected by officials.

In addition, the issue raised far wider concerns in China about the adulteration of lots of different food products including exploding watermelons caused by farmers who used chemicals to promote faster growth, bean sprouts treated with chemicals to make them grow faster, dumplings and steamed buns found to have levels of aluminum far above national standards, pork laced with the steroid clenbuterol to produce lean meat, and many others.

In February this year, reports surfaced that other dairies were using leather-hydrolyzed protein which, like melamine, boosts the protein content of milk. That report resulted in China’s closure of large numbers of dairies, some found to have with up to five times the legal limit of the substance.

The process of recovery for Mengniu has been long and painful. The company estimated a 2008 loss of 900 million yuan from inventory write-offs, plunging sales and damage-control expenditures. The company’s shares, trading at HK$35.80 per share at their 2007 peak, fell to HK$6 before recovering to hover at around HK$9. The shares have since recovered to trade in the HK$26 range.

After the scandal, Mengniu's spent a fortune on advertisements on CCTV, the country's largest TV station, and on outdoor billboards in major cities. It also invited consumers from all over the country to visit its farms and observe the milking process in the attempt to regain trust.

Mengniu said it had pledged US$100 million to upgrade the sources of its milk, investing in small and midsize ranches and dairy farms that it determined it could trust, In an attempt to build quality control, the company said in a prepared release, it has focused on constructing ranches and managing production to seek to maintain product quality. The Group recorded an annual turnover of RMB30 billion in 2010.

None of the scandal was mentioned in the press release issued yesterday announcing Mengniu’s return to Hong Kong. The products, the company said, are being delivered from Inner Mongolia to Hong Kong gradually and have been put on shelves at more than 80 stores. The products are also to be put on shelves at another 90 stores within a month, making a total of more than 170 sales points. That is eventually expected to rise to 400 with the inclusion of Park'N Shop, retail stores and pharmacies. In Macau, Mengniu products are expected to be available for sale within two weeks.

In recent years, Mengniu has focused on constructing ranches and managing production to enhance product quality in every stage of production, with the aim to serve consumers and build strong market awareness in the mainland market.

The group's diversified products range includes liquid milk products, such as UHT milk, milk beverages and yogurt, ice cream and other dairy products such as milk powder. In June 2011, the Group's annual production capacity reached 6.76 million metric tons.