Click to read the original article for details Introduction: The existence of premium milk satisfies the needs of consumers with higher purchasing power. However, from the perspective of industry development trends, this is more like a 'transitional product.' The biggest problem facing Chinese dairy companies remains the strong challenge from imported milk. "Not all milk is Telunsu." This blockbuster product has maintained sustained high growth since its launch ten years ago, and by 2016, it had achieved annual operating revenue of over 10 billion yuan. Due to the high-end reputation accumulated through marketing and communication, most Chinese consumers have accepted Telunsu's 'high-end, high-price' positioning. Besides drinking it themselves, it has also developed a certain gifting function. During festivals and when visiting patients, many people bring two boxes. The high price (250ml*12 boxes about 70 yuan), coupled with good sales, has brought high profits to Mengniu. Some have calculated that Telunsu accounts for about 70% to 80% of Mengniu's total profits. Based on its 2015 annual profit of 2.367 billion yuan, this single product's annual net profit is as high as about 1.7 billion yuan. Driven by Telunsu's huge profits, a new product system emerged in China's dairy industry: premium milk. Yili quickly launched the 'Jindian' series, Sanyuan launched 'Jizhi,' and Bright Dairy launched 'Youjia.' Meanwhile, Mengniu's Modern Dairy and Shengmu Hi-Tech also rose rapidly under the banners of premium and organic. The special product category of 'premium milk' is thriving in the Chinese market, with strong supply and demand. This is not only due to successful marketing but also closely related to changes in people's demand for milk. ********************************************************Premium Milk: A Successful Marketing Formula One important reason to call premium milk a marketing 'formula' is its ubiquitous, overwhelming advertising, which is quite similar to many high-margin beverages, health products, medicines, and liquors. Advertising bombardment and large-scale marketing investment are among the most critical factors for the success of many high-margin products. In the beverage industry, from Coca-Cola to Wanglaoji and JDB herbal teas, as well as the short-lived RIO cocktails, all follow this pattern. Coca-Cola and PepsiCo prepare large marketing budgets every year, sign various celebrity endorsements worldwide, and continue to invest heavily in advertising despite already having high visibility. After herbal tea products became popular nationwide from Guangdong, they persistently advertised on major TV channels, becoming one of the biggest sponsors of variety shows. RIO cocktails also created a new beverage category through continuous product placement and hard promotion in various TV programs. "Rewards attract brave men." Classic marketing cases from Chinese and foreign beverage companies are numerous, enough to fill hundreds of marketing textbooks. "Pepsi, the choice of a new generation," "Drink Wanglaoji to prevent getting angry," "Use your brain often, drink more Liuge核桃"—every successful marketing campaign is a large-scale investment that lays a solid foundation for product success. But all this is based on a simple premise: the product's profit margin must be high enough to support such large marketing investments. Telunsu, Jindian, and other premium milks are undoubtedly high-gross-margin products, and these profits are sufficient to support their high marketing costs. In 2014, media reported that the cost of Telunsu milk was 4-5 yuan per kilogram, or just over 1 yuan per box (250ml), but its terminal price was basically 5-6 yuan per box. Compared to raw material costs, this price includes more marketing costs. Celebrity endorsements from Chen Daoming, Faye Wong, and others, prime-time and major event advertisements, extensive presence in airports and cinemas, and even the awkward product placement of 'Shuhua milk' in the movie Transformers—all these high-end dairy advertisements are built with real money. Large advertising investments have successfully occupied consumers' minds, making more people accept that 'premium milk' is necessary. But when consumers pay nearly double the price of traditional products, what do they actually get? ********************************************************Not Living Up to the Hype The 'melamine' incident in 2008 became a watershed for China's dairy industry. Before that, with the improvement of Chinese consumers' living standards, the dairy industry developed rapidly. Data shows that in the first half of 2008, the national urban per capita consumption reached 11.92 kilograms, but the subsequent tainted milk powder incident caused the once-thriving dairy industry to plummet. Well-known dairy companies such as Mengniu, Yili, and Bright Dairy were all deeply affected, with sales declining, but premium milk was relatively less impacted. After the 'OMP' additive controversy subsided in 2009, Telunsu's sales began to hit record highs for the same period from September onwards, becoming a major profit contributor for Mengniu Dairy. An important reason is that after the melamine incident, many people became distrustful of traditional packaged milk, and their purchasing demand shifted to premium milk. In consumers' view, buying premium milk not only means better food safety but also higher nutritional content. Mengniu was happy to promote this aspect to justify its high prices. Protein content of 3.3 grams per 100 ml (later increased to 3.6 grams), 120 mg of 'natural' high calcium, smoother taste (higher fat content), and even the geographical location and soil conditions of the pastures have all become reasons for Telunsu to tout its 'quality.' In comparison, Telunsu's two other important competitors, Yili's Jindian series and Sanyuan's Jizhi milk, have a milk protein ratio of 3.3%, slightly lower than Telunsu, but still higher than traditional Baolibao, Tetra Brik, and Tetra Fino products. These affordable milks have a protein content of basically 3.0%-3.2% per 100 ml and calcium content around 100 mg, so the gap with premium milk products is not very large. If the comparison is further expanded to imported products, the slight nutritional advantage of premium milk immediately disappears. Germany's 'Oldenburger' has a protein content of 3.5%, France's 'Dutch Cow' also has 3.5% protein and 120 mg calcium per 100 ml; another German product, 'Hochwald,' has 3.4% protein and 120 mg calcium per 100 ml. These imported milks, widely sold on e-commerce platforms, have small packages (200ml-250ml) priced on par with or even lower than Telunsu and Jindian, while large packages, when converted to the same milliliter amount, are significantly cheaper across the board than domestic premium products. ********************************************************Premium Milk Dependency: The Biggest Problem for Chinese Dairy Companies From a purely cost-performance perspective, domestic premium milk does not have a clear advantage over imported milk or domestic conventional products, but under intensive and powerful marketing campaigns, its sales and profits have been rising steadily. In fact, premium milk is often given as a high-end gift, encroaching on some market share of the health products industry. Driven by the success of premium milk, dairy companies have also applied the same approach to yogurt, using imported lactic acid bacteria to create high-end yogurt brands such as 'Mozzarella,' 'Kefir,' and 'Icelandic Yogurt,' which have to some extent increased dairy companies' profits. China's dairy industry has thus entered a very delicate state: low-end and mid-end products that sell in volume have relatively low profits or even losses, while high-end dairy products continue to grow driven by marketing, consumption upgrades, and food safety concerns. Regarding the high price of premium milk, Mengniu executives have explained that testing fees, shelf fees, and logistics costs are important reasons for the high price. But these costs are necessary for any level of milk. In fact, to create premium products, Mengniu, Yili, and other dairy companies have paid high marketing expenses, which are one of the most critical cost factors behind the high prices. However, these premium products are nutritionally comparable to imported products from Europe, yet they are more expensive. To drink milk of the same quality as in Europe, the US, and Australia, domestic consumers have to pay a higher price. It can be said that the existence of premium milk meets the needs of consumers with higher purchasing power. But from the perspective of industry development trends, this is more like a 'transitional product' that provides better products for some consumers with purchasing power before the industry truly matures. For more consumers, it may still take a long time to drink domestic milk of better quality and lower price. But in this process, the increasing number of imported milks, relying on the unique natural environment of Europe and Australia, will likely provide more high-quality, low-priced products, thus bringing huge impact to domestic brands. How to get rid of the 'premium milk' dependency as soon as possible under the impact of imported milk and provide consumers with more cost-effective products? This may be the biggest challenge that Mengniu, Yili, and others need to face in the coming period.
Source: Lishi Business Review
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