---
title: "China's New Milk War"
description: "As a key gift during festivals, milk consumption in China peaks during Spring Festival and Mid-Autumn Festival. Despite lower per capita consumption compared to developed countries, the market is growing, with a shift towards low-temperature pasteurized milk driven by consumption upgrades and improved cold-chain logistics."
author: "节点财经"
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published: "2020-10-21"
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# China's New Milk War

> As a key gift during festivals, milk consumption in China peaks during Spring Festival and Mid-Autumn Festival. Despite lower per capita consumption compared to developed countries, the market is growing, with a shift towards low-temperature pasteurized milk driven by consumption upgrades and improved cold-chain logistics.

Source: Node Finance (ID: jiedian2018)
During the Mid-Autumn Festival, what gifts do you bring when visiting relatives? Ambrosial or Pure Zhen? Telunsu or Jindian?
Data shows that besides mooncakes, milk has become one of the important gifts for social visits in China. According to a report by TF Securities Research Institute, **the consumption peaks of dairy products in China are concentrated during the Spring Festival and Mid-Autumn Festival, mainly due to the demand for gifts during festive occasions.** Amid pervasive advertising, dairy products, especially high-end ones, have become an indispensable part of Chinese festivals.
However, compared with developed countries, per capita consumption of dairy products in China still lags far behind. Relevant data shows that in 2019, per capita milk consumption in China was about 32.66 kg, while the world average was about 90 kg, with China accounting for about one-third. Japan, with similar dietary habits, had a per capita consumption of about 72.66 kg, more than double that of China. There remains vast room for growth in China's dairy consumption.
Image source: Euromonitor, National Bureau of Statistics
In fact, it is only in the past one or two decades that Chinese people have incorporated milk into their daily diet. Besides its short history, the industry has also been plagued by various food safety issues. For example, the melamine incident in 2008 and the accusations against the two dairy giants Yili and Mengniu in early 2020 have further exacerbated market distrust of Chinese dairy brands.
From the perspective of the capital market, compared with the soy sauce leader whose PE multiple once reached as high as 100 times, **domestic dairy companies have seen relatively stable market value changes over the past five years, with PE basically ranging from 20 to 30 times, and a slight increase to around 40 times in the first half of 2020.**
However, this does not mean that the domestic milk market is peaceful. Since the 1990s, the domestic dairy industry has experienced multiple battles, including marketing wars and the UHT milk war, gradually forming the current "two superpowers and multiple strong players" industry pattern. In the next stage, with new transportation and preservation technologies, whether the low-temperature milk war can bring about new changes in the industry remains unknown.
**-01-**
**30% of Dairy Products Imported**
The dairy industry has developed in China for a long time, but it truly entered a period of rapid growth after 1998.
Around the millennium, the Chinese government initiated dietary reforms for residents, and "milk" was included in the national dietary plan for the first time. Coupled with the introduction of ultra-high temperature instantaneous sterilization and aseptic packaging technologies in the late 1990s, dairy products began a period of rapid development.
At that time, a "national milk campaign" was launched, and an egg and a carton of milk became common classroom staples for Chinese primary school students. Against this backdrop, China's dairy industry entered a golden decade, with leading companies like Yili and Mengniu emerging during this period.
However, the good times did not last long. The 2008 melamine incident dragged the dairy industry into a trough, and Chinese consumers' trust in domestic dairy products plummeted. Since then, the market share of local dairy brands has declined year by year, and a large number of imported milk powder began to impact the domestic dairy industry.
Over the past decade, China's dairy market has maintained a strong dependence on imports from New Zealand, Australia, and European countries. A PwC report shows that, converting all dairy products to fresh milk equivalent, China's fresh milk production increased more than 20-fold from 1980 to 2008, from 1.4 million tons to over 30 million tons. In 2012, production peaked at 33 million tons, and has since remained around 32 million tons.
While China's fresh milk production has remained stable, dairy consumption has continued to grow, with the supply-demand imbalance mainly filled by imported dairy products. **Milk powder, due to its lower transportation costs and longer shelf life, has become the main imported dairy product. In 2018, more than 30% of China's dairy products (in fresh milk equivalent) were imported, compared with about 5% in 2007.**
Chart source: PwC report "Modernization of China's Dairy Industry"
Compared with overseas dairy brands, one major disadvantage of Chinese dairy products is high production costs. In 2018, the price of fresh milk in China was 46% higher than in New Zealand and 53% higher than the global average.
Chart source: PwC report "Modernization of China's Dairy Industry"
The high cost of fresh milk is mainly due to high dairy farming costs, which in turn is due to high feed prices (such as corn and soybeans). For a long time, China has relied on imported feed for pastures. For example, alfalfa and soybean meal are important feed costs for large dairy farms in China, but domestic self-sufficiency has been low. Currently, about 40% of China's alfalfa is imported, with 90% of imported alfalfa coming from the United States. In addition, increasingly stringent environmental and food safety regulations and rising labor costs have also increased production costs for dairy companies.
Chart source: PwC report "Modernization of China's Dairy Industry"
Since 2018, with the escalation of Sino-US trade frictions, the uncontrollable feed costs have further pressured related companies. In July of that year, China began imposing a 25% tariff on alfalfa imported from the US. As feed costs rose, the average purchase price of raw milk in China increased to a three-year high in the first half of 2019.
In 2018, the government announced plans to increase domestic milk production to 45 million tons by 2025, an increase of over 40% from 2018. Achieving this goal means both increasing per-cow yield and increasing the number of dairy cows.
Chart source: PwC report "Modernization of China's Dairy Industry"
To secure stable raw milk supply, in July 2018, the state introduced a series of supportive policies for pastures, and local governments competed to offer preferential conditions such as land and loans. Chinese dairy companies also launched a campaign to acquire milk sources, making upstream pasture companies with cows scarce resources for mergers and acquisitions.
**-02-**
**Liquid Milk Supports a 400 Billion Yuan Dairy Market**
**Currently, China's dairy retail market is about 400 billion yuan. In 2018, there were 587 domestic dairy processing companies. Among them, Yili and Mengniu processed about 45% of the country's total fresh milk production. Large processing companies have strong pricing power over farms.**
In terms of industrial structure, China's dairy industry is in stark contrast to that of the United States. The US dairy industry is dominated by dairy farming cooperatives, with the top three dairy processing companies accounting for only 22% of the market share and being owned by dairy cooperatives.
Chart source: PwC report "Modernization of China's Dairy Industry"
In terms of consumption composition, the dominant products in China's dairy industry are liquid milk, yogurt, and milk powder. In 2019, liquid milk accounted for 61.82% of consumption, ranking first among dairy categories, followed by yogurt at 35.58%, and then cheese, butter, and others.
Image source: Euromonitor, Bohai Securities
Common liquid milk on the market can generally be divided into two types: ambient milk and low-temperature milk. Ambient milk (ambient white milk, ambient yogurt) is generally processed using ultra-high temperature sterilization (UHT), which, although it destroys the original flavor of milk, allows it to be stored at room temperature, so the shelf life of ambient milk can generally be as long as 6 to 12 months.
Low-temperature milk (pasteurized milk, low-temperature yogurt) is generally sterilized at lower temperatures, retaining more of the original taste and active substances of milk, but with a shorter shelf life, mostly only 4 to 7 days. In addition, low-temperature milk requires higher cold-chain transportation and storage technology, which means higher fulfillment costs.
**In terms of regional distribution, about 70% of China's milk is produced in the northern golden milk source belt, but 70% of milk consumption is concentrated in the south and coastal cities.** This distribution mismatch has led to "northern milk being difficult to transport south," and also brought difficulties for early northern dairy companies to capture the southern market. At that time, the number of cold storage facilities and cold-chain transportation technology were not high, and for reasons of profitability and efficiency, dairy companies mainly produced and sold ambient milk, with less attention to low-temperature milk.
Through continuous innovation, in recent years, domestic liquid milk categories have become increasingly diverse, expanding from the initial single dairy beverages, basic white milk, and low-temperature yogurt to high-end white milk, ambient yogurt, and lactic acid bacteria beverages. In these segments, Yili and Mengniu have highly overlapping businesses and fierce competition. For example, Yili's important profit product Ambrosial directly competes with Mengniu's Pure Zhen, and Mengniu's important profit product Telunsu competes with Yili's Jindian.
Image source: Company announcements, Huajin Securities Research Institute
Beyond liquid milk, in recent years, benefiting from the development of ambient yogurt, the market share of domestic yogurt categories has gradually expanded. According to Euromonitor data, **it is expected that by 2024, the domestic yogurt market share will increase to 42.2%.** Similar to the US market, China's yogurt market is relatively concentrated, with the top three dairy companies holding more than half of the market share. The gross margin of China's yogurt market is about 30-40%.
In the ice cream market, liquid milk leaders Mengniu and Yili are also major producers, with a combined market share of over 20%. In 2018, Yili produced nearly 400,000 tons of ice cream products, and in the first half of 2019, its ice cream gross margin was about 47%.
Since the 1990s, China's dairy industry has gradually formed a relatively stable competitive pattern of "two superpowers and one strong": Yili and Mengniu form a duopoly, followed by Bright Dairy. In addition, regional dairy companies represented by New Hope Dairy and Sanyuan Foods have formed a fragmented pattern in some key markets. Deconstructing the performance of Yili, Mengniu, and Bright to some extent helps us further understand the domestic dairy industry.
**-03-**
**Financial PK: Mengniu vs Yili vs Bright**
Yili and Mengniu can be said to be undisputed giants in the domestic dairy industry.
Data shows that in 2019, these two leaders contributed nearly 70% of the revenue of their dairy industry. According to the National Bureau of Statistics, in 2019, the main business revenue of dairy enterprises above designated size nationwide was 394.7 billion yuan, with Yili, Mengniu, and Bright ranking top three with revenues of 90 billion yuan, 79 billion yuan, and 22.6 billion yuan respectively. The combined revenue of the first two companies accounted for 68% of the revenue of 17 major domestic dairy companies.
**Driven by performance, as of the close on October 12, 2020, the market values of Yili, Mengniu, and Bright were 253.2 billion yuan, 151.5 billion yuan, and 21.5 billion yuan respectively. Among them, Yili's market value in the A-share food and beverage industry is second only to Haitian Flavoring's 558.4 billion yuan.**
In 2014, Yili proposed the "Top Five and 100 Billion" goal, i.e., to become one of the top five global dairy companies by 2020 with revenue exceeding 100 billion yuan; Mengniu also did not lag behind, proposing in 2017 to achieve sales and market value of 100 billion yuan by 2020. Now, both companies are at the time to check the results.
However, based on current financial performance and revenue growth rates, Mengniu's revenue scale is still more than 20 billion yuan short of the 100 billion target, which should be achieved by 2021, while Yili's 100 billion target should be achieved in 2020.
Data source: Financial reports, Node Investment Research
In 2019, Yili's revenue was about 11 billion yuan more than Mengniu's, and the gap between the two companies' revenue levels is widening. Bright's revenue was 22.6 billion yuan, still far behind Mengniu and Yili in scale.
From the chart, it can be seen that since 2014, Yili's revenue growth rate has exceeded the dairy sub-industry level most of the time. In contrast, Bright's revenue growth rate has been lower than the industry level in most years, but it made a significant breakthrough in H1 2020. Mengniu is in the middle, maintaining good revenue growth in many years, but in H1 2020, due to the impact of the epidemic, its growth rate was far lower than the industry level.
Image source: Wind, Haitong Securities Research Institute
In terms of product structure, liquid milk is the core business segment for all three companies. In 2019, Yili, Mengniu, and Bright's liquid milk revenues were 73.8 billion yuan, 59.4 billion yuan, and 13.8 billion yuan respectively, accounting for 82%, 86%, and 61.17% of their total revenues.
**The liquid milk business lines of domestic dairy companies mainly include three sub-product lines: ambient milk, low-temperature yogurt, and low-temperature fresh milk.**
From a product perspective, Yili has a leading advantage in the ambient milk market, while Mengniu is better at low-temperature milk.
Image source: Nielsen, BOC International
According to Nielsen data, in Q1 2020, Yili's market share in ambient liquid milk was 39.3%, while Mengniu's market share in this segment in 2019 was about 27%; in low-temperature milk (low-temperature yogurt + low-temperature fresh milk), Mengniu's market share in 2019 exceeded 30%, about 15 percentage points higher than Yili.
In low-temperature fresh milk, Bright is the leading company, but Yili and Mengniu are also paying more attention to this segment. According to Nielsen data, in 2019, Mengniu's low-temperature fresh milk revenue exceeded 700 million yuan, with growth of over 100%, and market share increased from 3.1% in 2018 to 7.1% in 2019.
In terms of profitability, in 2019, the net profits of Yili, Mengniu, and Bright were 6.934 billion yuan, 4.1 billion yuan, and 498 million yuan respectively. The year-on-year growth of net profit for the three companies from 2017 to 2019 showed a slowing trend.
Data source: Financial reports, Node Investment Research
**However, in terms of earning capacity, Yili has a clear advantage. Over the past six years, Yili's net profit margin has remained stable in the range of 7% to 9%, significantly higher than the other two companies.** Bright's net profit margin has mostly hovered between 2% and 5%, while Mengniu's net profit margin in the past three years has been basically around 5%, and even as low as -2% in 2016.
Data source: Financial reports, Node Investment Research
In terms of gross margin, in the past three years, the levels of Yili and Mengniu have been very close, basically around 37%, higher than Bright's 33%. This is mainly due to the two companies' conscious increase in the proportion of self-controlled milk sources, which helps with cost control. Currently, Mengniu's self-controlled milk source ratio exceeds 30%.
Data source: Financial reports, Node Investment Research
Looking at a longer time frame, since 2014, the gross margins of Yili and Mengniu have improved significantly, with Yili's gross margin increasing by 10 percentage points and Mengniu's by 5 percentage points.
In terms of expenditure, domestic dairy companies spare no expense in marketing, with Mengniu being particularly aggressive. In the first half of 2020, Mengniu's marketing expenses reached 11.5 billion yuan, ranking first among domestic dairy companies, followed by Yili at 11.3 billion yuan.
From financial reports, the marketing expenses of domestic dairy companies mainly include advertising and promotion costs, sales and distribution staff costs, and exhibition expenses. In the first half of 2020, due to sponsoring variety shows such as "Romantic Trip" and the parent-child reality show "Nature Super FUN," Yili spent 6.2 billion yuan on advertising and marketing.
Data source: Financial reports, Node Investment Research
Over the past six and a half years, Mengniu's selling expense ratio has climbed from about 21% to about 30%. Such a high selling expense ratio has brought a certain degree of revenue growth, but has had little effect on net profit, which has instead shown a downward trend year-on-year. It can be seen that the effect of spending heavily on advertising may not be satisfactory.
Data source: Financial reports
In terms of debt and capital turnover capacity, Yili and Mengniu's overall operating capacity is more stable than Bright's, but Mengniu's frequent M&A activities in recent years have indeed brought a certain long-term debt burden. Data source: Financial reports, Node Investment Research
Differences in accounts receivable turnover days among the companies reflect their bargaining power with upstream and downstream channel partners. Mengniu has the strongest bargaining power in channels, with accounts receivable turnover days basically between 3 and 6 days in the past three years, followed by Yili with 9 to 12 days. In contrast, Bright's accounts receivable turnover days are as long as 19 to 31 days.
In contrast, Mengniu's inventory turnover is fast. Its inventory turnover ratio is basically between 6 and 8, far lower than Bright's 13 to 15. This shows the former's strong control over inventory.
Data source: Financial reports, Node Investment Research
In terms of short-term solvency, Mengniu's quick ratio has remained basically around 1 with small fluctuations, indicating that Mengniu's overall short-term solvency is relatively stable. In contrast, the quick ratios of Yili and Bright are both declining significantly, reflecting a decline in their ability to directly repay short-term loans and interest due at any time.
Data source: Financial reports, Node Investment Research
In terms of long-term solvency, the equity ratios of Yili and Mengniu have both increased slightly in the past three years, but overall, Yili's equity ratio is lower than Mengniu's, indicating that Yili's ability to operate with debt and repay long-term debt is stronger than Mengniu's, but the long-term solvency risks of both companies are increasing. In contrast, Bright's long-term and short-term solvency are both weaker.
Data source: Financial reports, Node Investment Research
It can be seen that, thanks to their advantages in channels, scale, and other aspects, Yili and Mengniu still have obvious advantages in the domestic dairy market, not only in terms of revenue and net profit but also in their stronger ability to bear debt risks. However, it is worth noting that the two leaders rely too heavily on marketing-driven sales models, and whether they can continue to maintain the performance growth expected by the company in the next stage is questionable. **-04-**
**The Low-Temperature Milk War Under Consumption Upgrades**
In today's dairy market, ambient milk and milk powder have entered an oligopoly stage with significantly slowed growth, and the low-temperature milk (pasteurized milk) track, which previously received little attention, has become a new battlefield for major dairy companies. This is partly due to improvements in domestic cold-chain transportation technology and partly due to consumers' milk consumption upgrades.
In recent years, in addition to dairy giants like Yili and Mengniu entering the low-temperature milk track on a large scale, regional companies such as New Hope and Bright are also making efforts, and even e-commerce giants represented by Alibaba have begun to lay out the pasteurized milk market. Companies are rushing to enter, hoping to get a market ticket earlier.
According to Nomura Orient International Securities data, **in 2019, the market size of pasteurized milk in China was about 34.3 billion yuan, a year-on-year increase of 11.6%, while the sales scale of ambient milk was 94.2 billion yuan, with a year-on-year increase of only 1.7%.**
Compared with ambient milk, the profit level of pasteurized milk is considerable. According to New Hope Dairy data, the gross margin of its low-temperature products in 2019 was 42.87%, far higher than the 24.67% for ambient products. In some well-operated regions, the net profit margin of low-temperature dairy companies can reach 5%-10%, higher than the industry's 4.3%.
In this segment, local dairy companies have their own advantages, which brings more challenges to the expansion of ambient milk leaders like Yili and Mengniu. Previously, considering the short shelf life of low-temperature milk and the need for complete logistics and cold-chain technology for long-distance transportation, dairy companies generally chose to build factories and supporting pastures nearby, dominating regional development. For example, Beijing Sanyuan, Shanghai Bright, Sichuan New Hope, and Henan Huahuaniu are all relying on local advantages to dominate their regions.
In addition, in the battle of pasteurized milk, the fight for milk sources is crucial. The reason why "those who get milk sources get the world" is that low-temperature pasteurized milk has high production and standard requirements, must use 100% fresh milk, and the milk source must come from fresh, pollution-free, large-scale high-quality pastures. Moreover, requirements for total bacterial count and protein content are stricter.
To accelerate penetration of the fresh milk market, national dairy companies such as Mengniu, Yili, and Feihe have extended their reach to upstream milk sources, hoping to acquire more high-quality pastures. Various capital such as KKR and CITIC Capital have also begun to join, flooding into pastures and related upstream and downstream industrial chains such as feed. To obtain more milk sources, upstream and downstream integration and mutual support have become industry development trends.
For example, in the new round of pasture acquisitions, Mengniu, in addition to its self-controlled Fuyuan Animal Husbandry, has also acquired Modern Farming and China Shengmu. Yili is not far behind: through Youran Animal Husbandry, it acquired Saikexing, an upstream dairy company on the NEEQ; and it became the only potential buyer of Huishan Dairy.
In addition to Yili and Mengniu's continuous mergers and reorganizations upstream, downstream companies are gradually striving for upstream raw milk, expanding market scale, and trying to gain more say. For example, Sichuan's New Hope Dairy, as the second largest shareholder of Modern Farming, takes milk according to shareholding ratio with giant Mengniu, trying to enter the first tier with the help of milk sources.
However, for dairy companies, large-scale pastures are an industry requiring high technology, high capital investment, and professional talent. Direct acquisition of pastures often fails to bring returns in the short term. From the data, Mengniu's investments and acquisitions such as Modern Farming and Yashili have become "dragons" on the company's financial reports in the short term.
For related companies, building and operating large-scale pastures is not simple. From the perspective of investment return cycle, a large pasture usually takes six to ten years to recover costs. In addition to high time and capital costs, large-scale pastures also face environmental and other issues in dairy farming.
Driven by government policies and increasingly strict regulations, the number of small dairy farms in China has decreased rapidly in recent years, from 2.67 million in 2007 to 660,000 in 2018, a drop of nearly 75%. At the same time, the number of dairy cows has also been declining, from 14 million in 2013 to 6 million in 2018.
Data source: 2019 China Dairy Statistics
In addition to the milk source war, domestic dairy companies also face cost pressures from rising fresh milk prices. According to a Haitong Securities report, in Q2 2020, the average price of fresh milk in major producing areas was 3.59 yuan/kg, a year-on-year increase of 1.33%. In 2019, the average price of fresh milk in major producing areas was 3.65 yuan/kg, a year-on-year increase of 5.48% from 3.46 yuan/kg in 2018.
The above Haitong Securities report predicts that under cost pressure and raw milk price fluctuations, the market concentration of the domestic dairy industry will further increase in the next stage. This means that similar to Yili and Mengniu, the duopoly pattern will continue, the advantages of industry leaders will be further strengthened, and more small brands may be eliminated. China's milk war will usher in new opportunities and challenges.


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