In May 1950, a propaganda vehicle converted from an old car appeared on the streets of Shanghai, with the words “Guangming Arrives” and a torch-shaped trademark on the front. A female comrade holding Guangming promotional materials stood on the vehicle, broadcasting slogans along the way: “State-owned factories are the people's factories; please consume your own factory's products.”
This newly launched “Guangming” brand was both politically correct and had weathered many hardships. Three months before the propaganda vehicle took to the streets, the Kuomintang Air Force conducted indiscriminate bombing of Shanghai, severely damaging civilian facilities including Yangshupu Power Plant and Zhabei Water and Electricity Company, causing widespread power outages in the urban area. At that time, the Xinhua Egg Products Factory in Hongkou had a large amount of cold drink inventory at risk of being scrapped.
At the critical moment, a young deputy engineer stepped forward. Under his leadership, two 320-horsepower diesel generators were connected in parallel to generate electricity, successfully saving the factory's inventory. Later, Xinhua Egg Products Factory was renamed Shanghai Yimin No.1 Food Factory. This deputy engineer, a graduate of Shanghai Jiao Tong University, was promoted to general manager and founded the food brand: Guangming.
At that time, Yimin No.1 Factory had over 10 ice cream production lines and 5 ice pop production lines, becoming the first enterprise in New China capable of large-scale industrial production of cold drinks. Under his leadership, Yimin No.1 Factory successively produced Guangming brand milk powder and a cheaper substitute milk powder. At this time, Guangming's future competitors Yili and Mengniu would not be established for several more decades.
Although the Ministry of Light Industry issued the “Quality Standards and Inspection Methods for Dairy Products” in 1958, before the industrialization of dairy products, most of the milk consumed by Chinese people was “reconstituted milk” made from skimmed milk powder and anhydrous butter, mixed with some fresh milk, highly approximating fresh milk. The real milk that capitalists loved to dump during economic crises was far from ordinary people.
It wasn't until the 1990s that the domestic milk industry truly established itself. This industry experienced barbaric growth and nationwide criticism, and is still naturally viewed with suspicion and doubt by the public. Decades later, looking back, the brand that was once “both red and expert” failed to ride the wave of history and gradually fell behind in successive milk wars.
The prelude to this series of milk wars was opened by a Swedish company.
-01- Fresh Milk War: The Golden Eight Years of China's Dairy Industry
In the early 1990s, Deng Xiaoping's southern tour speeches triggered another wave of foreign investment in China. Tetra Pak, a Swedish company specializing in aseptic packaging for food, also sent business representatives to mainland China. But the headquarters' order was not to advertise or expand customers, but to:
Find a way to make Chinese people drink milk.
Before the popularization of aseptic packaging, there were two main ways Chinese people drank milk: one was milk farmers using buckets to deliver fresh milk, ringing bells as they walked through streets and alleys, commonly known as “da nai” (buying milk), which required heating and sterilization before drinking; the other was manufacturers sterilizing and bottling in glass bottles, but this was prone to loss during transportation, and the recycling and cleaning of glass bottles was also a significant cost.
Moreover, both types of milk had a fatal problem—short shelf life. Whether in buckets or glass bottles, milk's shelf life at room temperature was less than a day. At that time, many families didn't even have refrigerators, let alone high-end cold chain transportation, which resulted in a very small sales radius for milk, and the upstream supply chain represented by dairy farmers and milk collection stations was even more fragmented.
Tetra Pak's aseptic packaging patent extended the shelf life of milk at room temperature from a few hours to several months.
In the summer of 1998, Tetra Pak, together with Beijing's dairy company Sanyuan, organized a “China Milk Science Forum,” where over 200 experts gathered to discuss why the average height of Japanese people had increased by 10 centimeters compared to the previous generation. After several days of intense “discussion,” the experts unanimously concluded: Japanese people grew taller because they drank milk.
Thus, the slogan “A pound of milk a day makes China strong” and the Ministry of Education's “Student Milk” plan opened up a huge market. Milk in “Tetra Brik” and “Tetra Fino” packaging reached millions of households, also giving rise to the first major division in China's liquid milk market—UHT milk and low-temperature milk.
UHT milk, also known as ultra-high temperature processed milk, undergoes sterilization at 137°C-145°C for 4-15 seconds, killing both bacteria and proteins. It is characterized by low nutrition and average taste, but has a shelf life of 6-12 months and is inexpensive.
Low-temperature milk, also known as pasteurized milk, is sterilized at 75°C-85°C for 15-20 seconds, retaining high nutrition and good taste, but has a shelf life of only 7 days and relies heavily on cold chain transportation, making it 3-4 times more expensive than UHT milk.
The degree of nutrient destruction between UHT and pasteurized milk, Northeast Securities
In China, 70% of milk is produced in the golden milk source belt spanning Inner Mongolia, but 70% of milk consumption is in Beijing and the southeastern coast. The disconnect between production areas and consumer markets outlined two distinct development paths for China's liquid milk market: Mengniu and Yili focusing on the national market; Beijing Sanyuan and Shanghai Guangming focusing on regional markets.
In 1996, Shanghai established Bright Dairy based on the “Guangming” brand. Leveraging the purchasing power of Shanghai and the East China market, Guangming's high-priced low-temperature milk sold well. By the time Bright Dairy went public in 2002, its main business revenue reached 5.021 billion yuan, far exceeding Yili's 4 billion and Mengniu's 1.668 billion. Its milk production, sales, revenue, and market share were all first in China.
However, due to high cold chain transportation costs and a shelf life of only seven days, Bright Dairy often had to pay 5-8% more in channel fees than UHT milk to enter hypermarkets like Carrefour. Besides convenience stores on the street, the main channel for low-temperature milk was home delivery, and the labor costs for dairy companies can be imagined. This naturally confined Bright Dairy's low-temperature milk to the affluent East China region.
Bright Dairy's classic pasteurized milk product “Youbei”
For Mengniu and Yili, born in the golden milk source belt of North China, rather than making low-temperature milk that locals found expensive, it was better to make UHT milk with a longer shelf life and follow the route of surrounding cities from rural areas. With the explosion of milk consumption at the beginning of the century, “grabbing markets while grabbing milk plants” became the industry's main theme.
Niu Gensheng, founder of Mengniu, first secured over 500 outdoor billboards in Hohhot, emblazoned with “Inner Mongolia's Second Dairy Brand”; then bought time slots on CCTV, shouting “Be China's most bullish dairy enterprise.” In 2000, Niu Gensheng went south to Shenzhen, recruiting 300 ground promotion staff at once, all dressed in Inner Mongolian ethnic costumes, sweeping through residential communities one by one, giving away the first 10 boxes free in each community, selling 50 million yuan in a year.
Vigorous consumption transmitted upstream, resulting in double-digit growth in dairy cow inventory, total milk production, and per capita milk consumption from 2001 to 2006. However, the milk supply was chaotic; building one's own milk plant was not as good as grabbing others' milk sources. Until the Sanlu incident, the best quality-managed enterprises' self-built large-scale milk plants accounted for only 10%-15% of total milk sources.
In 2004, at the annual meeting of the China Dairy Industry Association in Wuhan, the president of a Shandong dairy company suddenly went off-script passionately, accusing Mengniu and Yili, who were present, of grabbing milk from his company's milk source base. At that time, Mengniu created the industry-famous “Mengniu Speed”: in the first three years, it surpassed one similar enterprise on average every day, and sales grew 200-fold in five years.
At the end of 2003, Niu Gensheng was named one of CCTV's Top Ten Economic Figures of the Year, with an award citation in the style of Zhu Jun: “His surname is Niu (cow), but he runs at the speed of a rocket.”
Before the melamine incident, China's raw milk production continued to grow, Nomura Securities
During the same period, China's dairy industry entered a turbulent phase: first the Fuyang inferior milk powder incident in 2004, then the Bright Dairy “recycled milk” incident in 2005, and Nestlé milk powder was also listed by Zhejiang Provincial Administration for Industry and Commerce as exceeding iodine standards. In June 2007, major dairy companies signed the “Nanjing Declaration on Dairy Enterprise Self-Discipline” in Nanjing. In 2008, the melamine incident broke out.
After the melamine problem was exposed, 135 dairy companies went to Beijing to participate in a seminar on “Quality and Safety Commitment of Dairy Products.” The meeting was led by the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), but its director, Li Changjiang, was conspicuously absent. The next day, Li Changjiang resigned.
Major public events often serve as catalysts for reform. One month after the seminar, the State Council fired the first shot: milk stations could only be operated by dairy companies, farms, or local cooperatives. From an industry development perspective, strong regulation inevitably accelerates the elimination of small and medium-sized enterprises, leading to increased industry concentration and continued growth of the leaders.
Historical experience shows that the plasticizer incident in liquor, the clenbuterol incident in pork, and even the vaccine incident at Changchun Changsheng all became supply-side reforms for their industries.
As various departmental documents were issued one after another, dairy companies took turns building their own pastures, and milk sources were divided up by leading companies. The costs of self-inspection and random inspections also rose, with testing costs as a proportion of total costs soaring from 5% in 2008 to 12% in 2012. A leader of a dairy company once said at an industry meeting: “In half a year, we were inspected more than 2,600 times. Such inspections would kill people.”
Under regulation, individual dairy farmers and small milk plants upstream gradually faded away, while leading companies with stronger downstream channel capabilities quickly captured market share. Leveraging the price and shelf life advantages of UHT milk, Mengniu and Yili used the rural-encirclement strategy to carve up nearly 80% of the UHT milk market.
For low-temperature milk, facing the three mountains of shelf life, cold chain transportation, and price, market concentration is difficult to increase like UHT milk. The top three domestic players—Bright Dairy, Sanyuan, and New Hope—together hold less than 30% of the market.
Changes in market concentration of UHT and pasteurized milk, Northeast Securities
Reflected in company performance, Bright Dairy, after taking the top spot in domestic milk in 2002, was quickly overtaken by Mengniu and Yili. Wang Jiafen, then chairman of Bright Dairy, established a UHT business unit and elevated UHT milk to the same status as low-temperature milk, but never had a competitive UHT product. Instead, it created internal competition between the UHT and low-temperature businesses.
Revenue comparison of Mengniu/Yili/Bright Dairy
During the same period, Bright Dairy was also embroiled in a protracted equity tug-of-war with Danone. Danone hoped to control Bright Dairy through capital and then dominate China's dairy market, while Bright Dairy refused to yield on brand control. Under dual internal and external constraints, Bright Dairy had to refocus on its low-temperature milk business. In 2008, Wang Jiafen, the soul figure who had led Bright Dairy for 15 years, left, leaving behind a meaningful remark:
“Bright is a state-owned enterprise; the appointment of general managers and chairmen must follow regulations. A manager's career eventually ends; this is the most appropriate time.”
-02- Yogurt War: Mosilian's Failure at the Last Hurdle
The core of the decade-long entanglement between Danone and Bright Dairy was the operating rights of the yogurt business.
In 2000, Bright Dairy underwent restructuring to prepare for listing, and Danone became a 5% shareholder. Since then, Danone gradually increased its attention to China's yogurt market. In 2004, Yi Shengmen, then president of Danone Asia-Pacific, visited Bright Dairy, expressing a strong desire for the operating rights of Bright's yogurt business, and even issued a harsh warning to Wang Jiafen: “Bright's management team has done well, but that only represents the past, not the future.”
At that time, Yi Shengmen also described to Wang Jiafen the process of Danone acquiring Lebaishi, where all of Lebaishi's management left, with strong overtones. Wang Jiafen later described in her memoirs: “I patiently recorded his nearly two-hour speech. If there is such a thing as shamelessness in the world, isn't this it?”
The tug-of-war continued intermittently for another two years, but on the most critical issues of yogurt operating rights and company control, neither side was willing to compromise.
Finally, at the end of 2006, Danone chose to part ways amicably with Bright Dairy and instead cooperated with Mengniu. In 2007, Danone transferred the yogurt sub-brand “Bio” to Mengniu for production and sales. A year later, Wang Jiafen, who had preserved Bright's operating rights, stepped down as chairman and faded from public view.
Behind the battle for operating rights was the gradual slowdown in overall fresh milk sales, the rising share of yogurt, and the possibility that the UHT fresh milk sector, which had gone from many players to oligopoly, could repeat in the yogurt sector.
Yogurt's sales share gradually expands, Nomura Securities
In 2009, Bright Dairy launched China's first room-temperature yogurt, “Mosilian.” As a yogurt product that requires no refrigeration and has a shelf life of up to 5 months, Mosilian, with its theme of “the secret of the longevity village,” avoided the limitations of low-temperature milk's sales radius and inability to operate nationally, and also caught the window period without similar competitors, becoming Bright's long-awaited hit product.
Before 2014, Mosilian almost monopolized the domestic room-temperature yogurt market, with sales surging from 160 million yuan in 2009 to 7.93 billion yuan in 2014. But Yili and Mengniu successively launched “Ambrosial” and “Pure Zhen,” entering the room-temperature yogurt field, abruptly halting Mosilian's growth momentum in 2015 and plunging it into a continuous decline.
Retail scale of room-temperature yogurt brands, Northeast Securities
A law in the consumer goods field is: whether a company has a reusable sales network often determines whether it can successfully expand its product categories.
For example, Nongfu Spring covers more than 2.37 million terminal retail outlets nationwide through 4,280 distributors, making it easy to shift from selling packaged water to fruit juices, tea drinks, and functional drinks. Bull, which makes sockets, once had a market value on par with Xiaomi, relying on 2,300 distributors and 730,000 sales outlets; almost every new product was pure profit.
But a nationwide channel is precisely Bright Dairy's weakness. As of 2019, Bright's number of distributors was only one-third of Yili's.
Bright's base is the low-temperature milk market in Shanghai and East China, with sales scenarios mainly in convenience stores and home delivery. It lags severely in building large supermarket channels where UHT milk dominates, and needs to redo what Mengniu and Yili have already done. Mengniu and Yili, having experienced the UHT milk melee, have ready-made UHT sales networks, allowing new products to be quickly distributed and price wars to be fought effortlessly.
On the other hand, although fresh milk and yogurt are both milk, their product attributes are completely different: fresh milk tastes similar, making product differentiation difficult, and consumers often focus on health and safety, so products don't need much iteration and have long life cycles. Yogurt, however, has differences in taste and flavor, has a shorter life cycle, and requires building a product matrix quickly based on hit products.
This is somewhat like the white goods and black goods in home appliances: fresh milk is like air conditioners, with slow changes in technology and processes, and buying one can last ten years; yogurt is like televisions, with constant iteration in technology and processes, and consumers have many choices, requiring higher demands on marketing and product iteration, which is also Bright's weakness.
In 2010, Yili spent 2 billion yuan to sponsor the Shanghai World Expo in Bright's hometown. Wang Guobin of Orient Fund asked Bright: Why not participate in the grand event at your doorstep? Bright replied that its network of outlets was not enough to cover the 2 billion yuan advertising cost.
In 2015, when Mosilian began to show signs of decline, Bright Dairy also fell into continuous changes in internal management, with the general manager resigning and being taken away for investigation. The chairman and general manager also changed consecutively in the following years. After that, “stability” became Bright's main theme. In the yogurt business, where a product matrix was most needed, apart from “Rushi” and “Changyou,” there were few standout products.
In contrast, Mengniu and Yili, leveraging their channel advantages, fought fiercely on all fronts: in high-end UHT milk, Jindian vs. Telunsu; in children's milk, QQ Star vs. Future Star; in flavored milk, Guli Duo vs. Suan Suan Ru; for lactose intolerant groups, if you launch Shuhua milk, I'll launch one too. The intensity of the battle can be seen from the rising sales expenses of both companies.
Sales expense comparison of Mengniu/Yili/Bright Dairy, Northeast Securities
The problems Bright Dairy encountered in the room-temperature yogurt market are also the problems faced by many regional dairy leaders that started with low-temperature milk. They all got the same script: Yili and Mengniu, with their channel advantages, dominate nationwide, Pure Zhen and Ambrosial quickly capture the market, and Mosilian, though still influential, has gone from lead actor to supporting role.
Whether fresh milk or yogurt, more than 70% of China's liquid milk market is occupied by UHT milk, while low-temperature fresh milk and low-temperature yogurt together account for only about 15%. To quickly understand the industry landscape of China's milk market in one sentence: Yili and Mengniu dominate UHT milk, and regional dairy companies divide low-temperature milk. This pattern is unlikely to change for a long time.
However, this clear-cut market pattern has begun to blur due to the emergence of a new species in low-temperature milk last year.
-03- “Medium-Temperature Milk” War: The Battle for the Last Blue Ocean
In March 2020, the State Administration for Market Regulation issued a new version of the food production license catalog, adding a new milk category: high-temperature sterilized milk.
High-temperature sterilized milk refers to milk sterilized at a temperature slightly higher than low-temperature milk but lower than UHT milk. The resulting milk retains more active substances than UHT milk and has a longer shelf life than low-temperature milk, reaching 15-25 days, commonly known as “medium-temperature milk.” Since it wins twice, it can also be called “win-win milk.”
Wei Chuan's medium-temperature milk product
The birth of medium-temperature milk has two major backgrounds: UHT milk sales growth began to slow after 2014, even declining for three consecutive years from 2017 to 2019. Low-temperature milk sales began to grow rapidly with the improvement of cold chain logistics and the prosperity of food delivery platforms.
Compared to traditional pasteurized milk, the extra week of shelf life, coupled with more developed cold chain distribution in cities, significantly lowered the barriers for transportation, sales, and terminals for medium-temperature milk.
Another background is the traditional competitive wisdom of Chinese merchants: currently, the State Administration for Market Regulation only recognizes the product type “high-temperature sterilized milk” but has not issued national product standards similar to those for UHT milk and pasteurized milk. In other words, how to make UHT and pasteurized milk must follow national standards; but how to make medium-temperature milk is up to the enterprises.
Lower barriers and self-defined standards naturally lead to the familiar price war script. Meiji's “Chunyi,” Wei Chuan's “Yanxuan Ranch,” Bright Dairy's “Fresh Ranch,” Sanyuan's “72°C,” Mengniu's “Daily Fresh,” Junlebao's “Yuexianhuo,” etc., quickly filled supermarket shelves, all with discounts and promotions, buy-one-get-one-free, or add 1 yuan for a second bottle, making “fresh milk freedom” a reality for Chinese people overnight.
Major brands are rushing in, competing for the last oligopoly ticket in the dairy industry.
In several sub-tracks of dairy products, those dominated by oligopolies include UHT fresh milk, room-temperature yogurt, and milk powder. These industries have all experienced the historical process of “eliminating the small and retaining the large”: in UHT milk, Yili and Mengniu divide and rule; although milk powder concentration is not yet high, Chinese parents, after the melamine incident, have recognized that “expensive is good,” making Chinese children drink the most expensive milk powder in the world, and allowing Feihe and Yili to maintain astonishing growth after exceeding 10 billion yuan in annual revenue.
Sub-tracks without oligopolies either cannot achieve scale to become oligopolies (low-temperature fresh milk, low-temperature yogurt) or have markets too small to make being an oligopoly worthwhile (cheese, butter, ice cream).
The essence of these two types of business is that the former wins by volume, with core competency in channel capability; the latter wins by price, with core competency in brand premium.
Feihe, the leader in the milk powder industry, has an iron army of over 10,000 promoters stationed at more than 100,000 retail terminals and maternal and child stores nationwide. Distributors are required to hold events at least once every two days, and each event must drive 10 times the sales; if they fail twice in a row, they are replaced.
In the milk powder industry, where e-commerce accounts for less than 30% of sales, thousands of distributors and year-round parent-child activities have become the core technology of domestic milk powder, even leading too-young overseas short-sellers to mistakenly believe Feihe's performance was “too good to be true,” boldly shorting the stock eight days after its listing.
Ice cream is a typical small market with high premium potential. Yili's cold drink revenue accounts for less than 10% of total revenue, but its gross margin is higher than the average of all businesses. Nearly half of Häagen-Dazs' sales come from China, where per capita ice cream consumption is far lower than in the US and Japan, also because it is expensive. Although low-temperature yogurt has a short sales radius, it can leverage concepts like meal replacement and health to create premiums.
In July 2018, Yimin No.1 Factory sent a letter to consumers. The cause was a WeChat article claiming that Guangming brand cold drinks, adhering to a mid-to-low-end route, had not raised prices for 17 years, and were facing a supply crisis due to channel obstruction. Consumers were so anxious that they begged Guangming to raise prices on Weibo, a touching scene.
Businesses that win by price often create internet-famous hit products by building brands; businesses that win by volume often become oligopolies through channels. The sudden emergence of medium-temperature milk has carved out a new market space on the original clear boundary, turning a price-winning business into a volume-winning business and creating space for nurturing oligopolies.
In Bright Dairy's base of Shanghai and East China, Mengniu used low-price strategies to create the hit product “Daily Fresh” with annual sales growth of nearly 500%. Bright Dairy, borrowing Mengniu's cross-province attack tactics, copied Sanyuan and Junlebao's North China stronghold, dethroning the bagged fresh milk that Beijingers had drunk for over a decade.
For China's dairy industry, this may be the last war of “eliminating the small and retaining the large.” For consumers, how long this war lasts determines how long the Chinese people's “fresh milk freedom” lasts.
-04- Epilogue: The Industry Code of Consumer Goods
In the consumer goods field, “crossing the river by feeling the stones from Japan” is a commonly used tactic. Scenes described in “M-shaped Society” and “The Fourth Consumer Era” can always find corresponding mirrors in China. In Japan, with more complete cold chain logistics and stronger purchasing power, low-temperature pasteurized milk occupies 98.3% of the market share. Considering that Chinese people's pursuit of food freshness is unparalleled globally, upgrading from UHT milk to low-temperature milk is also a major trend.
But compared to Japan, China is larger, has more people, and has a deeper urban-rural divide. The north-to-south milk transport, cold chain logistics, and fulfillment costs mean that delicious pasteurized milk is difficult to penetrate county towns and rural markets. In the early 2000s when Bright Dairy led, a former Bright employee pointed out this problem:
“Low-temperature cold chain enterprises are only a niche in the current Chinese market; coffee drinkers can never compare in consumer population with plain water drinkers.”
In China, most consumer goods are essentially doing two kinds of business: one is the “population base” business, and the other is the “high-end purchasing power” business. For example, the battlefield of community group buying has always been in third- and fourth-tier cities, while Hema, which sells “seafood even Ma Yun can't afford,” finds it difficult to expand beyond first-tier cities.
Over the past few decades, the development logic of Chinese consumer goods has been hidden in population distribution: among the country's 1.4 billion people, only 80 million live in first-tier cities. This determines that the main battlefield for local brands will never be first-tier cities, but the vast lower-tier cities.
In the nearly a century since “rural encirclement of cities” was born, it has gradually transformed from a military strategy into a business strategy. Whether it's the several melees in the dairy industry, Huawei breaking foreign monopolies by going to the countryside, or Pinduoduo starting its counterattack from outside the Fifth Ring Road, they are all actually doing one thing—selling things to the most common billion people in China.
As long as these gaps, divisions, and disparities do not disappear, we will still find their traces in future successful business stories.
Source: Yuanyan Research Institute (ID: caijingyanjiu)
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