Source: China News Service, Economic View. Author: Yan Shuxin.

"There are many homogenized products in the cheese industry, and product positioning is very important. In the future, the cheese industry should put more effort into product R&D and differentiation."

Recently, "the first cheese stock" Milkground (妙可蓝多) disclosed its Q3 2021 report, showing revenue and net profit growth of 67.58% and 171.27% respectively in the first three quarters.

Since 2018, riding the cheese stick wave, Milkground's net profit has turned from decline to multiple growth. High gross margins and vast market space have attracted many companies to enter this track, but it has also brought a series of problems, such as price wars and product homogenization.

Institutions Predict Market Size Exceeds 10 Billion Yuan

Recently, Milkground disclosed its Q3 2021 report. In the first three quarters, the company achieved operating revenue of 3.144 billion yuan, a year-on-year increase of 67.58%; net profit attributable to shareholders of the listed company (hereinafter referred to as net profit) was 143 million yuan, up 171.27% year-on-year. Among them, the cheese business achieved revenue of 2.282 billion yuan, accounting for over 70%.

Milkground is known as "the first cheese stock," and its advertisements frequently appear on TV, online videos, and elevators in major office buildings. An advertising jingle adapted from "Two Tigers" is particularly catchy.

In recent years, the cheese stick track has been at a peak, and Milkground has reaped the benefits. Wind data shows that from 2018 to 2020, the company's revenue increased by 24.82%, 42.32%, and 63.20% respectively; net profit increased by 148.69%, 80.72%, and 208.16% respectively. In 2017, its net profit had declined by 86.72%.

According to Milkground's 2021 semi-annual report, the gross margin of its cheese business in the first half of this year was 50.19%, and the gross margin of ready-to-eat nutritional cheese products, represented by cheese sticks, was as high as 56.92%. In the same period, the gross margin of its liquid milk business was 16.24%.

According to dairy industry analyst Song Liang, most cheese stick products have been on promotion this year, which has lowered the overall industry gross margin, but it can still reach 40%-50%. "Milkground's gross margin is relatively high in the industry."

Wang Dingmian, former executive director of the China Dairy Association and president of the Guangzhou Dairy Association, pointed out that due to differences in marketing costs, channel costs, etc., the gross margins of different brands of cheese sticks are also different. "But the raw materials and production processing costs are roughly similar, and there won't be much difference." Wang said.

According to Euromonitor data, in 2018, the top three in the domestic cheese consumer market share were all foreign brands: "Breguet" (28.3%), "La Vache Qui Rit" (7.7%), and New Zealand's Fonterra's "Anchor" (7.0%). Milkground ranked sixth with a market share of only 3.9%.

By 2020, Milkground's market share had reached 19.8%, ranking second in the industry, second only to "Breguet" (25.0%).

In August this year, Milkground revealed at an analyst meeting that its market share had risen to first place in the industry in the first half of this year.

Song Liang introduced that in the past 20 years, the development of China's cheese industry has been slow and the volume small. Since 2017, domestic cheese consumption has grown rapidly, largely because processed cheese, represented by cheese sticks, meets Chinese consumer preferences and has grown rapidly.

According to Everbright Securities estimates, in 2020, the retail cheese market size in China was 8.776 billion yuan, of which the cheese stick market was about 3.5-3.6 billion yuan, accounting for about 40%. The institution predicts that in 2021, the domestic low-temperature cheese stick market will reach 8.4 billion yuan, with a growth rate of 134%-141%; by 2030, its market size may increase to 15.5-23.2 billion yuan.

Zhu Danpeng, a Chinese food industry analyst, told China News Service that with the deepening of consumers' health awareness, cheese sticks have become the first choice for many parents to buy nutritional supplements for their children. As consumption continues to upgrade, the frequency of cheese stick consumption is also increasing.

"At present, China's cheese stick market is in a stage of rapid expansion and high growth."

Cheese stick products in offline supermarkets. Photo by Yan Shuxin, China News Service.

Various Players Enter the Fray

High gross margins and vast market space are attracting more and more players to enter this track.

In March this year, Junlebao held a new product launch conference for cheese sticks in Tianjin, launching its first cheese products; in April, Panda Dairy officially started the promotion and distribution of its cheese stick products; in August, Junyao Health launched five new categories on the first anniversary of its listing, including Kung Fu Panda IP Weidonggao calcium cheese sticks.

In fact, as early as 2018, Yili and Mengniu had already established separate cheese business divisions. After that, Yili successively launched children's cheese sticks, "Miaozhi" pocket cheese adult cheese sticks, and other products. In June 2021, Yili invested to set up a wholly-owned subsidiary, Inner Mongolia Yijiahao Cheese Co., Ltd., to operate its cheese business.

Mengniu has also been increasing its layout in the cheese field. In March 2019, Mengniu and European dairy company Arla Foods established a cheese joint venture, launching the cheese brand "Arla". Later, it invested 3 billion yuan in Milkground, becoming its controlling shareholder. In the first half of this year, Mengniu launched zero-additive children's cheese sticks, organic cheese sticks, and other products.

With capital support, a number of new brands have emerged in the industry. In July 2019, Miaofei Jiangsu Food Technology Co., Ltd. was established. Its founder, Chen Yun, previously served as general manager of Yili's cheese division and vice president of Milkground.

According to Tianyancha App, in July 2020, Miaofei received Series A investment from Matrix Partners China; in December of the same year, the brand completed nearly 100 million yuan in Series B financing, with investors including Hillhouse Ventures, Zhongding Capital, and Matrix Partners China.

Screenshot from Tianyancha App.

"Cheese Doctor" parent company Shanghai Niulu Brand Management Co., Ltd. was established in May 2019. In November 2020 and March 2021, "Cheese Doctor" completed two rounds of equity financing, with investors including Vanguard Capital, Sequoia China Seed Fund, etc.

Song Liang told China News Service that in the past two years, consumption of traditional dairy products has slowed significantly. Seeing the high growth of cheese, companies have laid out plans and entered segmented tracks such as children's processed cheese and adult processed cheese.

Nielsen data shows that in the first half of 2021, retail sales in the domestic liquid milk market increased by 9% year-on-year, infant and adult formula milk powder market retail sales increased by 7.7% year-on-year, while cheese market retail sales increased by as much as 35.3% year-on-year. In the same period in 2018, at physical retail terminals, retail sales of milk powder, low-temperature pure milk, and ambient yogurt increased by 14.8%, 16.1%, and 18.6% year-on-year, respectively.

Price Wars and Homogenization Issues Yet to Be Resolved

However, the concentrated entry of various players has also brought some problems to the industry.

At the Cheese Development Summit Forum in July this year, Gong Qun, general manager of Bright Dairy's raw material cheese marketing center, mentioned, "How is the current cheese terminal market competing? It's all about cheese sticks, and these cheese sticks have homogenized design, packaging, and selling points. Everyone knows the ingredient list, and everyone's products are similar."

Recently, China News Service observed in offline supermarkets that for different brands of cheese sticks, the top ingredients on the label are mostly water, cream, cheese, skimmed milk powder, concentrated milk protein, white sugar (or other sugars like crystalline fructose), just in slightly different order.

Ingredient list of a certain brand of cheese stick product. Photo by Yan Shuxin, China News Service.

In addition to product homogenization, price wars among major cheese stick brands are intensifying. China News Service noticed that in offline supermarkets, most cheese stick products are on promotion, either direct discounts or buy-one-get-one-free.

On e-commerce platforms, some products have even greater discounts. A cheese stick originally priced at 109 yuan can be as low as 69 yuan after coupons, and one brand even launched a "limited-time buy 1 get 6" activity.

"With so many companies entering at once, short-term supply growth has outpaced consumption growth. Therefore, since 2020, the industry has already seen price wars. By 2021, affected by factors such as the early pandemic, the growth rate of children's processed cheese consumption has slowed, intensifying competition among brands and making price wars more prominent," Song Liang said.

In August this year, Panda Dairy mentioned in the minutes of its 2021 semi-annual performance briefing that current competitor terminal price promotions are frequent, and competition is slightly beyond expectations.

At the aforementioned analyst meeting, Milkground also stated that price wars are common in the industry but difficult to sustain.

"From our observation, cheese sticks are not price-sensitive products; they are more optional consumption. The end users are mostly children, but the buyers are parents, who are not highly price-sensitive. They may think that low-priced brands have quality or taste issues, which is why they adopt low-price strategies. Cheese sticks value reputation, brand, and taste more, so low-price strategies are not sustainable due to product attributes."

However, Song Liang believes that in the future, with the further development of the domestic cheese industry, the price war and product homogenization issues will ease.

"From the laws of industrial development, price wars and product homogenization are inevitable. When homogenization occurs, companies need to use technological progress to enhance product differentiation, promote industrial technology upgrades, and improve product quality, thereby promoting the further development of the entire industry," Song Liang said.

At the China Dairy Capital Forum on October 22, Xue Chun, executive chairman of New Hope Trading and chairman of Mubao Shanghai Food Technology, also mentioned, "There are many homogenized products in the cheese industry, and product positioning is very important. In the future, the cheese industry should put more effort into product R&D and differentiation."

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