In 1992, MGM's "Tom and Jerry" was introduced to China, and audiences saw the mouse Jerry going to great lengths for a piece of cheese. This long-running animated series has led many to wonder why Jerry is so fond of that yellow block. The cheese with holes in the show is modeled after the famous Swiss Emmental cheese, a dairy product with holes and a chewy texture. Now, this dairy product has entered the daily lives of Chinese people, from cheese slices in burgers and pizzas to cheese sticks in children's hands. On one hand, China's food manufacturing chain is becoming increasingly complete; on the other hand, the dairy industry, after the wars in room-temperature and low-temperature milk, is now seeking high-value-added products, jointly opening the door to the enlightenment and development of China's cheese market. Compared to the room-temperature and low-temperature milk tracks, the cheese market shows high concentration and high growth. Traditional dairy enterprises such as Yili, Mengniu, and Bright Dairy have a distinct advantage, while emerging dairy companies and foreign brands are also consolidating their spheres of influence. Currently, in the capital market, the only specialized cheese listed company is Milkground, which, with Mengniu's backing, has become the leading cheese enterprise in China. Milkground's rise to prominence is largely due to cheese sticks. This type of processed cheese product has a low barrier to entry, but Milkground understands the Chinese consumer market, partnering with major IPs like PAW Patrol to capture a large number of child consumers. In this regard, the French brand Breguet, which has been in the Chinese market for 25 years, despite having single-handedly educated the Chinese children's cheese stick market, now has to concede defeat. Besides Milkground and Breguet, many new cheese brands have emerged in China in recent years, such as Dr. Cheese, Miaofei, Zhishifang, and Jistin. The shift from drinking milk to eating milk has brought dividends to the cheese market, and the battle on this niche track is spreading.
01 Cheese Wars In 2021, China's cheese product shipments reached 250,000 tons, with retail sales of 13.1 billion yuan, a 65.8% increase from 2019. According to Euromonitor, in the next five years, the compound growth rate of China's cheese product shipments and retail sales will maintain double-digit growth. Unexpectedly, the cheese fought over in the cartoon is being pushed onto a high-speed growth track by massive consumer demand, and a number of enterprises are seizing the opportunity to enter the market. On the evening of October 23, Ausnutria, headquartered in Changsha, disclosed a cross-border acquisition. Its wholly-owned subsidiary Ausnutria B.V. acquired 50% of Amalthea Group from Dairy Goat Holland B.V. for a cash consideration of approximately 18.4 million euros. Amalthea Group is a significant goat milk powder producer in the Netherlands, expected to provide Ausnutria with 45,000 tons of fresh goat milk annually. Additionally, this Dutch company owns the goat cheese brand Amalthea, which holds about 50% of the Dutch goat cheese market. Before this acquisition, Ausnutria's subsidiary Jiayibeite was already the world's largest goat milk powder brand, with sales of 3.348 billion yuan last year. Beyond strengthening its leading position, the larger motivation for this acquisition is to help the company extend its product portfolio from goat milk powder to cheese products, entering the rapidly growing cheese consumer market. After all, goat cheese is still rare in the Chinese market. Ausnutria's entry into the cheese market via goat cheese is not the first case of differentiated competition. Previously, local enterprise Xueyuan Shengnuo planned to launch yak cheese, testing the waters of differentiation. However, the mainstream battlefield for cheese products remains fresh milk-based cheese. To strengthen control, Mengniu recently made another tender offer to Milkground, planning to acquire 5% of its shares for nearly 800 million yuan, raising its stake to 35%. In 2020, Mengniu tentatively acquired 5% of Milkground for 287 million yuan, and last year it invested 3 billion yuan in a private placement, becoming the controlling shareholder and instantly becoming China's largest cheese enterprise. The leading dairy companies set an example, and capital has sensed the future of the cheese track. At the beginning of this year, Xu Xin, founder of Today Capital, participated in Dr. Cheese's new round of strategic financing through CTG Evergreen, becoming one of its shareholders. Before Xu Xin, institutions such as Challenger Capital, founded by the founder of Genki Forest, and Sequoia Capital China had already taken seats at Dr. Cheese's table; Hillhouse Capital and China Growth Capital invested in the children's cheese brand Miaofei; and One Cow a Day also joined the cheese war. Foreign capital has not been idle either. In July this year, Shandong Junjun Cheese underwent industrial and commercial changes, with French century-old cheese company BEL becoming a 70% shareholder. The influx of numerous capital into the cheese field is significant; everyone has every reason to believe that the Chinese will definitely create a cheese giant.
02 The Cheese World Sanyuan Foods produced China's first cheese in 1985 and has been deeply cultivating the B2B sector, with well-known companies like KFC, McDonald's, and Luckin Coffee as its clients. Since the early 1990s, it has been supplying cheese slices to McDonald's China and remains its largest cheese slice supplier. However, Sanyuan's cheese products have not reached a broader market. In 1997, France's Savencia Group began expanding into the Chinese market, building a production base in Tianjin, becoming the first foreign cheese enterprise in China. Its Breguet cheese brand entered the C-end directly with affordable cheese sticks. However, cheese sticks did not make waves in the consumer market. At that time, Chinese people had not even popularized drinking milk, so cheese could only be a virgin land requiring long-term cultivation. Breguet was not in a hurry and gradually increased its cheese business, now having four series: children, catering, home dining, and young people. According to Euromonitor data, in 2021, Breguet held a 24.4% market share in China's cheese market. Breguet's entry into the Chinese market with cheese sticks was, to some extent, learning from the model of coffee entering China. Initially, Chinese consumers' understanding of coffee did not come from American coffee but from Nestlé's coffee mate. Chinese consumers, accustomed to coffee with non-dairy creamer, have now, after market education, finally learned what coffee truly tastes like. Cheese and coffee, both imported products, have had similar experiences in China. In the early years, Breguet almost single-handedly educated the Chinese children's cheese stick market but ultimately lost to Milkground, a former partner. In 2021, Milkground's market share was 27.7%, surpassing Breguet and becoming China's number one cheese brand. In 2008, France's Aavencia Group and Guangze Dairy, the predecessor of Milkground, jointly built a cheese production base in Changchun. In 2015, Guangze Dairy transformed a Shanghai factory acquired from Danone Dairy into a cheese production line, determined to focus on cheese development, and renamed the company Milkground. In 2016, Milkground launched its first cheese stick. It was better at marketing than Breguet, deeply integrating with major IPs such as Two Tigers and PAW Patrol, and signing famous actress Sun Li, known for her "hot mom" image, as spokesperson. With extensive marketing and advertising, it successfully captured the children's consumer group. Milkground's success presented an opportunity for former executive Chen Yun. In 2019, he resigned as vice president and founded Miaofei Food, focusing on children's cheese products with a 0 sucrose concept. Later, another former Milkground executive, Zhang Zhigang, joined as executive director and general manager of Miaofei. In the past two years, besides Mengniu frequently making its presence felt in the cheese field, Dr. Cheese has been the one to impress investment institutions, taking a different path. Founder Chen Yuhua left Oldenburger, Germany's largest dairy company, in 2019 and founded Dr. Cheese, focusing on real cheese products for children aged 0-6. According to public reports, in the second year after product launch, revenue approached 1 billion yuan, firmly holding the top position in the high-end cheese market. Last year, Sequoia Capital led a 150 million yuan investment, showing the importance this investment institution, which has accompanied the dairy industry cycle, places on Dr. Cheese. However, most of Dr. Cheese's current cheese products are OEM-produced by Shandong Junjun Cheese, known as the source factory for China's dairy cheese, and it only started building its own factory at the end of last year.
03 The Track Heats Up You might not expect that Chinese cuisine, which was previously difficult to integrate with cheese, is now opening its doors to it. In the menu of the chain restaurant Grandma's Home, cheese pancakes and other dishes serve as examples of cheese integrating into Chinese cuisine. In the popular new-style tea beverage industry, cheese is also exploring possibilities, with cheese caps and customized cheese product supplies becoming the main cooperation methods between Milkground and Nayuki Tea and Guming. Against the backdrop of frequent epidemics in the past two years, the increase in home cooking frequency has given cheese a new opportunity. In 2020, Milkground's home dining series products grew 109% year-on-year. Now, cheese products are not only expanding in ready-to-eat consumption scenarios but also entering home dining, catering industry, and other consumption scenarios. On one hand, cheese has 10 times the protein and 8 times the calcium of milk, and lactose-intolerant people can also consume it, covering a broader population. Coupled with improvements in domestic cheese production technology and the perfection of cold chain logistics, these form the basic conditions for the current cheese craze. Most importantly, cheese is more profitable than liquid milk, giving enterprises the motivation to invest. Taking Milkground as an example, in 2021, the ready-to-eat nutrition series achieved revenue of 2.513 billion yuan with a gross margin of 55.44%. Over the past four years, Milkground's cheese segment gross margin increased from 34.4% in 2017 to 48.51% in 2021. During the same period, the growth in the gross margin of the cheese business segment raised the company's overall gross margin to 38.14%. How hot is cheese exactly? According to research by Hua'an Securities, from 2013 to 2021, the cheese market's compound growth rate was about 18%, making it the fastest-growing category in the dairy industry, far ahead of skim milk powder and liquid milk. The liquid milk businesses of the two giants, Yili and Mengniu, account for 70% and over 80% of their respective revenues, with gross margins generally maintained at around 30%. In recent years, the two giants have been struggling in multi-line competition in milk powder, ice cream, and other areas, and mid-tier dairy companies are even more difficult. Taking Sanyuan Foods as an example, its gross margin fell from 33.06% in 2018 to 25.48% in 2021. In fact, traditional dairy companies have been fighting from room-temperature milk to low-temperature milk, from downstream channels to upstream milk source pastures in recent years, and it has become quite difficult to further improve profitability. Mengniu proposed in 2017 to break through 100 billion in both sales and market value within three years. Last year, Mengniu's revenue reached 88.141 billion yuan, just short of the 90 billion threshold. Mengniu, controlled by COFCO, has been widening the gap with its rival Yili year by year, with Yili achieving operating revenue of 110.6 billion yuan last year. So, when the cheese track becomes hot, who would be willing to sit and wait?
04 Who Will Go Further? According to a research report by Hua'an Securities, based on 30% of liquid milk consumption, China's cheese consumption may have more than six times the growth space. With major enterprises and capital flooding in, and scenarios such as children's nutrition, snacks, and home dining cooking emerging, the demand for cheese is expanding, and short-term market competition is bound to become fierce. Product differentiation is an important and the only breakthrough opportunity. Currently, the mainstream product in the cheese market is still cheese sticks, with little overall breakthrough. Whether it's Dr. Cheese's real cheese or Miaofei's 0 sucrose, they are just adding a concept to cheese sticks. Most cheese stick products on the market contain flavors, white sugar, and additives, and the iteration and upgrade of cheese sticks actually rely on the increase in cheese content. After the disclosure of the draft of the "National Food Safety Standard - Processed Cheese and Cheese Products" in 2021, companies such as Milkground, Dr. Cheese, and Breguet launched cheese stick products with cheese content higher than 50%. This is partly in response to policy and partly to cater to consumers' demand for cheese nutrition. The technical barriers of cheese sticks are not as deep as imagined; it's all about marketing. From 2019 to 2021, Milkground's total sales expenses exceeded 2.2 billion yuan, while its net profit attributable to the parent company totaled only 233 million yuan. During the same period, the growth rate of sales expenses was higher than that of revenue. The massive spending directly affects the company's overall profitability, with net margins fluctuating between 1% and 5% over the three years. Mengniu's control of Milkground was not a whim; in 2018, Mengniu laid out its cheese business. As of the first half of this year, other segments including cheese achieved revenue of 2.259 billion yuan, accounting for 4.7% of total revenue. According to Lu Minfang's future layout, the cheese business will be a segment to sprint towards the 10 billion target. In the cheese business, Mengniu, with Milkground, has achieved the number one position in the cheese category and children's cheese stick single product nationwide. The melee between foreign and local cheese brands has fully begun, and this war is destined not to stop in the short term. The constantly stimulated Chinese dairy market will definitely be the ultimate winner.