Going global seems to have become a consensus among many brands seeking new growth.

Li Zi Yuan Milk's official WeChat account recently announced that in September 2024, the company received its first Southeast Asian order. 30 tons of sweet milk were successfully loaded and passed strict customs inspections, departing for Southeast Asia. Subsequent products will continue to be exported to Laos, Myanmar, Thailand, and other countries.

Seeking new growth overseas is a core goal for many domestic brands going global. However, for Li Zi Yuan, which has survived over 30 years of market turbulence relying on its single sweet milk product, whether this is a second growth curve or a lifeline remains to be seen.

After all, in the domestic market, Li Zi Yuan still faces a series of problems, including poor performance of new products, declining sales and market share, weakening profitability, and rising selling expenses. So, can Li Zi Yuan resolve its "midlife crisis" through going global?

The Big Single-Product Strategy Shows Signs of Fatigue

At a time when sugar-free health products are popular and sweet products are falling out of favor, Li Zi Yuan is facing the cyclical challenge of product iteration.

Li Zi Yuan's (SH: 605337) 2024 semi-annual report shows that in the first half of the year, the company achieved revenue of 679 million yuan, a year-on-year decrease of 3.08%; net profit was 95.1205 million yuan, a year-on-year decrease of 29.29%. Especially in the second quarter of this year, Li Zi Yuan's operating revenue was 350 million yuan, a year-on-year decrease of 3%; net profit was only 40 million yuan, a sharp year-on-year decline of 49.3%.

Source: Li Zi Yuan financial report

Looking at the overall trend, the growth rate of the milk beverage market is slowing down. Taking Juneyao Health (605388.SH), the "first stock of room-temperature lactic acid bacteria," as an example, from 2020 to 2023, Juneyao Health's net profit declined for four consecutive years. In the first half of 2024, the company's revenue fell to 756 million yuan, a year-on-year decrease of 14%, while net profit fell by 27.09% to 35 million yuan.

Clearly, competition in the dairy track has entered a white-hot stage. Li Zi Yuan not only faces pressure from dairy giants like Yili and Mengniu but also competes with many rivals such as Wahaha AD Calcium Milk, Yili Yoghurt, Mengniu Sour Milk, and Yakult Probiotic Drinks.

These competitors, as "national brands," not only have stable consumer mindshare and customer bases, but they also continuously attract new customers through nutritional value or rich flavors and diverse packaging. Even Yakult Probiotic Drinks is making frequent efforts in health attributes. In comparison, Li Zi Yuan seems somewhat "stretched thin."

Source: iiMedia Research

In terms of packaging design, Li Zi Yuan's plastic packaging, unchanged for a decade, may appeal more to consumers seeking a classic experience, but for young people pursuing modern packaging, this design appears somewhat outdated. In terms of flavor, Li Zi Yuan offers a variety of options including classic original, strawberry, and cantaloupe, but consumers with a slightly discerning palate can taste its sugary water essence, which is clearly out of place in today's health-conscious era.

This can be seen from the ingredient list: the first ingredient is water, followed by raw milk, whole milk powder, and white sugar. In addition, sweet milk contains high sugar content and various food additives (such as mono- and diglycerides of fatty acids, carrageenan, etc.). According to the nutrition facts table, each 100ml of the beverage contains only 1g of protein, while the national standard requires that pure milk products contain no less than 2.9g of protein per 100ml.

Image: Li Zi Yuan sweet milk ingredient list

No wonder consumers directly say: Li Zi Yuan sweet milk has no milk, only sweetness. Complaints like "water + milk powder + saccharin" and "full of technology" undoubtedly put the quality of Li Zi Yuan products under the spotlight.

Source: Xiaohongshu

However, this controversial milk beverage is Li Zi Yuan's core business, and it has relied on milk beverages to expand the market throughout its 30-year history. The milk beverage business contributes over 95% of the company's revenue. In the first half of 2024, the revenue from the milk beverage business was 656 million yuan, a year-on-year decrease of 4.87%, but it still accounted for 97.02% of the company's total revenue.

It can be seen that Li Zi Yuan's big single-product strategy has lost its core competitiveness under the current trends of intense brand competition and industry health consciousness.

The Difficult-to-Hatch Second Growth Curve

To reduce dependence on the single product and develop a second growth curve, Li Zi Yuan has launched multiple new products such as Li Zi Yuan Milk Coffee, Li Zi Yuan Coconut Milk, Fruit and Vegetable Yogurt, Lactose-Free Oat Milk, and Zero-Fat Lactic Acid Bacteria Drinks, but none have made a splash in the market. As of the first half of 2024, other beverage products accounted for less than 3% of Li Zi Yuan's revenue.

Undoubtedly, Li Zi Yuan has failed to produce a hit comparable to sweet milk. Behind this, it reflects Li Zi Yuan's shortcomings in product innovation and market insight. The new products have low market acceptance, fail to effectively attract consumers, and have not formed new growth momentum.

In terms of product promotion, to cope with declining performance, Li Zi Yuan once pinned hopes on marketing, but channel marketing is not a panacea.

On April 20 this year, Li Zi Yuan officially announced new-generation actor Cheng Yi as its brand spokesperson, high-profile covering core airport and shopping district screens in first-tier cities across the country, occupying subway, high-speed rail, elevator advertising spaces, and other core positions, covering a total of 1,000 commercial advertising screens in over 100 core cities.

Source: Internet

A series of measures also led to a sharp increase in selling expenses. The semi-annual report shows that Li Zi Yuan's selling expenses increased by 47.16% year-on-year to 100 million yuan.

This high-profile marketing also brought Li Zi Yuan a brief highlight. Just 14 hours after announcing the spokesperson, sweet milk achieved online sales of 15 million yuan. On July 8, when "Li Zi Yuan Lucky Milk" was launched, the new product's daily online sales quickly exceeded 5 million yuan.

However, this heat did not last, and performance did not form positive feedback. The financial report shows that while Li Zi Yuan's selling expenses rose, profits plummeted. In the second quarter of this year, Li Zi Yuan's operating revenue was 350 million yuan, a year-on-year decrease of 3%; net profit was only 40 million yuan, a sharp year-on-year decline of 49.3%.

The deep reason lies in insufficient product R&D. Historical data shows that from 2017 to the first half of 2020, Li Zi Yuan's R&D expenses as a proportion of operating revenue never exceeded 1%, at 0.68%, 1.22%, 0.97%, and 0.87%, respectively. In the first half of 2024, Li Zi Yuan's R&D investment reached 9.0787 million yuan. Although it increased compared to before, it is still negligible relative to its 656 million yuan milk beverage business revenue.

Source: Li Zi Yuan financial report

It is obvious that this "heavy marketing, light R&D" strategy has yielded little. Long-term reliance on a single product and large-scale marketing activities can stimulate sales in the short term, but cannot fundamentally solve the problem of insufficient product competitiveness.

In contrast, Yakult has won market recognition with the selling point of "active lactic acid bacteria," while Juneyao Health's "Wei Dong Li" focuses on the concept of "promoting gastrointestinal health." In recent years, Juneyao Health has not only strengthened its health positioning on the original product line but also actively explored transformation in drinking water, probiotics, and other fields.

In the first half of 2024, the revenue of Juneyao Health's subsidiary Runying Bio increased by 89% year-on-year, net profit increased by 166% year-on-year, and shipment value increased by more than 75% compared to the same period last year.

In the long run, no enterprise can rely on a single product strategy to succeed everywhere. Li Zi Yuan's predicament is also a common dilemma for many brands stuck in their comfort zone.

In a rapidly changing market environment, only by continuously innovating products, keeping up with consumer needs and market trends, and repeatedly stepping out of the comfort zone can enterprises maintain competitiveness and achieve sustainable development.

Can Going Global Work?

With the decline of the big single product and the difficulty in hatching a new growth curve, Li Zi Yuan faces declining performance and slowing market share growth. Going global is undoubtedly a breakthrough for seeking incremental growth.

China's dairy export market has experienced steady growth in recent years. It is worth noting that Thailand ranks third in China's dairy export market share, which fully demonstrates that the Southeast Asian market, where Thailand is located, has a high acceptance of Chinese-produced dairy products.

Take Chagee as an example. Its global store count has reached 4,500, including more than 100 overseas stores, especially performing well in the Southeast Asian market, with sales exceeding 10 billion yuan in 2023. The strong performance in overseas markets proves the success of its brand internationalization strategy, and also reflects the prospects of its products globally, especially in the Southeast Asian market.

It is worth mentioning that compared to the Chinese market with a significant "sugar-free" trend, the Southeast Asian market still has strong demand for sweet beverages, and sweet milk may find new opportunities in this market. Citing a previous report from Interface News, an interviewee working at a catering design and planning company in Southeast Asia said, "Milk tea should be so sweet that your throat sticks together." Chinese tea beverage brands that entered the Southeast Asian market earlier have noticed this difference. Consumers in Myanmar and Thailand have higher sugar requirements, so milk tea brands usually offer higher sweetness products.

However, despite the overseas market, in the Southeast Asian market where Thailand is located, Li Zi Yuan still needs to face dairy giants that have already gone global.

Source: Li Zi Yuan Milk Weibo

Currently, Ambrosial is sold in markets such as Singapore, Myanmar, Vietnam, Thailand, Malaysia, and the Philippines, and has formed synergies with the larger ice cream market, already possessing a certain brand awareness. In contrast, Li Zi Yuan relies solely on a single big product to "go it alone" in the Southeast Asian market, which increases the risk of losing in competition.

Internally, due to insufficient R&D investment, Li Zi Yuan finds it difficult to quickly launch new products that meet local market demands, losing its first-mover advantage and weakening its market competitiveness.

To succeed in overseas markets, the first priority is that the product must have strong competitiveness. To this end, Li Zi Yuan's domestic "heavy marketing, light R&D" approach may not be replicable overseas. On the contrary, Li Zi Yuan needs to increase R&D investment to launch new products that meet local market demands, thereby ensuring a leading position in fierce market competition.

For example, Coca-Cola has established multiple R&D centers globally. Through the research work of local R&D centers, Coca-Cola can better understand local consumer preferences and develop products that are closer to market demand. In India, Coca-Cola launched a mango-flavored drink called Maaza, catering to locals' love for mangoes. In contrast, Li Zi Yuan's insufficient investment in product R&D makes it difficult to quickly launch new products that meet local market demands, thus limiting its market competitiveness.

In addition, supply chain management issues, such as high logistics costs, poor inventory management, and unstable raw material supply, can affect product market response speed and cost control. It is reported that dairy giants like Yili and Mengniu have already built factories overseas, and some even have ice cream businesses empowering their dairy beverage business. In comparison, Li Zi Yuan, with only sweet milk, will face more pressure after going global.

Finally, due to unfamiliarity with overseas markets, compared to other brands like Mixue Ice City that establish localized production facilities, Li Zi Yuan relies on local distribution networks and has not yet formed a system overseas. Products may be sold more through local channel distributors, whose capabilities are not within Li Zi Yuan's control, which undoubtedly adds another layer of constraint to Li Zi Yuan's development.

At present, whether Li Zi Yuan can truly establish itself in the Southeast Asian market and use going global to expand brand increment and boost performance remains to be seen.