---
title: "2016 China Dairy Market Outlook"
description: "By Feng Weifang, Strategy Director of Shanghai Mingtai Mingguan Dairy Marketing Consulting Co., Ltd. Reviewing 2015, the Chinese dairy market experienced weak growth and companies sought breakthroughs. Market growth across all categories was lower than the same period in 2014, with some companies seeing declines; high-end white milk saw frequent cash rebates, gifts, and price cuts; low-end white milk sold at a loss; even the low-temperature fresh milk category, once a growth leader, saw negative growth; flavored milk, children's, and middle-aged/elderly categories also declined. Looking at breakthroughs: key categories grew for major companies like Yili, Mengniu, and Bright; yogurt innovation continued; giants invested heavily in entertainment programs; and the internet became a composite of promotion and channels. Grasp the trends, master the future! Where will China's dairy industry go in 2016? Based on the current domestic situation, this article proposes ten major market trends."
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published: "2016-01-28"
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# 2016 China Dairy Market Outlook

> By Feng Weifang, Strategy Director of Shanghai Mingtai Mingguan Dairy Marketing Consulting Co., Ltd. Reviewing 2015, the Chinese dairy market experienced weak growth and companies sought breakthroughs. Market growth across all categories was lower than the same period in 2014, with some companies seeing declines; high-end white milk saw frequent cash rebates, gifts, and price cuts; low-end white milk sold at a loss; even the low-temperature fresh milk category, once a growth leader, saw negative growth; flavored milk, children's, and middle-aged/elderly categories also declined. Looking at breakthroughs: key categories grew for major companies like Yili, Mengniu, and Bright; yogurt innovation continued; giants invested heavily in entertainment programs; and the internet became a composite of promotion and channels. Grasp the trends, master the future! Where will China's dairy industry go in 2016? Based on the current domestic situation, this article proposes ten major market trends.

By Feng Weifang, Strategy Director of Shanghai Mingtai Mingguan Dairy Marketing Consulting Co., Ltd.

Reviewing 2015, the Chinese dairy market experienced weak growth and companies sought breakthroughs. Looking at market growth: both the overall industry and category growth were lower than the same period in 2014, with some dairy companies seeing performance declines; high-end white milk saw frequent cash rebates, gifts, and price cuts; low-end white milk sold at a loss; the low-temperature fresh milk category, once a growth leader, saw negative industry growth; flavored milk, children's, and middle-aged/elderly categories also saw negative growth; infant formula entered an era of thin profits and negative industry growth. Looking at breakthroughs: key categories saw higher growth rates for companies like Yili, Mengniu, and Bright; yogurt category innovation continued, with companies hoping to increase product added value to improve gross margins; dairy giants invested heavily in entertainment programs; the internet gradually became a composite of promotion and channels for dairy companies.

Grasp the trends, master the future! Where will China's dairy industry go in 2016? Based on the current domestic dairy situation, this article proposes the following ten major market trends:

From the first half of 2015 to August, raw milk prices remained low and stable, hovering around 3.4 yuan/kg, with a rebound starting in September. According to the Ministry of Agriculture's fixed-point monitoring, in the third week of December, the average price of raw milk in 10 major dairy provinces including Inner Mongolia, Hebei, and Shandong was 3.54 yuan/kg. From January to November 2015, China imported 512,400 tons of milk powder, a year-on-year decrease of 43.59%, with an import value of $1.41 billion, a decrease of 67.30%. Based on the recovery trend of raw milk prices in the second half of 2015, the volume of imported milk powder, and the current development of various categories, we predict that raw milk prices will continue to rise steadily in 2016, reaching around 4 yuan/kg by year-end. In response to rising raw milk prices, basic products will see price increases, and high-end products will continue to rise. The increase in raw milk prices, through the basic gross margins required by the industry chain and sales links, will lead to higher terminal retail prices, and companies will shift from price wars on basic products to focusing on promoting high-margin items. At the same time, rising raw milk prices will encourage companies to increase retail prices through product innovation and added value, so high-value-added, high-margin products will become key R&D and promotion items. In 2016, product structural adjustment will become the driving force for dairy company growth. However, price wars will not disappear; in 2016, price wars and value wars will coexist long-term. In response, we suggest that dairy companies, while adjusting product structure, still need to pay attention to market competition for basic products and formulate reasonable periodic promotional activities.

Mengniu's Milk Deluxe and Yili's Weikezi officially introduced diamond-shaped packaging to the dairy market. Now, diamond-pack pure milk, flavored milk, and dairy drinks are no longer rare and have become high-margin products for dairy companies. Mosilian opened the ambient yogurt era, and together with Yili's Anmuxi, Mengniu's Pure Zhen, and Junlebao's Kaifeier, they form the "Four Golden Flowers" of diamond-pack ambient yogurt, sparking a domestic ambient yogurt craze. Since then, diamond packaging seems to have become a natural attribute of ambient yogurt. Although due to production line constraints, some dairy companies have launched slim-brick ambient yogurt (e.g., Jinhe Dairy's "Aladdin Legend" ambient yogurt, Wahaha's children's ambient yogurt "Children's Cheese Yogurt"), they have not become mainstream. More and more dairy companies are either introducing production lines or seeking OEM to launch diamond-pack ambient yogurt and ambient yogurt drinks. Guangxi Huangshi launched diamond-pack "regular ambient yogurt" and "women's ambient yogurt" in 2014; Shengmu launched diamond-pack "original organic ambient yogurt" in 2014 and "sea buckthorn organic ambient yogurt" in the second half of 2015; Tianyou Dairy launched diamond-pack ambient yogurt "Greek Myth"; New Hope Dairy launched diamond-pack ambient yogurt "Flower Yogurt" and "Lihai Yogurt"... At the same time, some dairy companies have applied the ambient yogurt concept to yogurt drinks, launching diamond-pack ambient yogurt drinks (with protein content lower than regular yogurt but higher than regular dairy drinks, such as Shanghai Guanneng Biotechnology's "Royal Yogurt"). Conservatively estimated, dozens of dairy companies have launched or are preparing to launch ambient yogurt and ambient yogurt drinks. In 2016, the number of SKUs for diamond-pack ambient yogurt and ambient yogurt drinks will multiply, and the prosperity of this category may attract special recruitment at the Spring Sugar and Wine Fair. This is an opportunity for regional dairy companies, but the appeal of the product concept is key!

Data shows that in 2015, the low-temperature yogurt category ranked among the top three in growth rate (first is ambient yogurt, second is ambient high-end white milk), leading the low-temperature industry's growth. Analyzing low-temperature categories, we find: Lactic acid bacteria drinks: retail prices are similar across companies, and although companies are still committed to deep product concept mining, price wars are intense. Fresh milk: besides Bright, Sanyuan, and New Hope, the main players are regional dairy companies, with relatively few competing brands; since the ingredient list only includes raw milk, apart from pasture, time, temperature, and process, the space for product concept mining is relatively small. For low-temperature yogurt, it has the following characteristics: First, product prices span a wide range, covering low, medium, and high price points, and in terms of product responsibility, it can cover blocking products, volume products, profit products, and image products; second, the product category is rich, from basic yogurt, probiotic yogurt, fruit yogurt to snack yogurt, with rich and segmented categories; third, the space for product concept mining is large, and besides pasture, process, and strains, any additive can become a selling point and source of profit, with large room for category innovation. In recent years, in terms of category innovation alone, low-temperature yogurt has evolved from common regular yogurt, through the old yogurt of 2010-2011, the city memory series of 2012-2014, and the brown yogurt, concentrated yogurt, and Western-style yogurt of 2014-2015, with increasing product differentiation and added value. Therefore, we predict that in 2016, low-temperature yogurt will continue to lead the low-temperature industry's growth, and category innovation will continue to exert force.

In China, "North has Wanjia Bao, South has Kashi," these are two typical high-end yogurt brands, and their product strategies and profit models are worth studying for regional dairy companies. In 2015, despite intense price wars, with some markets seeing fresh slim-brick pure milk retailing for less than 20 yuan per box, or even with a free box of ambient flavored dairy drink on top of a 30 yuan box, ambient high-end white milk still led industry growth (except ambient yogurt). Data shows that from January to September 2015, high-end white milk sales reached 11.12 billion yuan, a year-on-year increase of 17.7%. Since Mengniu's Telunsu ignited the ambient high-end white milk market, together with Yili's Jindian, Shengmu's full organic milk, and Modern Farming, they formed the four major domestic high-end white milk brands, prompting regional dairy companies to launch their own high-end white milk. Competition in high-end white milk has become increasingly fierce as the number of brands increases. At the same time, high-end white milk packaging has shifted from ordinary "skylight" style to "gift box" style. In the past two years, led by national big brands, high-end white milk has moved from domestic to organic fully imported, such as Mengniu Telunsu Global Selection and Yili Jindian Organic Imported Milk. Some regional dairy companies have also begun to follow suit, launching fully imported organic pure milk, such as Yinqiao Dairy's Sunshine A+ fully imported pure milk. National big brands and regional strong brands are doing fully imported high-end white milk, and the number of brands is increasing. For small and medium-sized regional dairy companies, whether in terms of brand power or product concept (single "pasture concept," "process concept," "Jersey cow concept," etc.), it is difficult to compete with fully imported high-end white milk. Looking at industry growth trends, we predict that in 2016, high-end white milk will continue to lead industry growth. For regional dairy companies, deeply mining product concepts may be the way out for regional high-end white milk.

If yogurt is divided into basic yogurt, regular probiotic yogurt, advanced probiotic yogurt, fruit yogurt, and snack yogurt, snack yogurt is undoubtedly the fastest-growing category. The main sales channels for snack yogurt are tourist attractions, supermarkets, and convenience stores, with convenience stores being the fastest-growing channel. Tourist attractions, due to their relatively large daily foot traffic, naturally have high single-store sales, such as Beijing Nanluoguxiang Wenyu Cheese's double-skin milk and Shanghai Nanjing Road's Shanghai Memory porcelain bottle yogurt. However, since daily foot traffic and the number of sales outlets are relatively fixed, overall sales are hard to increase significantly. Supermarkets, as the commanding heights of dairy sales channels, have two obvious characteristics: First, they carry a relatively complete range of items, covering low, medium, and high ends. Snack yogurt generally has a relatively high unit price per 100g (small net content, high retail price), which puts it at a significant price disadvantage compared to common regular yogurt. Second, supermarkets have the characteristic of one-stop shopping, suitable for bulk or family purchases. The immediate consumption or snack nature of snack yogurt, to a certain extent, does not match the one-stop shopping characteristic of supermarkets. Therefore, supermarkets are not the best sales channel for snack yogurt. Convenience store channels are increasingly favored by snack yogurt for the following reasons: First, the immediate consumption or snack nature of convenience stores matches snack yogurt; second, the number of convenience store outlets is increasing, so sales naturally rise quickly. Taking Shanghai convenience stores as an example: currently, FamilyMart has about 1,150 stores, Lawson about 350, C-Store about 350, and 7-11 about 70, and the number of outlets is still growing each year. The large convenience store system is generally located at community entrances or next to office buildings, becoming peak places for office workers' daily commutes and lunches, naturally becoming a favored channel for snack yogurt. At the same time, with the development of the convenience store system, channel costs are also increasing, and there is a trend toward "exclusive sales." Taking FamilyMart as an example, the system often requires products to first enter FamilyMart and achieve good sales before entering other convenience store systems. Snack yogurt will increasingly favor convenience store channels, prompting dairy companies to increase channel costs, which requires them to develop high-margin bestsellers to adapt to the increase in channel costs.

Affected by the "Year of the Sheep baby," the impact of "100-yuan milk powder e-commerce," the surge in imported infant formula brands, and the increasing transparency of infant formula prices, in 2015, despite price wars, the domestic infant formula industry still saw negative growth. In 2016, the arrival of "Year of the Monkey baby" and the opening of the "two-child policy" have given infant formula manufacturers hope. Dairy industry insiders say that the opening of the two-child policy will bring a 20% increase in the infant formula market. Based on the current 16 million newborns and a nearly 70 billion yuan formula market, the full opening of the two-child policy will bring at least 14 billion yuan in market increment. However, facing this 14 billion yuan increment, what will be the growth situation for domestic and imported formula? We predict that in 2016, the infant formula market will see a certain degree of recovery. In terms of stock, domestic formula still has an advantage; in terms of increment, imported formula will increase its share. In 2015, the China Food and Drug Administration designed new regulations for infant formula: products of the same age group registered by the same company must differ by more than 6 nutritional elements; directly stipulating that companies cannot have more than 5 series or 15 formulas. At the same time, in addition to imported infant formula brands, overseas purchasing agents and cross-border e-commerce are quietly rising, encroaching on existing and new infant formula markets. In response to the above, how will domestic infant formula brands effectively compete in 2016? Suggestions: First, continue to strengthen research on breast milk databases to develop infant formula more suitable for Chinese babies; second, strengthen the marketing team of infant formula manufacturers, making joint efforts in channel policies, consumer promotions, and e-commerce platforms; third, accelerate diversified transformation and expand into the nutrition field.

In earlier years, the Beijing, Shanghai, Guangzhou, Shenzhen, Hong Kong, and Macau markets seemed out of reach for regional dairy companies: high channel costs, concentrated first-tier brands, serious local protection, and local brand monopolies. In the past two years, however, there has been a trend of second- and third-tier brands seizing the Beijing-Shanghai-Guangzhou markets, and national brands seizing second- and third-tier markets: not to mention Tianjin Haihe Dairy and Tianjin Huaming Dairy around Beijing, and the Northeast's Wandashan Dairy entering the Beijing market. Hebei New Hope Tianxiang Dairy entered the Beijing market in 2012 with the "banana whirlwind" opportunity, and in the past two years, Tianxiang's other high-margin products have begun selling in Beijing, such as Beijing Memory, Huorun yogurt, and Weiliyouji. Inner Mongolia Xueyuan Dairy, with its differentiated product "Langege" in 2014, achieved "zero-awareness dairy company attacking megacities," and in 2015, it distributed "Mongolian cooked yogurt" in Beijing. East China has become a key expansion market for dairy companies from the Northeast, Northwest, and South China in recent years. Shanghai, as the core market of East China, naturally becomes a target for dairy companies. New Hope Shuangfeng, due to its superior geographical location, naturally can "get the moon first"; New Hope Tianxiang, with the help of its sister company Shuangfeng's channel strength, has also brought its 370g transparent packaging Huorun yogurt to the Shanghai market; Shenzhen Kashi, represented by high-end yogurt products, has also entered the Shanghai market; even the little-known French Yoplait has entered the Shanghai market and started supermarket channels. The Guangzhou market is no exception; New Hope banana milk series and various regional dairy companies' ambient lactic acid bacteria drinks have long entered the Guangzhou market. Looking at national brands, market sinking and channel sinking have become their main market strategies in recent years. Not to mention that basic white milk, flavored milk, and dairy drinks (such as Mengniu and Yili's basic pure milk, Suansuanru, and Yousuanru) have long been everywhere, national brands' high-end white milk has become the first choice for gifts in towns and rural markets, and ambient yogurt follows the distribution route of high-end white milk, with growth in second- and third-tier markets exceeding that in first-tier markets. Summarizing the main competitive strategies of second- and third-tier brands attacking Beijing-Shanghai-Guangzhou: First, strong product differentiation and high gross margins; second, selecting quality distributors and using their networks for distribution; third, preferring convenience store channels first, with supermarkets second. National brands seizing second- and third-tier markets adopt a follow strategy: high-end white milk follows basic products, and ambient yogurt follows high-end white milk.

When it comes to e-commerce, what we usually know about Taobao Mall, WeChat Mall, JD.com, 1号店, and apps are all e-commerce models. For dairy companies, some operate their own e-commerce platforms or hire third parties, and some distributors also conduct online sales. For the infant formula industry, e-commerce has become an important sales platform for manufacturers and the fastest-growing channel among the three major channels: mother-and-baby stores, e-commerce, and supermarkets. For liquid milk, from imported milk to domestic milk, the growth rate of e-commerce channels continues to rise. At the same time, e-commerce platform anniversary celebrations, Double 11, and Double 12 activities have become peak periods for annual sales growth in e-commerce channels. We predict that in 2016, the growth rate of e-commerce channels will continue to rise, and more and more products will be specifically designed for e-commerce channels. In response to the development of e-commerce, we suggest that regional dairy companies can use ambient specialty categories as an entry point to achieve differentiated competition and drive sales of their popular categories.

Since 2012, glass bottles have returned to the public eye, and regional dairy companies have resumed the milk delivery channel. The development of the milk delivery channel has gone through home delivery, self-pickup, self-service milk vending machines, and online ordering. Now, cooperation with third parties for O2O has become a new model for dairy companies' milk delivery business. The so-called "dairy companies build their own online milk ordering platform and cooperate with third parties for O2O" means that dairy companies build an online milk ordering platform, consumers order milk online, and then pick up milk at nearby offline stores. The third party refers to the offline pickup stores. Weigang Dairy launched this business model in 2015, cooperating with Suguo convenience stores to build a subscription channel. The O2O model combining online platforms with offline stores achieves "buy online, pick up nearby," which not only meets consumers' convenience needs, allowing them to pick up milk at any time during store hours; more importantly, storing products in offline store refrigerators better ensures product quality than leaving them in milk boxes at home. In the future, "omnichannel retail" based on O2O will become a major trend in the entire retail industry, and regional dairy companies operating milk delivery businesses can try it.

Want Want Group invested about 700 million yuan in Hunan to build a large dairy production base, which will be operational in 2016. From Want Want milk → Want Want children's pure milk → Want Want yogurt, this marks that Want Want is no longer just a hidden champion in the children's category but is officially entering the liquid milk industry and expanding regionally. In 2015, New Hope Dairy began its second round of national expansion, acquiring Suzhou Shuangxi, Hunan Nanshan, and Xichang Sanmu. Industry insiders say that New Hope Dairy is trying to lay out the Yangtze River Delta region through cooperation with Suzhou Shuangxi; through cooperation with Nanshan, enter the bridgehead of South China; and through cooperation with Xichang Sanmu, achieve coverage of the Panxi Corridor, seamlessly connecting Sichuan and Yunnan markets, forming an absolute advantage in the Southwest. From then on, New Hope Dairy gradually evolved from a regional fresh milk supplier to a national fresh milk supplier. On November 24, 2015, New Hope Dairy signed a strategic agreement with China Telecom's wholly-owned subsidiary, Tianyi E-commerce Co., Ltd., in Beijing to carry out close cooperation in the field of internet finance—free milk for business. New Hope Dairy hopes to accelerate its national layout in liquid milk through cross-industry cooperation. In today's domestic dairy market, Yili and Mengniu's ambient milk almost dominate the main liquid milk market nationwide, while Bright, Sanyuan, and others hold the low-temperature fresh milk market. For regional dairy companies to achieve rapid expansion, the possibility of success through fighting alone is already very small. Investing in factories, mergers and acquisitions, and cross-industry cooperation may help them expand rapidly.

Summary

In 2015, China's dairy market saw low growth. Where will it go in 2016? Raw milk prices will rise steadily, and product structural adjustment will become the growth driver; diamond-pack ambient yogurt and yogurt drink SKUs will multiply, and the Spring Sugar and Wine Fair may have special recruitment; low-temperature yogurt will continue to lead the low-temperature industry's growth, and how to achieve category innovation; high-end white milk will continue to lead industry growth, and how to mine product concepts to counter fully imported milk; how snack yogurt operates in convenience store channels; how domestic infant formula brands will effectively compete in 2016; how second- and third-tier brands attack Beijing-Shanghai-Guangzhou, and how national brands seize second- and third-tier markets; how regional dairy companies operate O2O for milk delivery channels; investing in factories, mergers and acquisitions, cross-industry cooperation... may become major issues facing dairy companies in 2016.

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