---
title: "Decoding Feihe Infant Formula: What's the Growth Strategy Behind a 15 Billion Yuan Revenue Increase in 4 Years?"
description: "This article analyzes the growth strategy of Feihe, a Chinese infant formula brand that rose from a 4% market share to 17.2% in six years, surpassing foreign competitors. It explores Feihe's high-end product positioning, focus on lower-tier cities, marketing tactics, offline promotion, and DTC model exploration."
author: "邹小困"
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published: "2021-08-05"
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# Decoding Feihe Infant Formula: What's the Growth Strategy Behind a 15 Billion Yuan Revenue Increase in 4 Years?

> This article analyzes the growth strategy of Feihe, a Chinese infant formula brand that rose from a 4% market share to 17.2% in six years, surpassing foreign competitors. It explores Feihe's high-end product positioning, focus on lower-tier cities, marketing tactics, offline promotion, and DTC model exploration.

Source: Growthbox (ID: growthbox2)

Hello everyone, I'm Zou Xiaokun.

Following the introduction of the three-child policy, parenting topics have once again sparked heated discussions, and the infant formula market has been brought into the spotlight. As a team dedicated to helping brands grow, Growthbox naturally pays close attention to the development of the maternal and infant industry and brand growth trends.

Undoubtedly, the biggest setback in the domestic infant formula market in recent decades was the 2008 melamine incident. Before the scandal broke, Sanlu was the undisputed leader among domestic infant formula brands.

After the overnight upheaval, Sanlu collapsed. At the time, many dairy company leaders thought their chance to rise had come, and they secretly anticipated a major reshuffle in the formula market, fantasizing about becoming the next leader.

However, the reality was that everyone underestimated the near-destructive blow of the melamine incident to the domestic dairy industry. **The market share of domestic infant formula brands plummeted from 65% to below 30%, and in first-tier cities, it fell to 15%.** Since then, consumer trust in domestic formula was completely shattered, and the market was nearly monopolized by imported products.

The past decade or so has been a period of rebuilding and lying low. Now, finally, a domestic brand has broken through the heavy encirclement of foreign brands. In six years, Feihe's market share grew rapidly from 4% to 17.2%, surpassing many foreign brands to **top the market share rankings.** As of the latest data in April 2021, **Feihe's market share reached 19%**, and it seems to be still growing.

Comparison of infant formula market share in 2014 and 2020
Source: Growthbox

I believe, like me, you firmly believe that national brands will eventually outperform foreign brands. However, have you ever wondered **why Feihe broke through** rather than other domestic brands? What is Feihe's winning formula?

Today, we will delve into the following aspects to uncover what Feihe has done right over the past decade and how they did it.

**1. Why did Feihe choose a high-end strategy?**
**2. While pursuing a high-end route, what user groups did they target?**
**3. What marketing tactics did Feihe use to build brand power, and what results did they achieve?**
**4. Why does Feihe still favor offline promotion when many brands focus on online channels?**
**5. As a traditional enterprise, how is Feihe exploring the DTC model?**

# **Reverse Thinking: Using High-End Products to Attack Lower-Tier Markets**

After Sanlu was brought down, Feihe quickly developed ambitions. To rapidly seize the market share lost by problematic dairy companies, Feihe adopted an extremely aggressive expansion policy. Starting in 2008, it quickly distributed products to the southern regions, and within a year, sales soared from 800 million yuan to nearly 2 billion yuan.

To this end, the helmsman Leng Youbin even signed a three-year betting agreement with Sequoia Capital.

But no matter how grand the scale, it couldn't overcome the fact that Chinese people had come to view domestic formula as "birds of a feather." As a result, Feihe, the first Chinese dairy company listed in the US, ultimately lost the bet and delisted in 2013, narrowly avoiding being sold to an American company.

Unwilling to hand over Feihe, Leng Youbin, guided by positioning theory, led Feihe on the path to rise.

Feihe's use of positioning theory is no secret in the industry. The theory was originally proposed by renowned American marketing experts Al Ries and Jack Trout in the early 1970s, and Feihe's positioning is "More suitable for Chinese babies' constitution."

However, our research found that on top of the grand framework of positioning theory, Feihe also incorporated the **dislocation theory** strategy.

The dislocation theory was derived from positioning theory by Liu Yuetan, a postdoctoral fellow in marketing at the University of Missouri. The theory posits that a brand should not only differentiate itself from competitors' similar products through "dislocation," but also strive to adjust and control customers' "psychological expectations," expanding the "dislocation" between "actual product" and "customer expectations."

In Feihe's case, this "dislocation" competitive strategy is implemented in two steps.

The first step is **following the "dislocation" positioning**: A few years ago, Feihe discovered that foreign formula brands had a high concentration in first- and second-tier cities, making it difficult to compete head-on. So it proactively chose lower-tier cities with low brand concentration as its main battlefield, gradually establishing its market position.

The second step is **upward "dislocation" transfer**: After gaining a firm foothold in the vast lower-tier cities, Feihe began to march into first-tier markets. Coupled with its high-end product positioning, it quickly became the number one formula brand in Beijing by market share.

While Feihe was transforming, other domestic brands were not idle. Their strategies might not have been as aggressive as Feihe's, but they all tried to showcase their skills.

### **Low Price vs. High Price: Feihe Wins**

Of course, Feihe was not the only one trying to seize the market vacated by Sanlu. In early 2009, several domestic dairy companies launched the most intense price war in history to compete for market share. However, after years of fierce fighting, they found that while sales revenue grew, net profits were far from optimistic.

What's worse, the market structure underwent a change extremely unfavorable to dairy companies: their bargaining power in the industry chain was greatly weakened.

In the past, formula manufacturers were relatively strong and had some bargaining power over downstream channels. After the price war began, it gave channels the opportunity to turn the tables, allowing them to demand greater concessions from dairy companies and share in their profits.

One participant, Beingmate, starting in 2016, faced the dual impact of the fake formula incident and the new formula registration system. As a listed company, under performance pressure, it launched aggressive promotions. Previously, Beingmate's sales expense ratio had never exceeded 45%, but in 2016 it soared to 62.13%.

Sales expenses kept rising, but sales revenue did not grow. Even though Beingmate's gross margin was relatively high in the industry, years of participating in price wars failed to save its **swing from profit to loss**.

Beingmate's net profit from 2011 to 2020 (in ten-thousand yuan)
Source: Growthbox

The low-price strategy, exemplified by Beingmate, turned domestic formula companies into market followers. No one could integrate the market or take up the banner of revitalizing China's national formula industry. Instead, they all ceded market dominance to foreign brands.

Perhaps dissatisfied with the bleak situation of domestic dairy companies, Feihe, which also faced bottlenecks, sought a solution to the brand positioning puzzle in 2015.

The solution had to start from the market environment. Our research found that the market environment at that time had three characteristics.

First, the impact of melamine was so profound that by 2015, foreign formula brands held a 70% market share in the domestic market.

What commonality did these foreign brands have? In one word: expensive. Chinese people often say, "Good goods are not cheap," so when it comes to buying things for infants, they certainly cannot skimp. Thus, for consumers, the willingness to pay more is driven by a strong desire for safety.

Second, in 2013, the tariff reduction agreement on dairy products was signed, making the landed price of imported formula 10,000 yuan per ton lower than the cost of domestic formula. At the same time, the rise of cross-border e-commerce and overseas shopping triggered a "price war" of buy-one-get-one-free in the formula industry. This had a huge impact on the existing formula pricing system.

Third, although domestic formula brands held a 65% market share in 2007, very few focused on infant formula, and there were even fewer professional brands dedicated to infant formula. In fact, only Sanlu was doing a dedicated infant category.

By 2014, in the domestic infant market of about 70-80 billion yuan, local companies' infant formula sales were basically hovering between 2 billion and 5 billion yuan, with none exceeding 10 billion.

Brand share of China's infant formula market in 2007
Source: Growthbox

Before 2015, Feihe's product layout was **comprehensive**, covering **low-end, mid-end, and high-end**. After synthesizing the above points, Feihe realized that its competitors should be imported brands. Since consumers had a demand for high-end products, **the "high-end" and "ultra-high-end" markets would become the key competitive points**.

Therefore, Feihe should decisively abandon the price war that hurt both sides, break away from the low-price promotion strategy in lower-tier cities, and reverse consumers' impression of domestic brands.

Soon, Feihe cut its low-end product "Feihui" and shifted to promoting its high-end product "Xingfeifan." This strategic adjustment sounds easy but actually requires considerable courage, because the Feihui series had been generating nearly 500 million yuan in annual revenue for Feihe, with a gross margin exceeding 40%.

However, you can't catch a wolf without risking a child. Giving up the lucrative low-end market allowed Feihe to focus more on the high-end market, while also ensuring consistency in customer experience and safeguarding Feihe's consumer reputation.

The current product series are divided into three levels: ultra-high-end, high-end, and ordinary. Among them, **Xingfeifan and Zhenzhi Organic are the flagship products, accounting for nearly 60% of Feihe's revenue.** These two products have also set a target of hitting 10 billion yuan in sales in 2021.

Feihe's ultra-high-end and high-end infant formula revenue growth rate in recent three years
Source: Growthbox

Moreover, Feihe has kept pace with competitors at every level in terms of product positioning and price. For example, Xingfeifan is priced at 480 yuan/kg, benchmarking against Wyeth's Illuma, Jilinguan, and Biostime's Gold series; Zhenzhi Organic is priced at 545 yuan/kg, benchmarking against Wyeth's BabyNes and Mead Johnson's special formula.

### **High-End in First-Tier vs. High-End in Lower-Tier: Feihe Wins**

So, is Feihe the only one with the secret to high-end strategy?

Of course not. Feihe's foreign competitors also have prices that are not "people-friendly." Taking Mead Johnson, which also follows a high-end route, as an example, we found that high prices alone do not guarantee long-term success.

From 2015 to 2019, while Mead Johnson's revenue growth was almost stagnant, Feihe made great strides, **with growth rates reaching nearly 80% in 2018**.

Comparison of revenue growth rates between Feihe and Mead Johnson
Source: Growthbox

We found that these foreign brands, including Mead Johnson, Wyeth, Ausnutria, Abbott, and Friso, all target first- and second-tier cities and have basically divided up the market share there.

However, first- and second-tier cities are where birth rates are most suppressed, and the ceiling for formula is lowering. It's not even a stock market, let alone an incremental one. Further competing for market share in first- and second-tier cities has diminishing marginal returns.

This also explains why, under the same product price positioning, Feihe increasingly shows a trend of surpassing Mead Johnson. The main difference lies in **user segmentation**.

Dongxing Securities pointed out that Feihe's high-end products did not penetrate the user base in first- and second-tier cities: in 2019, the retail value of formula in lower-tier cities was 134.4 billion yuan, with Feihe accounting for 20.12 billion yuan, a market share of about 15%; in first- and second-tier cities, the retail value was 115.8 billion yuan, with Feihe accounting for 6.7 billion yuan, a market share of about 6%.

Even the ultra-high-end products Xingfeifan and Zhizhen Organic, priced at 300-400 yuan, were **rolled out in third- and fourth-tier cities**, not first- and second-tier cities.

Therefore, when summarizing Feihe's tactics, China Merchants Securities even used revolutionary terms like **"human wave tactics"** and **"rural encirclement of cities."**

To understand the cleverness of Feihe's user segmentation, one must first know the maternal and infant market structure in lower-tier cities: **extremely fragmented channels.**

Growthbox's research shows that although China's consumer market is shifting from a pattern of "concentrated media, fragmented channels" to "concentrated channels, fragmented media," the maternal and infant market in lower-tier cities has not yet caught up with this trend, and channels remain highly fragmented.

However, international brands and their Chinese agents, accustomed to easy profits, mainly rely on distribution in supermarkets in first- and second-tier cities. Their localization is low, and their offline promotion capabilities are insufficient. They have no motivation to bend down and roll up their pants to earn this hard money in lower-tier cities.

In the words of maternal and infant channel providers in third- and fourth-tier cities, "Their people are out of touch with the ground."

In contrast, **domestic brands' channel sinking efforts and marketing promotion methods are more suitable for lower-tier markets.**

On the one hand, mothers in first- and second-tier cities still have serious distrust of domestic formula and have more channels to buy imported products. On the other hand, mothers in third- and fourth-tier cities, due to information gaps and differences in cognitive literacy, are often not very resistant to domestic brands.

Moreover, in recent years, the maternal and infant consumption capacity in third- and fourth-tier cities has rapidly improved, and parents can afford high-quality infant formula. According to data from Ruiguan Consulting, **consumers in third- and fourth-tier cities have a 10%-20% higher preference for domestic formula than those in first- and second-tier cities.**

Comparison of preferences for domestic and foreign brands across city tiers
Source: Growthbox

In summary, Feihe's successful combination is "**using high-end products to break into lower-tier markets**." This entry point is very sophisticated and very bold!

### **Consistency vs. Vacillation: Feihe Wins Again**

As the title suggests, if high-end products and lower-tier markets are Feihe's two legs, then the **consistency** of executing the strategy from top to bottom is the brain.

In 2001, the Heilongjiang Agricultural Reclamation Bureau integrated its dairy enterprises to form Wandashan Group. At the time, Leng Youbin, the factory director, refused the position of deputy general manager of the group. He took nearly a hundred employees, the "Feihe" trademark (which was just an empty shell), and the original factory's 14 million yuan debt to start anew in Kedong County.

In other words, Feihe carries Leng Youbin's strong personal will, which is reflected in the high consistency of subsequent strategy execution.

For example, in **communication strategy, ground promotion, products, channels, public relations, trust endorsements, and market**, Feihe has highly uniformly executed the new competitive strategy, forming a competitive focus. In the next chapter, when we dissect the ground promotion process, you'll see its firmness and efficiency.

This benefits from a well-established organizational structure and also reflects the operator's personal will and leadership charisma.

In contrast, Beingmate's price war self-destruction was behind the frequent changes in company strategy caused by frequent changes in leadership.

As early as 2001, Beingmate was ambitious to become a full-industry-chain company covering "food, clothing, use, and travel" for children aged 0-6. But in July 2011, just three months after Beingmate went public, founder Xie Hong set the record for the fastest resignation by a founder of a Chinese listed company.

Soon, in November 2012, Beingmate announced the sale of its baby products business, marking the failure of its full-industry-chain strategy.

Subsequently, the company's leadership began to change frequently: Executive Deputy General Manager Zhu Deyu quit after nine months; in April 2011, Huang Xiaoqiang took over as Beingmate's third chairman, but resigned after only three years due to "personal reasons"; in February 2014, former General Manager Wang Zhentai became the fourth chairman.

From a strategic perspective, after going public, Beingmate focused on formula but did not achieve much. Instead, it fell into crisis multiple times due to food safety issues, with performance declining year after year, approaching delisting.

In summary, after Feihe chose the strategy of **high-end products + lower-tier markets** and ensured **high consistency**, its revenue and net profit have grown steadily and rapidly for over five years, with gross and net margins also steadily improving.

Revenue increased from 3.724 billion yuan in 2016 to 18.624 billion yuan in 2020, with a 5-year CAGR of 49.38%; net profit increased from 269 million yuan in 2016 to 6.045 billion yuan in 2020, with a 5-year CAGR of 117.72%.

Feihe's revenue, non-GAAP net profit attributable to parent (in hundred million yuan) and YoY growth
Source: Growthbox

# **Establishing the "Persona": Brand Marketing Takes the Lead**

The past loud calls in hypermarkets have been replaced by various marketing advertisements. When consumers are surrounded by a dazzling array of goods, even good wine fears deep alleys.

So, what is the correct way for Feihe to sell?

During market research, Feihe found that among the factors influencing consumers' decisions to buy infant formula, **brand reputation has the highest weight**, followed by food safety and nutritional composition. Since the high-end brand positioning has been clarified, marketing actions naturally need to follow immediately.

Consumer survey on factors influencing infant formula purchase decisions
Source: Growthbox

Leng Youbin's bold spending on advertising has been a habit since Feihe's inception.

In Feihe's first year, while still deeply in debt, Leng Youbin equipped management with cars and gave everyone a mink coat. In Northeast China, the expensive mink coat means far more than warmth; it is a symbol of wealth and taste, naturally becoming an excellent opportunity to promote Feihe.

The following year, Feihe spent over 20 million yuan to purchase nearly 2,000 square meters of office space in Beijing's Xingcheng International Building, moving its marketing headquarters to Beijing, less than a kilometer from Nestlé's office building.

When it comes to branding, Leng Youbin spent even more lavishly.

### **Traditional Three-Step Approach to Build the Highest Level of National Recognition**

**In 2016, Feihe's adjusted net profit for the year was only 269 million yuan, but it spent 550 million yuan on advertising alone.** Such a large expenditure, but with concentrated firepower, aimed to equate the label "More suitable for Chinese babies' constitution" with Feihe formula.

The specific strategy is divided into three steps: **first, find a spokesperson; second, invest in CCTV channels to shape brand image; third, use Focus Media to achieve strong coverage of the target audience.** At that time, the traffic economy had not yet taken shape, and endorsement plays had not yet become "brand-effect integration" for "harvesting leeks."

Feihe formula
Source: Weibo @Feihe

**Feihe chose Zhang Ziyi as its spokesperson,** coinciding with the first year of the revised Advertising Law.

Article 38 of the Advertising Law clearly stipulates that advertising spokespersons must base their recommendations and endorsements on facts, comply with this law and relevant administrative regulations, and must not recommend or endorse products they have not used or services they have not received.

In other words, celebrity endorsements require "try before you endorse."

As a result, netizens argued online about whether Zhang Ziyi's two children actually drank Feihe formula. Although no conclusion was reached, at least the name of Zhang Ziyi endorsing Feihe was spread.

In the same year, **Feihe was selected for the CCTV National Brand Plan.** As early as 2013, Feihe began advertising on CCTV, with costs as high as 300 million yuan. After the new brand strategy was determined, Feihe cooperated with Zhongshi Jinqiao Advertising Company to gain strong exposure on authoritative media and high-traffic programs around "More suitable for Chinese babies' constitution."

After being selected for the National Brand Plan, CCTV's prime programs like "News Network" and "Focus Report" even opened dedicated advertising slots for the brand. National media serving as trust endorsements for brand positioning increased the credibility of the positioning to a certain extent. This is a typical media position endorsement.

**In 2017, Feihe reached a strategic cooperation with Focus Media.** Within a few months, it quickly launched advertising in over 60 cities, leveraging Focus Media's high-frequency and mandatory elevator ads to form a powerful "air bombing group," reaching an average of 500 million mainstream people daily.

What are the characteristics of the combination of Zhang Ziyi + CCTV + Focus Media? The most popular celebrity, the most powerful media channel, and the most penetrating advertising placement. With the simultaneous launch of these three "mosts," Feihe's ambition is clear: to build the most nationally recognized formula brand.

### **In the Era of Fragmented Information, Marketing Shifts to Online Channels**

Today, the channels through which users obtain information are undergoing major changes. News apps, short video apps, anime video sites, and social platforms for product recommendations have surged in. TV ads and elevator ads are far from covering the target audience.

According to a joint study by iResearch and Weibo Big Data, the current core maternal and infant consumer group is young, highly educated, and high-income, with strong consumption power. They enjoy life through entertainment, food, and shopping, and their consumption values are diversified.

Portrait of China's core maternal and infant population in 2021
Source: iResearch, Weibo Big Data

Therefore, Feihe began to target the tastes of new young mothers, placing ads in popular dramas and variety shows on Hunan Satellite TV, iQiyi, and other platforms favored by young consumers. There are even cases with over 100 million yuan in spending, such as establishing "China Baby Day" and creating parenting variety shows.

However, while inheriting the "bloodline" of big marketing spending, Feihe also discovered that the way users consume information is becoming increasingly fragmented. Focusing only on big IPs or big cases is inevitably insufficient.

In other words, Feihe's core goal of building a high-end formula brand has not changed; what needs to be updated is the marketing battlefield.

iResearch research found that among the TOP10 channels for maternal and infant groups to obtain parenting information in 2021, Weibo is the only public information platform second only to maternal and infant websites. On the one hand, maternal and infant groups actively search for information on Weibo; on the other hand, the maternal and infant circle tends to trust experts and has a strong demand for knowledge-based content.

TOP10 channels for maternal and infant groups to obtain parenting information in 2021
Source: iResearch, Weibo Big Data

The report shows that Weibo has a wealth of pediatrician/science accounts with strong professionalism, which have gained high recognition among maternal and infant groups. Short video platforms have many parenting influencers, social platforms have many official brand accounts, and Q&A communities have accumulated good reputations through rich, professional, and original content.

Comprehensive platform characteristics such as high visibility, strong influence, maternal and infant group aggregation, many KOLs, and trustworthy experts align well with Feihe's needs for "deep brand cultivation" and "long-term operation." This is why Feihe chose Weibo as its main online brand promotion battlefield.

Perception of core internet platforms by maternal and infant groups in 2021
Source: iResearch, Weibo Big Data

The content Feihe aims to convey can be summarized in four points:

**1. Resolve trust in milk sources.** Due to the lingering trust crisis over "milk sources" left by the formula industry, Feihe places great emphasis on disseminating and popularizing its milk source quality, focusing on promoting its location in the Beidahuang 47°N milk source belt.

Therefore, on Weibo, it uses big V visits to show the real appearance of the milk source belt to more consumers.

**2. Convey freshness.** Feihe's official Weibo account invites well-known parenting experts like @Cui Yutao to share "fresh parenting views," providing mothers and fathers with correct and scientific parenting methods and communicating concepts with mothers of the new era.

In addition, it customized the celebrity micro-variety show #Fresh Companionship#, launching a TV-network interaction on Weibo. @Weibo Variety led over 350 cross-field big Vs in entertainment, variety, and humor to heat up the show and make it go viral. The two topics have read volumes exceeding 720 million.

**3. Persist in conveying the core concept of "More suitable for Chinese babies."** Feihe promotes this concept on Weibo through Zhang Ziyi and multiple celebrity mothers and fathers, such as Wu Jing.

**4. Create the industry influence IP "China Baby Day."** Feihe Dairy, the China Dairy Products Association, and the China Dairy Association, together with more than 20 units, jointly initiated the establishment of May 28 as a special festival for Chinese babies—"China Baby Day," meaning "I love baby."

The 2021 "China Baby Day" just concluded recently. Feihe collaborated with many brands on Weibo, and related Weibo topics have exceeded 700 million reads.

It can be seen that Weibo is an amplifier for celebrity/KOL influence and can centrally produce high-quality marketing content.

Weibo has a rich ecosystem of celebrities, experts, and KOLs, with diverse playstyles and high timeliness for hot news. At the same time, video platforms create active social circles for maternal and infant groups, which aligns well with Feihe's brand tone and positioning.

Weibo maternal and infant matrix operation model
Source: iResearch, Weibo Big Data

Since 2019, Feihe has also followed the trend and started live streaming. In 2020, it increased live streaming efforts, conducting a total of 96 live streams on Weibo.

As of now in 2021, it has conducted over 67 live streams on Weibo, covering topics such as parenting tips, baby nutrition, high-quality companionship, offline activities (festivals), expert lectures, and formula ingredient science.

Most importantly, **offline activities are synchronized with online promotion.** As the highlight of Feihe's marketing, offline activities will be detailed in the next chapter.

Data shows that Feihe's Weibo buzz trend from January 1, 2020, to May 1, 2021, is strongly correlated with the above social media combination strategy.

Feihe's Weibo buzz trend
Source: iResearch, Weibo Big Data

It can be seen that Feihe uses integrated marketing, on the one hand using emotion to drive brand preference, giving the brand warmth and care, and enhancing mainstream people's awareness and favorability of Feihe; on the other hand, using rational knowledge education to drive consumer mindset.

After the mainstream audience accepts and becomes close to the brand, it deeply communicates product functional benefits, thereby driving consumers to choose Feihe products, achieving the effect of "both fame and fortune."

### **Ultra-High Premium Brought by Brand Power**

After seeing the series of operations above, you must be curious about the results.

According to Feihe's financial report, in 2020, it achieved a gross profit of 13.478 billion yuan, with a gross margin reaching a record high of 72.5%. Looking at competitors in the same period, Ausnutria and Yashili had gross margins of only 49.86% and 34%, respectively.

Feihe's gross and net margins from 2014 to 2020
Source: Growthbox

**70%—a gross margin far exceeding the industry average**—does it come entirely from high pricing? Aren't costs and marketing expenses high?

Just five years into Feihe's high-end strategy, Leng Youbin proudly stated on a program, "Calculated per kilogram, Feihe formula is the most expensive in the world!"

Generally, high price means high quality, and Leng Youbin indeed claims that Feihe's R&D expenses are "**number one in the world**."

So, we curiously dug into Feihe's R&D expenses. From 2018 to 2020, they were 15 million yuan, 109 million yuan, and 265 million yuan, respectively, with R&D investment as a percentage of operating revenue at only 1.05%, 1.09%, and 1.4%.

In comparison, Ausnutria's R&D cost in 2020 was 132.1 million yuan, accounting for 1.96% of revenue. Health and Happiness Group, which owns Biostime, had R&D costs of 163.7 million yuan, accounting for 1.5% of revenue. Both have higher R&D investment ratios than Feihe.

Comparison of R&D expenses among Ausnutria, Health and Happiness, and Feihe
Source: Growthbox

Such a comparison shows that Feihe's claim of being "number one in R&D" seems untrue, and its R&D costs are not very high.

Since the money earned is not heavily invested in R&D, combined with the "big spending" on marketing analyzed in the previous section, we speculate that Feihe must be investing a large proportion of money in marketing expenses.

But the financial report shows that **in 2020, Feihe's sales and distribution expenses were 5.263 billion yuan, with a marketing expense ratio of 28.26%.** In 2019, this expense was 4.112 billion yuan, with a marketing expense ratio of 29.86%.

Today, the heavy marketing strategy seems to have become an overall trend among dairy companies. Compared with other brands, Feihe's marketing expense ratio is not even particularly high.

Comparison of marketing expense ratios among Feihe and other formula companies
Source: Company financial reports, Essence Securities

In fact, brand-oriented marketing is not directly linked to product sales. Its results are reflected in two aspects: first, Feihe's buzz has indeed increased significantly in recent years; second, Feihe's marketing expenses are gradually decreasing as brand reputation is established and its position stabilizes. This is also the effect of Feihe's brand building.

In summary, Feihe has built its brand through exposure on CCTV and social channels like Weibo, embedding its brand image in consumers' minds. This laid the foundation for the success of its offline promotion activities.

# **Human Wave Tactics: Effective Ground Promotion Follows**

In fact, Chinese dairy companies do not directly interact with consumers. **Most sales rely on channel distributors**, and Feihe is an example of taking cooperation with distributors to the extreme.

In the current era of digital concepts sweeping through, Feihe still chooses a relatively traditional marketing method—ground promotion.

Although it is not a new or high-tech marketing method, it has repeatedly proven its high-return nature. After all, Alibaba's "China Supply Iron Army" built its empire, and Meituan's ground promotion army conquered its territory.

In 2019, Feihe used **500,000 ground promotion events** to achieve annual revenue of 13.7 billion yuan, and its market value rose from 56.1 billion HKD to 135.8 billion HKD, while also winning the top spot in infant formula market share.

Feihe's annual number of ground promotion events (in ten-thousands)
Source: Growthbox

There are 365 days in a year, 34 provincial-level administrative regions, and 2,856 county-level administrative divisions in China. We calculated on our fingers: this is equivalent to at least one county-level city hosting a Feihe event every other day!

**Small scale and high frequency—this precisely subverts the logic of most competing brands' ground promotion events.**

Mead Johnson, which had to enter lower-tier markets to acquire new customers, couldn't learn Feihe's "small but beautiful" event approach. It spent costs on larger-scale events without achieving the expected returns.

Just recently, on June 6, Primavera Capital acquired Mead Johnson's Greater China business from Reckitt Benckiser and will have permanent exclusive rights to the Mead Johnson brand in the Greater China market.

Feihe clearly seized the psychology of consumers who prefer short, fast, and concise information, increasing the number of offline events while reducing their scale. Just like Douyin, which doesn't make movies or TV dramas costing tens of millions, but instead makes low-cost short videos, threatening the dominance of Youku, iQiyi, and Tencent Video in the video industry.

### **Where Does the Ground Promotion Army Come From?**

Since high-frequency ground promotion events require human resources, Feihe's **labor cost issue** has been seriously questioned.

In 2019, after Feihe secured the top position among domestic formula brands with its market share performance, it was shorted twice in quick succession.

On July 8, 2020, short-selling institution Blue Orca released a short report on Feihe, questioning whether Feihe might have inflated revenue, understated expenses, exaggerated capital expenditures, and also questioned Feihe's financial audits, US listing history, high growth in recent years, and its relationship with Yuanshengtai.

Whether Blue Orca was trying to imitate Muddy Waters shorting Luckin Coffee to make a big story out of a Chinese company, in any case, Feihe quickly responded positively to Blue Orca with its semi-annual report.

The financial report showed that Feihe achieved revenue of 8.707 billion yuan in the first half of 2020, a year-on-year increase of 48%; gross profit was 6.176 billion yuan, up 55%; net profit attributable to the parent was 2.753 billion yuan, up 57%. Among them, high-end formula revenue was 6.77 billion yuan, a significant year-on-year increase of 73%.

It must be said that as an overseas short-selling institution, Blue Orca's inability to understand China's distributor model is not new. Therefore, we start from the issue of understated personnel costs that Blue Orca seriously questioned, and dissect Feihe's staffing strategy.

Blue Orca first used a 2019 employment lawsuit between Feihe distributors and their employees to prove that Feihe paid the basic wages of sales promoters. Then it found multiple recruitment ads for full-time sales promoters, calculated an average monthly salary of 2,551 yuan for promoters, and then obtained evidence from an investor conference call in March 2020 that **Feihe has more than 50,000 sales personnel**.

Short seller's report questioning Feihe's marketing costs
Source: Growthbox

Based on these conditions, Blue Orca calculated that the cost of these more than 50,000 undisclosed full-time and part-time sales representatives is at least 925 million yuan.

However, Feihe's prospectus submitted in 2019 claimed only 5,422 full-time employees, of which only 3,130 were in sales and marketing. So where did the labor costs for these 50,000 people go?

Feihe's full-time/part-time promoter situation
Source: Growthbox

Our research found that in reality, Feihe's ground promotion team is not entirely its own, but **composed of Feihe's own ground promotion team + distributor teams**. The more than 50,000 personnel mentioned in the report include all part-time promoters from distributors and terminal retail stores. According to accounting standards, the wages of these part-time employees are included in sales expenses.

As early as 2013, Feihe began to arrange ground promotion activities, with only tens of thousands of events per year at that time. By 2016, Feihe formally developed a ground promotion team, managed by province. Initially, each province had 3-4 people, increasing to over 20 in 2017, and expanding to 70-100 by 2020, divided by level into provincial planners, activity assistants, and full-time or part-time promoters.

Therefore, Feihe's own professional ground promotion team nationwide has about 4,000 people. Full-time activity assistants sign labor contracts, with wages borne by Feihe, and social insurance and housing fund are linked to distributors.

Feihe's ground promotion team organizational structure
Source: Growthbox

The rest of the ground promotion personnel come from distributors. However, since they work for different masters, how can they be made to cooperate perfectly and fight willingly?

It turns out that while other brands' distributors have to go through great lengths to get money from the brand, Feihe proactively established a customer fund at the billion-yuan level, specifically for ground promotion activities, with **all profits going to distributors**. This is naturally a great incentive for distributors.

### **No Cost, All Profit? Holding Events Is Indeed "Fragrant"**

With so much manpower mobilized, let's take a look at what Feihe's ground promotion activities actually do.

It is understood that ground promotion activities are divided into four types: **mini shows, carnivals, Mother's Love, and city/province exclusive events**. Among them, mini shows account for over 80% of activities, Mother's Love events are second in number, and carnivals are the fewest.

Specifically, mini shows are mainly held in maternal and infant stores, targeting families with children aged 0-5; Mother's Love events are concentrated in hospitals and hotels, held in the form of public welfare activities and promotional lectures; carnivals target customers in large shopping malls and plazas; after achieving a high local market share, they attempt channel monopoly—that is, city/province exclusive events.

So, how does Feihe achieve such high-frequency and efficient ground promotion activities and convert them into effective user purchases and even repurchases? Summarized in a formula:

**High frequency + standardization + channel profit sharing = high ROI**

It is worth noting that among these activities, except for Mother's Love, which is held in hospitals and focuses on gaining the trust of mothers through professional knowledge popularization, **the ROI of the other activities is almost "no cost, all profit."**

Mini shows have an average investment of 400 yuan and can generate 13,000 yuan in sales revenue; city/province exclusive events have an average investment of 4,000 yuan and can generate 35,000 yuan in sales revenue; carnivals have an average investment of 40,000 yuan and can generate 200,000-300,000 yuan in sales revenue.

Classification of Feihe's ground promotion activities
Source: Growthbox

According to Feihe's requirements, distributors must hold offline promotional activities at a frequency of no less than once every two days. **Activity costs are shared equally by distributors and Feihe, and the activity cost-effectiveness ratio must be strictly controlled within 10%.**

On this basis, all activity content is planned by Feihe, and material standards are uniformly provided by Feihe. Under Feihe's standardized process guidance, local distributors will send 2 **activity assistants** to maternal and infant stores to assist in carrying out activities.

Activity assistants are responsible for communicating with store owners about activity times and details. On the day of the event, they act as both event staff and sales personnel, and they record the event in real time, upload it to Feihe's employee platform, and feed it back to headquarters to ensure the activity is real and effective. At the same time, activity assistants also assist distributors in training store promoters.

Feihe's offline marketing chain
Source: Growthbox

In summary, the secret to Feihe's ground promotion activities is: **high frequency, process-oriented, standardized, and strong execution.** With over 1,800 distributors and 100,000+ retail points conducting high-frequency ground promotion activities, the ROI of offline sales expenses far exceeds the overall sales expense ROI.

Breakdown of Feihe's sales expenses
Source: Growthbox

### **Leveraging "Single-Layer Distributors" to Obtain User Information**

As mentioned earlier, Feihe gives all profits from ground promotion activities to distributors. Since ground promotion is for selling goods and making money, why is Feihe so "generous"?

Usually, due to the existence of the distribution system, brands and consumers are often separated. Brands can only rely on data provided by distributors to obtain information, but distributors vary in quality, making it difficult to form unified standards. Or distributors are unwilling to share customer data with the brand due to various concerns.

It wasn't until **the internet created more channels that DTC brands were able to bypass distributors and achieve a curve overtaking of old brands.** In today's DTC era, old brands that once relied entirely on distributors have also realized the importance of holding customer information.

But Feihe does not have its own stores and currently cannot do without distributors. So, Feihe came up with a method between the distributor system and the DTC system—**single-layer distributors.**

Single-layer distributor model
Source: Growthbox

When there is only one layer of distributors, **it enables flat management and is conducive to controlling channel prices.**

Sales personnel review distributors and retail outlets every one to two months to monitor whether Feihe products are sold at the suggested retail price and to crack down on cross-channel selling. **Ensuring consistency in the price system across all channels is equivalent to ensuring stable net profit margins for distributors.**

At the same time, **reducing multi-layer distributors can increase the profit space and profitability of both the company and distributors**, thereby strengthening stable cooperative relationships and enabling more timely access to first-hand market information and feedback, and insight into market trends.

If you carefully study Feihe's financial reports, you will find that **Feihe's offline revenue accounts for an extremely high proportion, while online revenue is extremely low.**

Feihe only counts revenue from Tmall, Taobao, and JD.com as online sales revenue. Even if customers are acquired through online channels, they ultimately purchase through distributors who ship locally or pick up locally, without bypassing distributors.

Of course, Feihe definitely has its motives. It gains something more valuable than money—**customer information.**

# **Data Empowerment: Unlocking Retention and Repurchase**

**With customer information, digital empowerment can be used to achieve integrated online and offline membership management.**

In the WeChat ecosystem, Feihe has a mysterious official account—"**Xing Ma Hui**" (Star Mom Club). It has built a comprehensive membership system for Feihe and is an important way to connect its own channels and achieve retention and repurchase.

It is understood that "Xing Ma Hui" is the most well-established platform under Feihe, covering a complete content matrix, including knowledge popularization, expert Q&A, etc., covering all parenting stages. The total follower count exceeds 10 million, and every headline article has over 100,000 reads, ranking seventh among maternal and infant early education official accounts.

Feihe's online content matrix
Source: Growthbox

However, the way to guide users to follow is not mysterious: coupons and benefits. Among them, the benefits for new customers are particularly attractive. With the baby's birth certificate and the mother's ID card, they can receive a free can of formula.

Once consumers enter the baby's birth information and mobile phone number when registering, a new user profile is mostly completed, and the collected information naturally enters Feihe's data middle platform.

This **digital middle platform built on Alibaba Cloud** is Feihe's digital weapon. Since 2016, the platform has used Dataphin for data source integration and systematic construction management, and uses Quick BI for data visualization analysis and display, helping Feihe fully connect all online and offline data.

The most basic functions of this system for membership business include:

**a. Track the life cycle based on baby birth information and mother's information, accurately determine the required products (stage 1/2/3) and services (what kind of parenting knowledge).**

**b. Use mobile phone numbers to connect online and offline user purchase order data, achieving aggregation of purchase records under the same account.**

**c. Scan codes at offline ground promotion events to record participation, accumulate online user behavior data, and match and unify historical user behavior data with membership identity into the membership system.**

Feihe uses this digital middle platform to continuously analyze product and rights preferences for customer groups and regions, guide regional marketing strategy formulation, and conduct long-term continuous quantitative analysis of ground promotion activities. Activity effectiveness is no longer solely measured by on-site sales, but from a longer-term perspective to screen truly effective activities.

In other words, customer information + digital technology help Feihe build its own **offline retention and repurchase system**, giving Feihe both the deep foundation of an old brand and the growth secret of a new brand.

It is worth mentioning that we noticed that Feihe's retention and repurchase system is highly similar to that of Kidswant. The difference is that Kidswant collects information from its own offline stores, while Feihe collects it from its distributors' stores.

After a little investigation, we found that **Kidswant's chairman Wang Jianguo holds 2% of Feihe's equity**. In this light, it is not surprising that the two companies use similar strategies to improve retention and repurchase rates.

That said, besides "Xing Ma Hui," Feihe also uses WeChat groups, Douyin, and live streaming to guide users to repurchase and retain online.

Taking WeChat groups as an example, regular content includes parenting knowledge articles, product and parenting knowledge live streams, brand activities, and mother exchanges. According to practical experience, group interaction can effectively retain users.

Looking at offline, the methods to guide repurchase are more direct and simple:

**a. Distribute store repurchase coupons at events**
**b. In-store pre-deposit/new customer first purchase gives repurchase coupons**
**c. Old customers are continuously invited to participate in offline ground promotion activities**
**d. Maternal and infant stores and Feihe nutrition consultants maintain continuous communication with users in WeChat groups to guide store repurchase**

As shown in the figure below, analyzing from both online and offline channels, this membership system effectively drives user repurchase.

Feihe's membership system
Source: Growthbox

On the one hand, single-layer distributors have provided Feihe with the possibility of **getting close to consumers**, helping Feihe build user profiles and a membership system.

On the other hand, direct e-commerce and WeChat private domain sales, although small in scale, can bring **higher gross margins** and **more direct opportunities to contact users**, which is an irresistible temptation for any brand.

So, can Feihe achieve a breakthrough in the DTC model in the infant formula track where credit costs are extremely high?

According to data obtained by Growthbox, in direct e-commerce channels, Feihe's total membership on JD.com and Alibaba platforms exceeded 5.65 million in 2020, with 4 million new members, a year-on-year growth of 242%. Member sales exceeded 1 billion yuan, a year-on-year growth of 297%.

On JD.com, Feihe's total transaction volume increased by 104% year-on-year, and on Alibaba platforms, it increased by 94%.

It seems that **while Feihe has succeeded in offline channels, it is also increasingly paying attention to the development of online channels**.

As of 2019, the CR3 of China's formula industry was only 34.1%. If benchmarked against the US's 90.5%, the UK's 82%, and Japan's 76.2%, the increase in concentration of the domestic formula industry is an inevitable trend.

Concentration (CR3) of the international formula industry in 2019
Source: Growthbox

In 2020, Leng Youbin said in an interview that **the reshuffle of the infant formula market is expected to end by the end of 2021, or at the latest by 2022.** In the future Chinese market, the products of the top five brands will account for 70%-80% of total market sales, while the remaining small brands will share 10%-20% of the market share.

We attribute Feihe's current achievements to three major success factors.

**First, clear strategic positioning.** Since its strategic transformation in 2015, Feihe has proposed the slogan "More suitable for Chinese babies," positioning itself as a high-end brand among domestic formula, and used the reverse thinking of not lowering prices to enter lower-tier cities, facing rapid market changes with a dislocation competition posture.

**Second, close tactical coordination.** Since Feihe clarified its growth positioning, it has demonstrated rapid response and high execution capability in team building, marketing strategy, online and offline tactics, and data system construction.

The organic combination of mass media integrated marketing and high-frequency offline ground promotion activities supports the marketing funnel of awareness—conversion—repurchase, achieving ultra-high gross margins.

**Third, firm execution from top to bottom.** It must be said that team consistency is the ultimate key to Feihe's success. To do brand marketing, it invests heavily in advertising, including inviting Zhang Ziyi as spokesperson, being selected for the "National Brand Plan," planting the brand on Weibo and Focus Media, and embedding the brand image in users' minds.

To do ground promotion, it maximizes leverage and goes all in. The 700,000 online and offline events in 2020 are the best proof.

However, Feihe also has many problems.

In terms of online channels, Feihe only began cooperating with JD.com in 2018, establishing self-operated and POP flagship stores, and has multiple authorized stores. **It started relatively late in the e-commerce category.**

This year, after the sudden outbreak of the pandemic, Feihe quickly moved its ground promotion activities online. According to Feihe itself, the cumulative number of live streams has exceeded 144,000. However, online lacks the sense of experiential consumption, so as the pandemic situation eased, offline activities accelerated their recovery, and the current activity volume has recovered to 80% of normal levels.

In addition, **after using ground promotion tactics to occupy lower-tier cities, whether Feihe can break through to higher-tier cities remains unknown.**

In particular, by replicating Feihe's online marketing chain, we found that its playstyle is no different from most players in the market. Therefore, whether the established middle platform can retain and convert private domain traffic also has certain problems.

It is undeniable that Feihe has indeed set an example for the rise of domestic formula brands. For future development, Feihe will still face considerable challenges.

**PS**: From August 24-26, 2021, the 2021 (4th) China FMCG Conference, hosted by New Distribution, will be held in Shanghai. **Focusing on industry trends + practical cases + growth connection as the core**, **3,000** FMCG practitioners will gather for the event.

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Some of the confirmed heavyweight guests so far include:

**1. Tao Shiquan, founder of Jiangxiaobai;**
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**4. Chen Xiaodong, senior vice president of Nestlé Greater China;**
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**6. Bi Chaojiao, general manager of China Resources Snow Breweries Marketing Center;**
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**10. Li De, general manager of Gold Hongye Paper Group E-commerce**...

**A grand gathering for FMCG professionals—you must be there!**

**Are you "watching" me?**


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