SHANGHAI (Reuters) - A unit of French food group Danone SA (DANO.PA) said on Monday it opened an investigation after Chinese state TV reported that it bribed medical staff to boost sales of its infant formula at hospitals in a number of regions across northern China.
The latest allegations follow a report by China Central Television (CCTV) last week that Dumex, Danone’s milk powder business, bribed staff in a single hospital in the northern city of Tianjin to give its milk powder to new-born babies. Dumex said it expected to have a report ready by early next week.
China is a magnet for foreign milk powder makers, with the country’s $12.4 billion market expected to double by 2017. But foreign firms are under scrutiny after recent media reports alleging corrupt sales practices in the industry. Authorities last month fined a group of mostly foreign milk powder producers $110 million for price fixing.
CCTV quoted an unnamed whistleblower with computer records showing Dumex spent nearly 500,000 yuan ($81,700) in April alone in bribes to medical staff in seven provinces in northern China.
The records detailed the names of recipients, the amounts given and the cities where each transfer took place. Images from the report showed the amounts of each transfer ranged from 100 yuan to several thousand yuan.
“Without (our bosses’) approval, we wouldn’t be able to do this sort of thing,” the whistleblower told CCTV.
Similar reports were carried in a number of official newspapers on Monday, including the Beijing Times and the China Youth papers.
“Dumex started the investigation as soon as we saw the news, and the report should be ready by October 1,” the company said in a statement emailed to Reuters, declining to comment on whether senior staff in China were aware of the payments.
“Dumex has a strict policy prohibiting any staff or dealer to promote infant formula milk powder in hospital channel(s) ... If any employee has any illegal behaviors, we will take decisive and stringent measures to prevent and correct.”
Milk powder firms typically spend close to 5 percent of their revenue opening medical sales channels, a separate report in the 21st Century Business Herald newspaper said, citing a China-based former employee at a foreign milk powder brand.
Last week’s CCTV report on Dumex said milk formula makers were bribing medical staff to recommend their products to new mothers. International guidelines used in China say doctors should promote breastfeeding unless there are medical reasons not to.
Milk powder is a sensitive issue in China after a scandal in 2008 when the industrial chemical melamine was added to baby milk and killed at least six children and left thousands ill.
This damaged the reputation of local firms and boosted the market share of international brands, who now account for close to 80 percent of the infant formula market in China’s major cites such as Beijing and Shanghai, and around 50 percent in second-tier cites, according to data from Rabobank.
The escalation of the corruption allegations in Chinese media and the pressure over pricing is a potential warning sign that China’s resolve to nurture home-grown milk powder producers is hardening, some analysts said.
“(The government) should create an equal playing field for both foreign and Chinese companies so they can compete at the same level. This is obviously not what is happening now,” said Sandy Chen, senior analyst for food & agribusiness at Rabobank.
“I wouldn’t say these are pure coincidences. If you are trying to consolidate the market, provide support to domestic producers, and re-boost confidence in domestic brands, it obviously all adds up.”
Chinese milk powder makers including Inner Mongolia Yili Industrial Group Co Ltd (600887.SS) and China Mengniu Dairy Co Ltd (2319.HK) are set to get 30 billion yuan ($4.9 billion) in official funds to support sector consolidation, recent Chinese media reports said.
Hospitals were an important sales channel for milk powder makers because doctors could have a significant impact on which milk powder brand mothers ultimately buy, said Chen.
China accounted for a fifth of the total revenue for Danone’s baby-nutrition division in 2012. Danone had a 9.2 percent share by retail value of China’s infant formula milk market last year, according to market research firm Euromonitor.
Chinese authorities have been cracking down in recent months on graft in various industries, especially the pharmaceutical sector. Autos, telecoms and banks might come next, regulators have suggested.
Editing by Dean Yates and Ian Geoghegan