Click "Read Original" for details China's infant formula market is now replaying the "comeback" story that once played out in the TV and small appliance markets. Recently, Nielsen's Q3 2020 report showed that Feihe奶粉 has surpassed all foreign brands to become the best-selling brand in China's infant formula market. According to third-party statistics, the market share of domestic formula in China rose from 25% in 2008 to 49% in 2018, and online market share rose to 70%. In 2019, the State Council's seven ministries issued the "Action Plan for Improving Domestic Infant Formula Milk Powder," which explicitly set a goal of "striving to stabilize the self-sufficiency level of infant formula at over 60%." The "new national trend" in the infant formula market has become a trend, with a strong momentum to defeat imported infant formula. In this competition between imported and domestic infant formula, domestic brands are using a "horse race" mechanism to contend with imported brands. Among them, the most important players are the leading Feihe and the closely following Junlebao. -0****1- Feihe Launches a Comeback It is an indisputable fact that Feihe is firmly the number one infant formula brand in China. China Feihe (HK6186), listed on the Hong Kong Stock Exchange on August 18, released its 2020 interim report, showing: In the first half of this year, Feihe achieved revenue of 8.707 billion yuan, a year-on-year increase of 48%; among which, the high-end infant formula product series achieved revenue of 6.773 billion yuan, a significant year-on-year increase of 73%; at the same time, the gross margin was as high as 70.9%, and the gross margin of the high-end infant formula product series was even higher at 74.2%, directly catching up with liquor giant Moutai. Stimulated by the impressive annual report, Feihe's market value has exceeded 160 billion yuan. Feihe is undoubtedly the darling of the market. In the 1990s, Leng Youbin spent more than 10 million yuan to buy Zhaoguang Ranch from the government and renamed it Feihe Dairy, beginning rapid development relying on the northern market. In 2003, Feihe listed on NASDAQ, becoming the first Chinese dairy company to list overseas. In 2008, the melamine incident broke out, but because it was not involved in the Sanlu series of incidents, Feihe became one of the few brands that were not affected. Feihe seized this historic strategic opportunity and, through an advertising campaign for "consistently good milk powder," quickly harvested the market left behind by the collapse of competitors. In 2009 alone, Feihe invested over 300 million yuan in "consistently good milk powder" advertisements, and its market share in infant formula suddenly rose from 2.7% to 7.3%. In August 2009, Feihe partnered with Sequoia Capital and moved from the NYSE small-cap board to the main board. Due to overly high expectations for domestic formula growth and weak brand power, Feihe lost a bet with Sequoia. In 2011, it signed a redemption agreement with Sequoia Capital, and the stock price fell from $44 to just $7, even dropping to $2.2 at one point, a decline of over 95%. Finally, it was forced to delist from the U.S. in 2013. After failing in the capital market, Feihe calmed down and re-examined the market, learning from the previous capital market lesson. Feihe discovered that in the 3rd to 5th tier markets in the inland hinterland, away from the first-tier supermarkets and KA channels controlled by imported brands, there was a strong demand for high-quality high-end infant formula. Feihe thus began to focus on high-end products, launching a high-end formula marketing campaign. In 2013, Feihe began adjusting its product structure to focus on high-end products, with high-end product revenue accounting for over 40%. In 2014, it launched the "crossing the river and entering the city" nationalization strategy, attacking East and South China and expanding channel coverage. In 2015, Feihe established the brand positioning of "more suitable for Chinese babies' constitution" and invited Zhang Ziyi as spokesperson, beginning large-scale national advertising. From then on, a domestic formula comeback officially began. From 2015 to 2019, Feihe achieved sales revenue of 3.615 billion yuan, 3.724 billion yuan, 5.887 billion yuan, 10.392 billion yuan, and 13.722 billion yuan respectively, with cumulative revenue growth of 283%, becoming the first domestic infant formula brand in China to exceed 10 billion yuan in annual sales. According to Frost & Sullivan's report, by 2018 retail sales value, its brand ranked first among domestic and international peers with a market share of 7.3%, and ranked first among domestic infant formula groups with a market share of 15.6%. -02- Successful High-End Flanking From a marketing strategy perspective, Feihe's comeback is more about daring to invest saturated forces in the blank flanking areas left by foreign brands. In current China, the most mainstream demand is for infants to eat "better." With the enhancement of China's economic strength and the increase of national wealth, Chinese parents have the ability and willingness to let their offspring eat better and safer. As a foreign product, imported brands have an inherent cognitive advantage, whether in terms of formula technology, milk source safety, and other perceived aspects. For a long time, Chinese formula brands could not break through because of this. Experience shows that imported formula is known for being "expensive," and in the infant formula category, the perception has formed that "good is expensive, and expensive is safe." Market data also confirms this. According to Frost & Sullivan statistics, the average retail price of high-end infant formula in China in 2014 and 2018 was 335.3 and 421.7 yuan/kg respectively, showing a rapid upward trend, with a compound annual growth rate of 5.8% over these five years, and it is expected to reach 486 yuan/kg by 2023. In first-tier cities, imported formula has deep distribution advantages in KA and supermarkets, allowing the advantage of imported brands to be released. Up to now, the market share is still held by the four major imported brands: Abbott, Wyeth, Mead Johnson, and Danone. In 3rd to 5th tier cities where imported brands cannot deeply distribute, consumers' choice criteria are simplified to "expensive is good." Feihe's success lies in discovering the blank flanking opportunity left by imported formula brands, quickly forming a complete set of marketing tactics around this opportunity, and launching deep saturated attacks, achieving brand and sales growth by occupying the vacant position. Leng Youbin once said in an interview: For formula, consumers perceive that "good is expensive." Although Feihe has formula products under 200 yuan, high-end products sell better. With the strategic direction clear, the tactics became clear, and Feihe took the lead in launching a rapid flanking attack. First, focus on high-end products. Feihe achieves a high-end feel by focusing on the high-priced product "Star Feifan." On JD.com, the price of Star Feifan Stage 1 is marked at 324 yuan/700g. In 2018, the average retail price of infant formula products in China (including domestic and overseas brands) was 202.6 yuan/kg, and Star Feifan's price is already comparable to foreign imported brands. China Feihe's 2020 financial report shows that Star Feifan series sales increased 7 times in two years, contributing 68.6% of Feihe's total revenue. Focusing on high-end (high-priced products) not only solidifies the "high-end perception," but the high gross margin from high prices also provides sufficient ammunition for the next step of saturated communication. Second, focus on flanking channels. Unlike imported formula brands that concentrate in KA/supermarkets in 1st and 2nd tier cities, Feihe focuses its channel forces on maternal and child channels in 3rd to 5th tier cities. According to Kantar Worldpanel's 2018 China Shopper Report, offline maternal and child stores account for about 75% of sales in lower-tier cities and townships, so deep cultivation of offline maternal and child channels in 3rd to 5th tier cities becomes a key strategy. In Henan alone, Feihe's distributor team is divided into four major regions, with over 100 distributors and over 1,500 promoters. Up to now, Feihe's distributors and retailers cover more than 119,000 sales points, with an average annual growth rate of over 25%. At the same time, Feihe develops down-to-earth offline marketing methods for each distributor's regional characteristics, precisely managing and controlling price and quantity to prevent cross-regional sales and channel conflicts. This deep control and broad layout of channels not only directly conveys the "leading brand" perception but also directly controls the realization of "volume." Finally, saturated promotion. In 2015, Feihe officially confirmed the differentiated brand positioning of "more suitable for Chinese babies' constitution" and hired Zhang Ziyi as brand spokesperson. After the positioning was confirmed, Feihe used a "saturated" strategy, through multi-touchpoint, multi-frequency, multi-scenario, "focusing on positioning" communication, to strengthen the implantation in the mind and respond to competitors' communication attacks. This saturated strategy is first reflected in marketing investment. From 2016 to 2018, its cumulative sales expenses reached 7.17 billion yuan, about 35% of the three-year cumulative revenue. That is, for every 100 yuan of revenue, 35 yuan was used for marketing expenditure. In the first half of 2020, Feihe's sales expenses reached 2.2 billion yuan, a year-on-year increase of 42%, a record high for the same period. In addition to advertising on key positions such as CCTV, airports, subways, and elevators, Feihe also implements saturated ground promotion in conjunction with channel strategy. Feihe has thousands of consumer education team members and tens of thousands of promoters stationed in various maternal and child stores. In 2019, it carried out 500,000 promotional activities nationwide, including Mother's Love seminars, carnivals, roadshows, maternal and infant expert lectures, and mini-shows. Saturated promotion not only helps Feihe quickly seize consumer mindshare, but also directly converts strong familiarity and awareness into sales at the terminal. Focusing on flanking gaps and saturated lightning attacks are the core of Feihe's comeback offense and defense. -03- Junlebao's Close Following Another domestic infant formula brand with impressive recent performance is Junlebao, which adopts a completely different positioning from Feihe and is coming on strong, with a tendency to overtake. Data shows that in 2019, Junlebao's sales revenue increased by 25% year-on-year, with formula production and sales of 75,000 tons, a year-on-year increase of 62%, leading national sales, with a growth rate ten times the industry average, and the fastest global growth. It became a leading national sales brand in less than 6 years of listing. Junlebao's journey in formula has been more turbulent than Feihe's. Junlebao started as a small yogurt workshop in 1995. In 1999, Junlebao became a subsidiary of Sanlu producing liquid milk. Although the company remained independently operated, the product packaging still bore the Sanlu label. After the 2008 melamine incident, Junlebao, which only made yogurt at the time, was still "caught in the crossfire." Even though tests showed the products were fine, like other Hebei dairy companies, it was suspended for rectification for 15 days. It was not until 2009 that Junlebao bought back the shares held by Sanlu, completely breaking away from the Sanlu system. In 2010, Mengniu invested 469.2 million yuan to acquire 51% of Junlebao's shares, becoming its largest shareholder. In 2014, Junlebao entered the infant formula market, and in 2015 it recorded sales of 720 million yuan. In 2018, Junlebao's annual revenue reached 13 billion yuan, with infant formula accounting for 60%, contributing nearly 10% of Mengniu Group's net profit. In 2019, Mengniu sold its 51% stake in Junlebao for 4.011 billion yuan, and Junlebao truly embarked on the path of independent development. As a newcomer in domestic infant formula, Junlebao adopted a completely different positioning from Feihe: high quality at low prices. That is, in communication positioning, it focuses on "European dual certification (European BRC and IFS)," and in pricing, it focuses on "under 300 yuan," with the Lebo series selling online at around 150 yuan. As a victim of the melamine incident, Junlebao attaches great importance to "quality." From the beginning, Junlebao proposed the "full industry chain" model (i.e., integrated production and operation of pasture planting, dairy farming, and production and processing) and the "four world-class" model (world-class pastures, world-class factories, world-class partners, and world-class quality management system). As a new entrant, Junlebao's low-price strategy is also to the point. In the early stage, it avoided direct confrontation with leading brands like Feihe, establishing market position by harvesting miscellaneous brands. Especially since the implementation of the formula registration system in 2018, Junlebao's growth rate has accelerated significantly. In 2018, sales exceeded 5 billion yuan, doubling performance. In 2019, formula exceeded 75,000 tons, with sales approaching 10 billion yuan. Junlebao's low price initially relied on e-commerce. In 2014, Junlebao disrupted the market with a low price of 130 yuan, causing a national sensation and even being called "Xiaomi of the formula industry." The concept of direct internet sales not only avoided channel difficulties but also provided justification for its low price. Low prices have natural lethality, and Junlebao's biggest marketing challenge is to offset the negative association of "low price." Continuously improving quality perception and saturated communication have become necessary tools for Junlebao to address this challenge. In terms of quality perception, in 2015 it passed the top BRC certification, using "standards" to prove international quality; in 2016, Junlebao formula entered the Hong Kong market with "same quality, same price," with the first batch of products sold in Hong Kong pharmacies, using "action" to prove international quality. In 2017, it took the General Secretary's instruction "let the next generation of the motherland drink good formula" as its corporate mission, using "responsibility" to prove international quality. Starting in 2019, Junlebao began to focus on "European dual certification," simplifying communication and strengthening association. Saturated communication is both the best tool for seizing mindshare and a tool for creating familiarity and strengthening trust. In terms of saturated communication strategy, Feihe and Junlebao can be called two horses in the formula field, following each other closely in CCTV, airports, subways, short videos, key elevator advertising positions, and offline promotional activities. According to relevant sources, Junlebao's marketing expenses in the first half of 2020 were around 2 billion yuan, and in August it ranked eighth in elevator advertising spending. By linking to Feihe, it not only strengthens Junlebao's positioning but also further increases the harvesting of miscellaneous brands. More importantly, Junlebao's "high quality at low prices" positioning has extremely strong "repurchase." Third-party research data shows that Junlebao formula's repurchase rate is as high as 96%, and the net promoter score is 45%, far exceeding imported brands. It is precisely this "strong repurchase" attribute (word-of-mouth and diffusion) that, over time, Junlebao is likely to pose a lethal threat to Feihe. It only needs to wait for Feihe to make a mistake, and Junlebao can replace it. -04- The Tight Horse Race Feihe, or Junlebao? Currently, this horse race is at its most intense middle stage. Who will ultimately laugh last in this battle for the top spot in China's infant formula market? Who will ultimately lead Chinese brands to a final decisive battle against imported brands and win decisively? From a competitive offense and defense perspective, perhaps there is no definitive answer yet. Among all competitive strategic elements, "price" may be the essential factor that ultimately determines the direction of competition. As mentioned above, Feihe's strategic opportunity lies in "high-end," while Junlebao's strategic opportunity lies in "low price." Feihe's growth engine lies in: seizing the weak markets that imported brands cannot temporarily cover. Once saturation is achieved in 3rd to 5th tier cities, the original flanking competition turns into a direct attack. This urban street battle is destined to be fierce, and the outcome is unknown. Junlebao's growth engine lies in: harvesting market share from scattered miscellaneous brands through high quality at low prices, seizing the "value-for-money" market. Whether in flanking battles in 3rd to 5th tier cities or in frontal street battles in first-tier cities, it will not directly face the intense firepower of imported brands. That is to say, when Feihe launches a frontal attack on imported brands and engages in fierce hand-to-hand combat, Junlebao is still developing in the shadows. When potential opponents are stuck in the mud, it is speeding on the highway. These two different situations may ultimately determine the direction of this horse race. Historical data may imply future trends. From zero to 10 billion in formula sales, Junlebao took 5 years (2015-2019), while Feihe took 6 years (2013-2018). In 2019, both Junlebao and Feihe claimed sales of over 100 million cans. Considering product prices, Junlebao actually covers more users than Feihe. With less time and more users, one can foresee the potential and scale of the value-for-money market. Behind the price lies the user profile and consumption concept. According to public data provided by Junlebao's big data service provider Bilin Hongke: Junlebao's user profile is women born in the 1980s and 1990s in second-tier cities, mainly mass consumers, keen on online shopping and parenting, with a preference for beauty, skincare, discounts, and group buying. This group of users highly overlaps with the consumer groups of Vipshop, Tmall Global, etc. "Young, with attitude, economical and practical, with quality pursuit" - this group with such consumption concepts is the "middle class" driving China's economic development. When Junlebao meets the "middle class craze," its future growth is not hard to imagine. Growth speed, consumption concepts, and user profiles all prove from different aspects the adaptability and scalability of Junlebao's positioning in the market. Once brand momentum is combined with consumption trends and fashions, Junlebao's growth ceiling will inevitably be continuously broken. If one day, when Feihe is in a fierce battle with imported brands, Junlebao quietly seizes market share with "high quality at low prices," the horse race pattern in domestic infant formula may be rewritten by Junlebao. About the author: Zhang Jian, General Manager of Red Arrow Brand Strategy Consulting, has many years of experience in the FMCG industry and is willing to exchange and learn with peers. The above article represents only personal views.