Dairy companies with winning formula in infant milk powders target Far East, writes Laura Slattery

BABIES ARE big business for the Irish dairy industry. With major infant milk formula manufacturers like Abbott, Wyeth and Numico within spitting distance, lapping up its milk powders, the Republic has become the biggest exporter of breast milk substitutes in the EU, shipping around 13 per cent of the world's formula supply.

Among Irish dairy companies, infant formula milk powder is now the oldest in their large and still expanding family of high-margin food ingredients, helping them "move up the value chain" of food production and into the one place they all want to be: China.

This week, Glanbia announced that its new human vitamin and minerals plant in Shanghai has begun taking orders from customers.

The dairy and ingredients group has long been a manufacturer of baby milk powders, but this plant will produce "the chip inside", explains group managing director John Moloney.

With 18 million babies born there each year - more than Europe, North America and South America combined - it is little surprise that dairy companies have their eyes firmly fixed on China for future profit nourishment, and are investing accordingly.

Although Glanbia's Shanghai plant, currently undergoing an "intensive" customer approval phase, will only provide "modest to begin with" revenues of €10-€12 million in the next year, the key words here would appear to be "to begin with".

Just as babies gradually wean themselves onto richer foods, Irish ingredients suppliers are diversifying their recipes for growth.

"Shanghai gives us a platform for the region and we will see what we can add to it," says Moloney.

Infant formula is a component of the group's wider strategy of spoon-feeding cash - up to €200 million this year - into its ingredients and nutritionals division.

At Kerry, the Republic's largest food company, which produces infant formula applications at its flagship plant in Listowel, it is a similar tale: its ingredients and flavours unit nurtures higher margins, faster sales growth and better profits than its UK and Ireland consumer foods operation.

Last year, Kerry secured double-digit growth (17 per cent) in sales revenue in the Asia-Pacific region, where it is merrily unconstrained by the kind of profit-denting cost recovery lag suffered by consumer foods businesses during the present period of steep "agflation", or inflation in the price of agricultural commodities.

Selling high-tech ingredients overseas puts companies in a better position to make hay from the stronger global dairy markets.

For the Dairygold co-op, which has gone so far as to spin its consumer foods business off into a separate entity, infant milk formula is also a natural fit.

Dairygold Food Ingredients' focus on the sector is "paying handsome dividends", according to commercial director Aidan Fitzsimons, with sales to China increasing 50 per cent in 2007.

Its export success is filtering through to the local economy in Mitchelstown, where Dairygold has invested more than €6 million in production facilities for formula ingredients in the last three months. A research and development centre is opening in April, while milk returns to local farmers are enhanced through the business's added-value nature, says Fitzsimons.

The Asian market is the "prime target", he says. Figures from Bord Bia show that infant formula exports were broadly flat in the first nine months of 2007 compared to 2006. But the total of €402 million includes major growth spurts in exports to the Philippines, Hong Kong and China. Exports to China were 70 per cent higher at €24.2 million, compared to €14.2 million in the first nine months of 2006.

Fitzsimons believes that China's one-child policy, rather than limiting sales, is actually creating demand for "premium quality, highly functional baby foods" and helping the market there grow by 20 per cent a year.

Under the "little emperor syndrome", each child is likely to have two parents and four grandparents lavishing attention on his or her welfare, and with diets across all ages fast becoming more westernised, that welfare emphatically includes infant milk formula.

"In China, people who didn't breast feed were using cow's milk, which is not appropriate. When formula became available, it was almost seen as a sign of the new world," says Michael Barry, director of the Irish Dairy Industries' Association (IDIA), a group affiliated to employers' body Ibec.

As economic progress goes, the trend will be dispiriting to breastfeeding advocates, who have worked tirelessly to encourage mothers to abandon the bottle in favour of the breast.

The infant formula industry has been scarred by marketing scandals and there is a long-standing international World Health Organisation code of practice in place. But the restrictions heighten one potential hiccup.

"In an industry that doesn't advertise, the competitor is not another brand down the road, but your sister plant operating in another country," Barry says.

With some manufacturers already stepping up capacity in places like Singapore that have lower labour and energy costs, the IDIA frets that the dairy ingredients industry could suffer just like any other export business.

What brought manufacturers here in the first place was Ireland's ability to produce natural, clean, high quality ingredients for a delicate, sensitive group of clients. But this could eventually be emulated elsewhere at a lower cost, forcing dairy processors to rely on the direct relationships they have forged with overseas manufacturers.

Existing supply relationships are giving the Irish dairy industry the exposure it needs to expand in Asia, however: "It is quite striking to see the origin of the raw material on the back of Chinese companies' products. On Abbott-made milk you would see Cootehill, Co Cavan, on the label." says Barry.

"There's nothing that beats having a customer on your doorstop," Fitzsimons notes.

But he is optimistic that the "intangibles" will anchor the pharma groups here, and that Ireland won't be hit by a case of the baby milk blues just yet.

Nestlé no no: marketing left a sour taste

SOME PEOPLE still don't buy Kit Kats because of Nestlé's controversial marketing of its baby milk products in developing countries since the 1970s.

It is alleged that Nestlé supported the distribution of free formula samples in hospital maternity wards and promoted its products as being nutritionally superior to breast milk. As formula must be mixed with water, which is often contaminated in poor countries, it increases the risk of death and health problems in babies.

Nestlé, which is both the world's largest food group and the largest producer of infant formula, is still stringently monitored by action groups, which is why it takes pains on its website to deny that it breaks international marketing codes.

New EU labelling rules will now require baby milk manufacturers to remove "prebiotic", "probiotic" and other health claims not backed by scientific evidence from their packaging by 2010.

"You don't market infant formula. It's not responsible to do so," says Michael Barry of the Irish Dairy Industries' Association.

"Formula is an alternative way to feed a baby where people can't breast feed. You should never have an expectant mother looking at an ad for bottle feeding."