BEIJING (AdAgeChina.com) -- Globally, the brand that will take the biggest hit from the melamine scandal is the "Made in China" brand itself.
Expect further ramp-ups in "country-of-origin" labeling for foods, including processed foods. Also, there will likely be stricter restrictions on imports from suspect sources like China. Customers around the world are now questioning the dependence our global supply chain has developed on Chinese manufacturers.
Although the earlier pet food and toy scandals were big news, in the end, they were limited to single suppliers or to areas that were less susceptible to consumer panic.
In the current melamine case, we are talking about the lives and future of children, and the basic sustenance that goes into their bodies. The emotional effect is visceral. Also, it has spread beyond any previous scandal, including countries such as Japan, South Korea, the U.K., the U.S., Africa and New Zealand.
The scandal could cause a number of global marketers, particularly those in the food processing sector, to reexamine their supply chain, investigate alternative supply sources, and perhaps start "China-free" ad campaigns.
This incident will likely have a beneficial effect on the organic foods sector though. It will support the growing interest in locally grown, unprocessed or minimally processed foods and strengthen s their claims to be safer and healthier than big, processed food products. Their market share should benefit at the expense of the global brands.
The effect of the melamine scandal on global brands will be minimal compared to the effect on Chinese brands. At least one Chinese brand, Sanlu, has already received the death penalty. There may be more to come.
Multinationals are at less risk for several reasons. They have stronger brands to begin with, thus better resistance. The problem extends fairly equally across all the major brands, so it's a systemic problem. Western consumers are baffled by supply chain problems, so it's easiest to blame remote Chinese suppliers.
Chinese manufacturers and exporters will certainly experience a broader, negative effect. Chinese government assurances will be less than comforting, considering several of the departments responsible for monitoring this scandal have also been called out by consumers in the tainted milk case.
At the end of the day, all food costs are going up. Global brands may rejig their supply chains to use alternative, less cost-effective sources, and then pass these increases on to the consumer. In addition, the increased scrutiny and testing will likely add to the final product cost, so expect higher costs at check-out for dairy products and other processed foods.
As the costs go up for global brands, this makes them less competitive against organic, local alternatives -- hitting global brands squarely in a weak spot. Global supply chains are surely cost- effective, but are notoriously hard to police for quality.
Multinationals can either absorb the higher cost and take lower profits, which is hard to do when margins are so thin, or raise prices -- thus putting their brands at risk against the organic alternatives.
The most successful brands will proactively respond to this incident by taking their own labeling steps. You may see the biggest brands introduce "pure" or "farm-fresh" product lines to offer customers an alternative that is guaranteed by the brand franchise, perhaps locally grown, organic or minimally processed. They will also initiate PR efforts to shore up customer confidence.
Trust is the foundation of the brand/customer relationship. No brand can afford to neglect this fundamental truth and survive.
Christopher Millward is the CEO of Firebrands, a Beijing-based consulting firm.
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