According to the China Dairy Quality Report (2023) released by the Dairy Association of China, per capita dairy consumption in China was 42 kg in 2022, down 0.6 kg from the previous year. Among dairy products, liquid milk, which accounts for the largest share, saw its first decline in eight years, dropping by 8%.

In an era dominated by competition for existing market share, differentiation has naturally become the norm. In this volatile environment, who will emerge victorious in the second half of the liquid milk market?

Accelerating Differentiation: Liquid Milk at a New Crossroads

In dairy consumption, liquid milk has always played a leading role.

In the broader context, in 2022, liquid milk accounted for approximately 77.4% of China's dairy consumption.

Specifically, for the two dairy giants Yili and Mengniu, before 2022, liquid milk consistently accounted for over 80% of Mengniu's revenue. Yili was not far behind, with its liquid milk business generating 65.432 billion yuan in revenue in the first three quarters of 2023, contributing 67.2% to its total revenue.

However, even this pillar business, which is equivalent to the lifeline and moat of dairy companies, cannot avoid the fate of accelerated differentiation.

From the supply side, in the liquid milk sector, leading dairy companies have shown strong resilience, and the gap with regional dairy companies has further widened.

Yili is undoubtedly one of the dairy companies at the top of the pyramid. The latest financial data shows that Yili's total operating revenue for the first three quarters reached 97.404 billion yuan, with net profit growing by 16.36%. Its core liquid milk business showed a trend of strengthening quarter by quarter.

From January to September 2023, Yili's liquid milk business revenue reached 65.432 billion yuan, a year-on-year increase of 2.07%. In the third quarter alone, revenue reached 23.009 billion yuan, up 8.48% year-on-year, an increase of 7.96 percentage points compared to the second quarter.

Compared to Yili, other dairy companies performed less impressively. For example, Bright Dairy, often called the "perennial third," saw its third-quarter liquid milk revenue decline by 2.68% year-on-year to 4.218 billion yuan. Seven small and medium-sized dairy companies, including Tianrun Dairy, Hairong Technology, Manor Ranch, and Pinwo Food, also experienced varying degrees of year-on-year decline in net profit.

From the demand side, consumers are increasingly pursuing quality and refinement, willing to pay more for higher-end liquid milk.

According to Frost & Sullivan data, the retail sales value of high-end liquid milk grew from 75.9 billion yuan in 2015 to 150.3 billion yuan in 2020, with a projected compound annual growth rate of 15.0% from 2020 to 2025.

This is an inevitable trend in an era of stock competition. Even if market demand is saturated and growth space is limited, high-end milk can still bring substantial revenue to companies. Even in 2021, during the worst of the pandemic, Telunsu brought Mengniu over 30 billion yuan in revenue, and Yili's Jindian exceeded 20 billion yuan.

This year, Yili launched Jindian Limited Edition Hulunbuir Organic Pure Milk, capitalizing on the "high-standard limited organic pasture in Hulunbuir grassland at 48 degrees north latitude" and "richer nutrition" to capture consumer trends. As a result, high-end white milk, represented by the Jindian brand, achieved double-digit growth in the third quarter.

The accelerated differentiation in the liquid milk market is a foregone conclusion, but freshly brewed coffee and freshly made tea drinks continue to exert pressure on the domestic liquid milk market, further compressing the living space of dairy companies, especially small and medium-sized ones.

According to iiMedia Research data, China's coffee market size was approximately 381.7 billion yuan in 2021, expected to reach 617.8 billion yuan in 2023, with a projected growth rate of 27.2%. Data from the China Chain Store & Franchise Association shows that China's new tea beverage market grew from 42.2 billion yuan in 2017 to 100.3 billion yuan in 2021, with a compound annual growth rate of over 20%.

In this environment of both crisis and opportunity, the "ceiling" has quietly arrived, placing liquid milk at a crossroads. Dairy companies urgently need to enhance their competitiveness through innovation and differentiation.

Shaking Up the Second Half: How Can Chinese Dairy Companies Further Unlock Market Imagination?

In the rather severe market situation, the third-quarter reports submitted by leading dairy companies like Yili have given the industry some confidence.

This confidence stems not only from the scale growth achieved by these companies but also from their strong resilience in the rapidly differentiating liquid milk market.

Of course, objectively speaking, delivering such better-than-expected results is partly due to the third quarter being the traditional peak season for liquid milk sales. Qiu Xiangmin, Secretary of the Board of Directors of Yili Co., Ltd., also stated that during this year's double festivals (Mid-Autumn Festival and National Day), the consumption demand for dairy products as health gifts is recovering. The resurgence of gift demand has driven an upgrade in the product mix, and the upcoming Spring Festival is also a major peak season for dairy products.

Behind this, it reflects the gradual improvement in residents' purchasing power. Data shows that in the first three quarters, the national per capita disposable income was 29,398 yuan, a nominal year-on-year increase of 6.3%.

However, to increase dealers' willingness to stock up and win more consumer favor, it is not enough to rely solely on external factors such as "peak season," "policies," and "improved purchasing power." Dairy companies need to proactively adapt, gaining more detailed insights and precise understanding of different consumer needs.

On the one hand, dairy companies need to expand horizontally, launching more diverse products to meet the segmented needs of different consumer groups.

Liziyuan, which previously focused on sweet milk beverage series, has been trying to step out of its "comfort zone" in recent years, successively launching products such as milk coffee, coconut milk, and fruit and vegetable yogurt. This year, it also seized the zero-sugar trend and launched a new 0-sucrose version of its sweet milk product.

As a leading dairy company, Yili has always adhered to a consumer-centric approach in the liquid milk industry, actively seeking innovation and change. After capturing consumers' needs for balancing lactose intolerance and stabilizing blood sugar, it launched the world's first blood sugar control milk, Shuhua An Tang Jian, in April this year. The product has been certified as a low glycemic index (GI) food, with a GI value of only 20.

The second growth curve beyond liquid milk has also passed the "inflection point" and is accelerating upward.

Financial data shows that during the reporting period, Yili's milk powder and dairy products revenue reached 19.922 billion yuan, with milk powder market share growing against the trend and leading the industry. Adult milk powder also maintained rapid growth, with market share rising to 23.9%. The cold drinks business generated 10.383 billion yuan in revenue, continuing high-speed growth and maintaining the top market share in the industry.

On the other hand, dairy companies cannot ignore vertical deepening. Only continuous technological advancement is key to achieving differentiated advantages.

After all, China's dairy consumption still has considerable room for growth. According to predictions from the Industrial Economics Research Office of the National Dairy Industry Technology System, by 2025, China's total dairy consumption is expected to reach 67 million to 70 million tons. The Dietary Guidelines for Chinese Residents (2022) recommends an intake of 300 to 500 grams of milk and dairy products per person per day, but current per capita dairy consumption is only equivalent to 23.0% to 35.1% of the recommended amount.

Given the increasing health awareness among the public, only by continuously increasing investment in technological research and innovation in dairy and nutrition can companies widen the gap with competitors.

For example, Sanzhi Xiaoniu soft milk uses EHT enzymatic hydrolysis technology, adding lactase to break down lactose in milk.

Another example is Yili's pioneering targeted extraction and protection technology for lactoferrin, which increases the retention rate of lactoferrin in room-temperature pure milk from 10% to over 90%, breaking key technical barriers. As of the end of December 2022, Yili ranked second among the world's top ten dairy companies in total global patent applications and invention applications, successfully providing innovative driving force for the continuous development of various businesses.

In summary, by using diversification to create new market growth points and continuously integrating cutting-edge technology into product innovation, dairy companies in the "era of differentiation" in liquid milk have gained some insights into responding to market changes and upgrading consumer demands. However, to find a more suitable way to survive in the era of stock competition, they may need more time for trial and error and adjustment.