In 2008, contamination of baby milk formula with melamine in the People’s Republic of China shockingly lead to the death of at least six infants and the poisoning of an estimated 300,000. Consumer trust of Chinese dairy products consequently plummeted whereas consumer trust in Western European dairy products increased. What followed is a bizarre example of globalised capitalism.
Nutricia, the largest producer of baby milk formula in the Netherlands produced sufficient amounts of the product for the Dutch market. The Dutch market was saturated and growth was mostly sought in foreign markets. Dutch prices for baby milk formula were relatively fixed and units were sold at retailers without a premium as a service to the customer, resulting in boxes being sold for around 10 euros per box.
In China, a box of Nutricia’s Nutrillon goes as much as 100 euros per box (a profit margin of over 700%). Expats and students in Europe started bringing boxes of baby milk formula home for their family. However that quickly escalated into an immensely profitable black market in which freelancers could react to targets posted on special websites, get the cash to buy the baby milk formula, and deliver the products to China either by plane or ship.
Within a month the supermarkets in metropolitan Netherlands saw their demand multiply by as much as 10,000%. Local branches of the larger retailers, driven to meet their revenue targets, quickly responded and competed heavily with one another to be able to supply as much as Nutrillon as possible. They started selling carts full of the white powder through the backdoor, sometimes receiving as much as 10,000 euros per batch and churned out multiple batches per week. The retailers were happy and the Chinese buyers came back in fancier cars each month. This was in 2010-2011.
However, the market quickly institutionalised and specialist buyers began scavenging the supermarkets for boxes of Nutrillon. The most important change in the market was that larger buyers started to skip the middleman and go straight to the producer, Nutricia. Containers full of baby milk formula were now being sent straight from the factory to China at higher prices.
The larger Dutch retailers could not (or refused to) compete with the prices the Chinese importers were paying Nutricia. Local branches started ordering as many as they could from the manufacturers in order to gain access a greater supply of this cash cow. Overall, the inflow of the white powder stopped. Yet the gap between supply and demand was still too large and empty shelves became a common sight.
What is shocking about this story was that it was only picked up in early 2013 by the mainstream media; over two years after the market was actually hit and only after a news story emerged in the UK that baby milk formula there was being ‘rationed’. It was only in May 2013 that the Dutch government actually started talking to the stakeholders including the Chinese government. Moreover, most media coverage only briefly and superficially mentions the supply and demand gap and the baby milk formula being shipped to China. The actual in-depth developments within the market remain largely uncovered.
In any case, mothers dependent on premium baby milk formula now are left wanting (of course, there is always the alternative of breastfeeding or buying a different brand). The consumers are angry. Nevertheless, nothing illegal is being done here: there are no import/export restrictions on this particular type of white powder and none are likely to be put in place any time soon. The aforementioned Dutch government officials meeting with their Chinese counterparts last May probably only resulted in the Chinese officials laughing out loud when the Dutch were out of earshot.
Had the media actually carried out their jobs properly, the story would have been covered earlier and perhaps more pressure could have been put on the industry to solve the issue. While the industry reports increased production, the only effect the consumer see is increased, and in some cases doubled, prices.
The bigger picture is the most interesting facet of this situation. This story can be extrapolated. Over two billion people live in China and India combined. Two billion people who previously were largely unable to afford luxury consumer products. Sadly, most of these people will remain unable to do so in the near future, but at an increasingly high rate more and more people are climbing the ladder of economic status due to economic growth. This results in an explosive demand for luxury products in atypical markets which often lag behind the realised economic growth (for example, the increased demand in meat, one of the main causes of the ongoing food price crisis).
Long-term traditional market mechanics can smooth out these wrinkles. And yet, freak events like the melamine scandal can disrupt these natural processes, resulting in situations like Dutch produced items being unavailable in the Netherlands. Now imagine a situation like this arising with a vital medicine for example. In any case, let us all hope the Chinese will learn to trust their domestically produced baby milk formula again – young Dutch mothers would be very, very happy with that.