---
title: "Dairy Industry Enters the Second Half: No Easy Growth"
description: "In recent years, due to optimistic expectations for consumption, Chinese dairy companies have seen a boom in large pasture construction, and small and medium-sized farms have actively expanded their herds, but the overly rapid capacity expansion has laid hidden dangers for today's dairy industry difficulties. Nielsen data shows that from 2021 to 2023, the revenue growth rate of domestic dairy products significantly declined, with year-on-year growth of 7.9%, -6.5%, and -2.4% respectively, while raw milk production capacity maintained an average annual growth rate of 7% during the same period. Since this year, the impact of oversupply of domestic raw milk has further escalated. The direct impact is that the price of raw milk continues to decline, even leading to a price-cost inversion."
author: "窄播"
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published: "2024-07-22"
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# Dairy Industry Enters the Second Half: No Easy Growth

> In recent years, due to optimistic expectations for consumption, Chinese dairy companies have seen a boom in large pasture construction, and small and medium-sized farms have actively expanded their herds, but the overly rapid capacity expansion has laid hidden dangers for today's dairy industry difficulties. Nielsen data shows that from 2021 to 2023, the revenue growth rate of domestic dairy products significantly declined, with year-on-year growth of 7.9%, -6.5%, and -2.4% respectively, while raw milk production capacity maintained an average annual growth rate of 7% during the same period. Since this year, the impact of oversupply of domestic raw milk has further escalated. The direct impact is that the price of raw milk continues to decline, even leading to a price-cost inversion.

In recent years, due to optimistic expectations for consumption, Chinese dairy companies have seen a boom in large pasture construction, and small and medium-sized farms have actively expanded their herds, but the overly rapid capacity expansion has laid hidden dangers for today's dairy industry difficulties. Nielsen data shows that from 2021 to 2023, the revenue growth rate of domestic dairy products significantly declined, with year-on-year growth of 7.9%, -6.5%, and -2.4% respectively, while raw milk production capacity maintained an average annual growth rate of 7% during the same period. Since this year, the impact of oversupply of domestic raw milk has further escalated. **The direct impact is that the price of raw milk continues to decline, even leading to a price-cost inversion.** According to the latest data from the Ministry of Agriculture and Rural Affairs, the price of fresh milk has fallen year-on-year for 27 consecutive months, the longest continuous decline since 2010. To digest excess capacity, some breeding enterprises have culled dairy cows to control costs, and some cows have entered the beef market, leading to a continuous decline in beef prices this year. Many dairy companies have had to use spray drying to store excess fresh milk, despite losing 10,000 yuan per ton of spray-dried milk. The oversupply of domestic raw milk has also led to a reduction in imports, affecting the price of fresh milk in New Zealand. The weak dairy consumption market has plunged the entire domestic dairy industry into a trough. Zou Yang, Chairman of Tianjin Haihe Dairy, stated bluntly at the FBIF2024 Forum, **"After March this year, the sales of all categories in China's dairy industry have been very poor, and the pressure on large enterprises is enormous."** Yan Wei, Partner at Roland Berger, also said at the above conference, **"The domestic dairy industry has entered the true second half, with no easy growth."** When the overall market growth is slow but structural changes are obvious, it means that if you act quickly and see clearly, you can seize the trends of category changes. Facing difficulties, we have observed three major trends of dairy companies actively seeking survival: first, continuously developing new products in segmented categories, such as launching affordable low-temperature fresh milk and expanding yogurt consumption scenarios in the meal replacement and leisure track; second, expanding new channels, especially seeking growth opportunities in lower-tier markets and the B2B market; third, catering to consumers' health needs, focusing on healthier, more organic, and more nutritious dairy products.

**Low-Temperature Fresh Milk Ushers in a Favorable Wind**
**Dairy Companies Innovate Beyond Just Flavors**
In terms of product structure, currently, domestic dairy consumption is still dominated by room-temperature milk. However, with the maturity of cold chain technology and consumer awareness, low-temperature pasteurized fresh milk, which has higher freshness and nutritional value, is growing significantly faster than the overall liquid milk. **Major dairy companies are increasing their efforts in the low-temperature milk sector.** Due to the short shelf life and limited sales radius of low-temperature fresh milk, industry concentration is lower than that of room-temperature milk. Euromonitor data shows that in 2022, the industry concentration of room-temperature white milk and low-temperature white milk was 87% and 28%, respectively. Room-temperature white milk is dominated by national leading enterprises Yili and Mengniu. In the low-temperature fresh milk sector, regional dairy companies with local milk sources and channel networks have an advantage. The organic fresh milk launched by Hema in cooperation with Shaanxi's Huashanmu Dairy has gradually opened up Shaanxi's low-temperature pasteurized milk market since its launch in Xi'an stores in January 2019, and is now distributed to 29 cities across the country through Hema's cold chain channels. According to Huashanmu statistics, low-temperature pasteurized milk has grown by more than 70% annually since 2019, with growth exceeding 130% last year. Notably, as the dairy price war that lasted throughout 2023 continues, **low-temperature milk, which previously had high unit prices, is also trading price for volume.** NielsenIQ data shows that in 2023, the price per pack of low-temperature fresh milk fell by 0.5%, while in 2022 it increased by 8.6%. Recently, Hema's organic fresh milk dropped from nearly 30 yuan per bottle last year to 19.9 yuan per bottle, and it also launched an organic high-calcium 4.0 pasteurized milk priced at over 20 yuan. Hema's affordable organic milk not only caters to consumers' focus on value for money but also escalates the low-temperature milk price war this year. Hema stated that the scale production effect brought by higher sales volume has reduced logistics costs by about 3%, and the introduction of the TPM model at the factory production end has also reduced manufacturing costs by 2-3%, with these cost reductions across various links helping Hema lower fresh milk prices. At the same time, **to explore structural opportunities in the existing market, dairy companies are continuously creating segmented consumption scenarios and developing innovative categories in various segments.** Innovation is not only reflected in flavors but also **includes texture, form, packaging, consumption scenarios, and the cultural value endowed.** For example, Tianjin's time-honored brand Haihe focuses on flavored milk innovation. In addition to launching flavors like rose lychee and cherry blossom white peach, it also introduced a "cilantro avocado" flavor, which is a bold breakthrough for Haihe and faced significant pressure before launch. Fortunately, the cilantro avocado flavor product received positive feedback after launch and even became a city representative, with people saying, "The relaxation of Tianjin people is reflected in this milk." Zou Yang stated that as a time-honored Tianjin brand, Haihe should draw on Tianjin's cultural temperament to make milk that is **"delicious and fun."** Recently, Haihe also collaborated with Deyunshe to launch co-branded yogurt products and an ice cream called "Yunhe Jiuxiao," endowing the products with the cultural connotation of Tianjin crosstalk. Bai Xuedong, Vice President of New Hope Blue Ocean, believes that flavor innovation is minor innovation because the entry barrier is too low and easily achieved. Bai Xuedong stated that in the past, yogurt has always focused on health, with no significant breakthrough in the **delicious and leisure** track. Therefore, Da Vinci, a new brand under New Hope Blue Ocean Dairy, decided to focus on this track. When launching its first product "Good Satisfaction," Da Vinci wanted to make a breakthrough in taste to achieve a stunning effect, so it put whole strawberries and grapes into it, creating a "luxurious, three-dimensional fruit experience." It also developed a PET cup packaging, "consumers think it's glass when they hold it." The innovation from inside to outside enhanced consumer perception, and this new product received good feedback after launch. In three years, Da Vinci's annual sales grew from 30 million to 260 million yuan. The emerging yogurt company "Xin Xiaomei" launched in 2020, innovating by breaking through yogurt consumption scenarios and choosing to focus on room-temperature stirred yogurt. "Everyone drinks yogurt; we make it for eating." Zhang Xingshi, General Manager of Xin Xiaomei's Marketing Center, stated that they will firmly pursue the meal replacement track, continue innovation, and create differentiation. In the second phase of the product, Xin Xiaomei launched a grain lid containing fruit oatmeal and fruit freeze-dried pieces, making it clear to consumers. This is because meal replacement has rigid demand and high frequency, expanding the consumption scenarios of yogurt. **Cheese is showing a trend towards snacking and dessertification.** Ren Song, Executive President of Milkground, stated that when they started making cheese in 2015, the penetration rate of cheese in China was in single digits. Milkground launched the cheese stick category, and by the end of 2019, the single product exceeded 500 million, and the next year exceeded 1.5 billion, rapidly developing into a major product in the cheese industry. Through cheese sticks, more and more Chinese consumers have gained awareness of cheese. Compared with Japan, China's proportion of yogurt and cheese is much smaller, and there are still many opportunities for structural optimization. By deeply exploring these segmented categories, dairy companies can find new growth points in the existing market and promote the structural upgrade of the entire industry.

FBIF Food & Beverage Innovation Forum 2024 Roland Berger Partner Yan Wei

**New Growth Channels:**
**Focus on B2B Market and Lower-Tier Markets**
In terms of channels, dairy companies are also trying to find new ways out, with one main track being **competing for the B2B market.** In recent years, the rapid development of freshly made coffee, new tea drinks, and baking markets has brought growth opportunities for dairy companies. Taking the coffee industry as an example, according to Hua'an Securities estimates, the expansion brought by the B2B coffee track to dairy products is expected to reach 26.5 billion yuan by 2025. In the freshly made coffee track, domestic consumers are keen on milk coffee and have diverse needs for thickness, milk aroma, and sweetness; in the new tea drink track, light cream bases with "0 trans fatty acids, 0 non-dairy creamer, 0 hydrogenated vegetable oil" have become the new industry benchmark; the baking bread track is also "rolling" dairy ingredients. These industries have put forward more diversified and professional requirements for dairy products, while giving dairy companies opportunities to enter. Major dairy companies such as Mengniu, Sanyuan, Royal Group, Beingmate, and Fonterra are actively expanding B2B channels and launching customized dairy products. For example, in July, Nestlé Professional announced a further strategic cooperation with Chayanyuese, launching a tailor-made milk base product for it; since 2023, Mengniu Professional Beverages has launched three major product categories suitable for beverage stores: pure milk, whipping cream, and milk base, and has successively reached cooperation with B2B customers such as Wedome, KFC, and Baishida; Royal Group also provides water buffalo milk raw materials for brands such as Guming, Bawang Chaji, Lelecha, and Manner Coffee... Gerard Smith, CEO of Australian dairy giant Noumi, said that sales in many To C categories are declining, so brands are considering what new touchpoints can create a second growth curve. Therefore, Noumi launched Milklab, a plant-based milk brand specially designed for coffee shops, which now cooperates with 73% of Australian local coffee shops and is currently opening up the Chinese coffee shop market. At the same time, looking at the national regional market, **dairy products show growth potential in lower-tier markets.** The NielsenIQ Zero Research Report points out that lower-tier markets are the main battlefield driving the growth of the consumer market. From 2019 to 2023, the compound growth rate of sales of room-temperature liquid milk, low-temperature liquid milk, and adult milk powder in lower-tier markets was better than that in upper-tier markets. At the same time, in 2023, the number of stores in lower-tier markets increased by 90,000, with an expansion rate of 2%. Thanks to the sinking of domestic chain supermarkets and the year-by-year development of cold chain logistics, dairy manufacturers have the opportunity to further increase their market penetration in lower-tier cities and rural areas.

NielsenIQ Report "2024 China Dairy Industry Trends and Outlook" Liu Chunxi, Executive President of Yili, mentioned that **many township consumers have changed from not drinking liquid milk and only drinking a small amount of milk powder to having the habit of drinking milk every week and every day.** Since 2023, Yili has insisted on channel sinking, increased investment in new channels in counties, and held multiple innovative marketing activities combined with local characteristics of counties. For example, recently, Yili jointly launched a co-branded product with Xi'an's Great Tang All Day Mall. Last year, Yili also interacted with popular cities Zibo and Harbin through products. Liu Chunxi stated that **the classification of dairy consumption in county populations is relatively direct, mainly divided into three categories: nutritious milk, delicious milk, and beverages.** Based on research on lower-tier market areas, Yili mobilized dairy industry clusters distributed in second- and third-tier county cities. On the one hand, it produces products that meet local needs according to local tastes; on the other hand, it uses digital systems to allocate resources, ensuring that products can be quickly and accurately delivered to consumers. **In addition, as sales in traditional hypermarkets decline, growth channels have shifted to membership supermarkets, discount stores, and small convenience stores.** Yan Wei pointed out that during the current period of weak dairy consumption, most consumers are more price-sensitive, and channels that win by price, such as Pinduoduo and emerging discount stores, are developing faster. The middle class, on the other hand, cares more about quality-price ratio and has certain requirements for both product quality and price. Therefore, membership supermarkets like Sam's Club and Costco have strong performance. For these two types of channels, Yan Wei believes that discount stores mainly attract traffic through low-priced products, thereby driving sales of white-label products, but low prices will also affect the overall price system, and brands need to weigh the development weight in different channels. In membership stores, consumers tend to buy products that are different from other channels, so brand merchants need to provide differentiated products.

**Healthier, More Organic, More Nutritious,**
**New Protein is the Future Trend**
The enhancement of consumers' health awareness is a major trend in the dairy industry, and dairy companies have correspondingly launched various more segmented and functional products, **with innovation directions mainly focusing on sugar-free and low-fat, gut health, weight control, and chronic diseases in middle-aged and elderly people.** Among them, **sugar-free and sugar reduction** are the main directions for major dairy brands. Yili launched lactose-free milk "Shuhua Ankangjian," claiming to be the world's first blood sugar control milk. This product is not only for the elderly but also for young people under stress and with irregular diets. **In the yogurt track, zero sucrose and zero fat have almost become standard.** Brands such as Lechun, Wandashan, Classy Kiss, and Jane Ho have all launched zero sucrose products. Adding sugar substitutes is a way for many yogurt brands to ensure taste, while Da Vinci yogurt, to cater to consumers' psychology of "fear of sugar," innovated on the basis of zero sucrose and launched zero sugar substitute yogurt, balancing deliciousness by adding fruit jam. Demographic changes have also led dairy products to develop in the direction of functional segmented innovation. In recent years, the birth rate of newborns in China has dropped sharply, impacting the infant formula field. However, population aging is irreversible, and the dairy product market for adults and middle-aged and elderly people has huge potential. Lou Yuanying, nutrition expert at IFF, stated that to grasp the middle-aged and elderly market, it is key to capture the two major needs of nutrition and health. Currently, global innovation in food and beverages for middle-aged and elderly groups is still very niche. Dairy companies can provide corresponding solutions in dairy products for common problems such as elevated blood sugar, lactose intolerance, cardiovascular and cerebrovascular diseases, and muscle and bone degeneration in the elderly. Yan Wei also mentioned that Japan has made various refined products in the middle-aged and elderly dairy market for gut health, bone health, sleep, vision, and other fields, and its experience is worth learning from. Some high-end dairy products that focus more on health, organic, and sustainability target the middle class. Casey Thomas, Vice President of Fonterra Greater China, believes that grass-fed milk has huge development potential in China. He stated that in recent years, the global compound annual growth rate of grass-fed milk has exceeded 20%. With the development of China's middle class, the improvement of green consumption awareness, and the growth of demand for health and well-being, it will promote the development of the high-end market. Grass-fed milk comes from cows that are mostly naturally grazed outdoors and mainly fed fresh pasture. This feeding method is closer to the natural living habits of cows, and grass-fed milk is considered to have higher natural attributes and nutritional value. However, due to the extremely small number of pastures with grass-fed conditions globally, the production cost of grass-fed milk is relatively high, and grass-fed milk products are usually priced higher. The market awareness of grass-fed milk still needs to be improved, and consumer acceptance needs time to cultivate. Notably, **new protein is a star field in the future development trend of dairy products.** Several companies focusing on new protein, such as GFI, Shuidi Nongchang, Perfect Day, and Formo, shared their technological progress and future visions at the FBIF2024 Forum. New protein usually refers to alternative proteins different from traditional animal-derived proteins, sourced from plants, microbial fermentation, animal cell culture, and other non-traditional livestock pathways. Among them, competition in plant-based products is particularly fierce. Domestic beverage brands such as Nongfu Spring, VV, Yangyuan, and Doudouben are accelerating their layout in the plant-based protein field. In recent years, more and more plant-based products have entered consumers'视野. Plant-based milk, made from plant-based raw materials such as soybeans, almonds, oats, coconut, cashews, and peanuts, has attracted consumer groups who are lactose intolerant, focus on low sugar and sugar-free, and pay attention to environmental protection and sustainability. Gerard Smith believes that plant-based milk rich in nutrients will become a trend in the next few years. Currently, a quarter of coffee shops in Australia use plant-based milk. GFI stated that for consumers, traditional animal protein has many pain points and limitations, such as higher fat and cholesterol content, higher calories, which may lead to three highs and obesity, and these pain points and limitations will be the space for new protein to play in the future. New protein can provide high protein, compound nutrition, low fat and low calories, and good taste. It also has advantages in improving immunity, promoting digestion, and maintaining energy. According to Boston Consulting Group data forecasts, by 2035, the global new protein market size is expected to reach $290 billion (approximately 2.08 trillion yuan), accounting for 11% of the market share of all protein types.

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