Sour times

Milk slump sends warning on China consumer froth

A year ago, China's thirst for milk was the great white hope for dairy companies. Now the froth has started to subside. A profit warning from Hong Kong-listed infant formula maker Yashili shows the dangers of investing based on broad consumer trends.

At first glance, the halving of Yashili's shares in just over a year doesn't square with the consumer reality. Food scares and an expanding middle class have driven China's consumers to prefer foreign powdered milk. The overall market is set to double in the four years to 2017, according to Euromonitor. Yashili's appeal, and one reason French dairy group Danone has bought a 25 per cent stake in the company, was that it sources its raw material overseas, so can charge a premium. State pledges to consolidate the milk market should if anything help support Yashili's value.

The trouble is that markets and suppliers got ahead of themselves. Imports of whole powdered milk in China are likely to fall 12 per cent in 2015, according to the US Department of Agriculture. The price of the stuff has sunk by over 50 per cent over the past year. Customers are as thirsty as ever, but suppliers now need to work through their inventories, and worry about increasing domestic production. Yashili's profits are set to fall 40 per cent this year. Babies still need milk, but producers forgot that what's rational for one company is the opposite when all join in.

Too-great expectations have set in elsewhere too. Li Ning, a sportswear brand, is still reeling from stuffing retailers with stock they now can't sell. It also warned on profits last week. Auto manufacturers are having to compensate car dealers who filled showrooms in the expectation that auto sales would keep climbing rapidly. For them, estimated 7 per cent demand growth in 2015 is a disappointment, and a financial headache.

The Chinese consumer is still rising. Retail sales grew 11.7 per cent year on year in November, while average wages are likely to have increased by 10 per cent in 2014. But investment based on demographics and broad economic trends is a poor way to generate sustainable returns. What looks irresistibly fresh today can curdle by tomorrow.