---
title: "“Milk Giants” Battle for the Infant Formula Market: Yili Goes Left, Mengniu Goes Right"
description: "Yili's acquisition of Ausnutria and Mengniu's potential privatization of Yashili highlight the escalating competition between China's top two dairy companies in the infant formula market. As the industry enters a phase of stagnant growth, both giants are using mergers and acquisitions to expand their product lines and secure their positions."
author: "财经新媒体"
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published: "2022-05-15"
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# “Milk Giants” Battle for the Infant Formula Market: Yili Goes Left, Mengniu Goes Right

> Yili's acquisition of Ausnutria and Mengniu's potential privatization of Yashili highlight the escalating competition between China's top two dairy companies in the infant formula market. As the industry enters a phase of stagnant growth, both giants are using mergers and acquisitions to expand their product lines and secure their positions.

> **Yili acquires Ausnutria, Mengniu privatizes Yashili: Can the dairy giants reign supreme in the infant formula market?**
The war between China's dairy giants has spread from milk source competition to the infant formula market.
In early March, Yili completed its tender offer for Ausnutria, demonstrating its determination to expand its infant formula portfolio. In mid-March, Mengniu and Yashili announced a potential transaction, including possible privatization, which to some extent signaled the failure of Mengniu's early infant formula business layout. However, in February, Mengniu was already bidding for another major infant formula brand, Friso.
It is evident that the battle between dairy giants is intensifying in the infant formula market, but who will emerge victorious in this wave of mergers and acquisitions and capture the billion-yuan blue ocean of the infant formula market?
**The Battle for the Infant Formula Market: Is M&A the Only Way?**
According to Euromonitor data, China's dairy market has shown a significant slowdown in growth since 2018. In 2019, the market size was approximately 633 billion yuan, and in 2020, it grew only 0.87% year-on-year. Market analysts believe that under supply-demand balance, without obvious growth drivers, the dairy market size will stabilize at around 640 billion yuan.
As the industry enters a stock market and products become homogenized, the two giants, Yili and Mengniu, which hold the majority of market share, find it difficult to achieve high revenue growth, hitting a bottleneck in brand development.
But for companies to grow, they cannot afford to stagnate. In mid-March, besides potentially privatizing Yashili, Mengniu was also bidding for Friso's global business in February. Market sources said, "The bidding for Friso's global business has entered the second round, with Mengniu offering the highest price at $2 billion, advancing to the next round along with private equity and investment banks."
Similarly, Yili finally completed its full tender offer for Ausnutria's issued shares in March this year. The announcement stated that as of that date, Yili's wholly-owned subsidiary "Hong Kong Jingang Trading Co., Ltd." held or controlled 953 million shares of Ausnutria, accounting for 52.7% of Ausnutria's total issued share capital.
As is well known, M&A can bring significant economies of scale. Companies can supplement and adjust their assets through M&A to achieve optimal economic scale and reduce production costs. This makes such moves a necessary means for industry leaders to solidify their positions or expand business lines.
In the dairy industry, a wave of M&A has long begun. According to data from Rabobank, global dairy M&A activity reached 105 deals in 2019; in 2020, activity slowed to about 80 announced deals; in 2021, it rebounded to over 50 announced deals by mid-year.
According to "Tanglang Observation," in 2010, Bright Dairy acquired a 51% stake in New Zealand's Synlait through capital increase; in 2013, Biostime acquired Changsha Yingke Nutrition; in 2019, Yili acquired Westland, New Zealand's second-largest dairy company, and Mengniu acquired the infant formula brand Bellamy's; in 2020, Mengniu acquired the cheese brand Milkground.
As M&A among dairy companies accelerates, the gap between giants is narrowing, and the market has entered a stalemate. With the introduction of the "strictest national standard for infant formula," small and medium-sized dairy companies are being phased out faster. Yili and Mengniu are trying to capture the vacated market share through M&A, but will they succeed?
**Yili Goes Left, Mengniu Goes Right**
Yili and Mengniu's moves to expand through acquiring infant formula companies are not just about business line expansion. While maintaining steady growth in liquid milk, both giants are seeking second or third growth curves.
In 2020, Yili proposed a new group strategic goal: "Top 3 globally by 2025, No. 1 globally by 2030." However, according to Rabobank's 2021 global dairy top 20 list, Lactalis became the largest dairy company with annual revenue of $23 billion, Nestlé ($20.8 billion) ranked second, Dairy Farmers of America ($19 billion) ranked third, and Yili ($13.8 billion) ranked fifth, with a gap of over $5 billion from third place.
To close or surpass this gap, Yili **cannot be limited to its original liquid milk business.** Financial reports show that in January-February 2022, Yili's revenue was approximately 21.5 billion yuan, up over 15% year-on-year; total profit was approximately 3.3 billion yuan, with a year-on-year growth rate exceeding 20%.
Currently, Yili's revenue mainly comes from liquid milk (including white milk and yogurt), which has long accounted for up to 80% of revenue, but its growth rate is fluctuating. In January-February, Yili's room-temperature liquid milk revenue increased by about 15% year-on-year, but in the third quarter of last year, liquid milk growth was only 2.12%; in the third quarter of 2020, it was 9.6%.
But now, **the infant formula business is becoming Yili's second growth pole.** In the first two months of 2022, Yili's newly launched Jilinguan infant formula saw revenue growth of over 30% year-on-year, the fastest in the industry; Jilinguan also became the only leading infant formula company to pass the strictest "new national standard."
It is worth noting that **after completing the tender offer for Ausnutria in March, Yili has laid the foundation to become the "leader in China's infant formula industry."**
On one hand, Ausnutria is a leader in the global infant formula field. According to Nielsen data, since 2018, Ausnutria's formula goat milk powder sales have accounted for over 60% of total domestic infant formula goat milk powder imports for three consecutive years, ranking first globally in goat milk powder sales.
In addition to owning the world's No. 1 goat milk brand Kabrita, Ausnutria also owns the ultra-premium cow milk formula brand Hypnoc 1897 and other well-known brands. Industry insiders have analyzed that by 2023, Yili's infant formula business could become the No. 1 in China or even globally.
On the other hand, with complementary brand effects, supply chains, and other advantages, the successful merger means Yili may achieve a higher valuation. According to Wind forecast data, in 2021, the combined scale of Yili and Ausnutria was nearly 120 billion yuan. After financial consolidation, Yili's performance indicators are expected to further improve.
It is clear that the successful acquisition of Ausnutria is not only an expansion of business lines for Yili but also a driver to achieve the company's strategic goal of "Top 3 globally." With complementary business layouts, supply chains, and channel construction, both parties' revenues may also be further optimized.
But **Mengniu's layout in the infant formula market has not been as smooth.**
In fact, Mengniu acquired Yashili in 2013, spending HK$11 billion to take over more than 70% of Yashili's shares at that time. At the time, Mengniu President Sun Yiping said, "The acquisition of Yashili is to fill the group's infant formula short board. It will effectively strengthen both business platforms, complement Mengniu's infant formula business, and bring significant synergies to both companies." Current Mengniu President Lu Minfang stated in 2020 regarding the development goals of the infant formula business, "To enter the top three domestically within three years."
But this wish has not been realized, and **Yashili now faces the prospect of privatization and delisting.** Financial reports show that Yashili's revenue was 3.89 billion yuan in 2013, fell 27.6% year-on-year to 3.554 billion yuan in 2014, and from 2015 to 2020, revenue was 2.762 billion yuan, 2.203 billion yuan, 2.255 billion yuan, 3.011 billion yuan, 3.412 billion yuan, and 3.649 billion yuan, respectively. Although revenue recovered somewhat in 2018, it has been difficult to return to the 2013 high.
In terms of net profit, Yashili suffered losses in both 2016 and 2017. Even in 2016, Mengniu reported a loss of 751 million yuan, attributing the loss to Yashili's losses and goodwill impairment.
Recently, Yashili issued a profit warning for 2021, but given that Dumex's business performance did not meet expectations, after a one-time impairment provision of no more than 300 million yuan for Dumex, Yashili expects a loss of no more than 189 million yuan in 2021.
The continued decline in performance is the main reason for Yashili's delisting. The March announcement by Mengniu and Yashili confirmed market speculation about Yashili's privatization. The announcement stated that Mengniu is discussing its equity in Yashili and certain other business interests. If a potential transaction or offer is made, the cancellation price per Yashili share would be HK$1.2.
But **Mengniu has not given up on its infant formula business layout.** Besides the acquired Yashili, Bellamy's, acquired in 2019, is also an important support for Mengniu's infant formula business. In February this year, Mengniu was also bidding for the global business of another major infant formula brand, Friso.
In any case, in the infant formula market layout, Mengniu lags far behind Yili. One may become the "No. 1 in China's infant formula industry," while the other is regrouping and attempting to acquire companies to fill the gaps in its business lines. But where will the two dairy giants head in the future?
**Three-Child Policy Implementation and the Involution of the Infant Formula Industry**
In fact, after years of industry development, China's dairy product categories have become increasingly diverse, but room-temperature milk still holds the highest market share and remains dominant. However, with consumers' pursuit of "freshness" and "high quality," sub-sectors such as low-temperature milk and dairy products have become hot. The infant formula market is also trending toward high-end and organic products, and dairy brands are further expanding their territories.
In the infant formula market, the continuous implementation of the national two-child and three-child policies is also conducive to the development of domestic brands. According to the "2015-2020 China Infant Formula Market Size and Forecast," China's infant formula market sales increased from 125.867 billion yuan in 2015 to 169.214 billion yuan in 2020, and it is expected to reach 187.077 billion yuan by 2025.
For a long time, **the infant formula market has been monopolized by foreign brands, but now domestic brands are showing a trend of counterattack.** According to iiMedia Research data, in December 2021, China's infant formula imports and import value both declined to some extent, with imports at 80,000 tons and import value at 4.26 billion yuan, down 24% and 7.9% year-on-year, respectively.
An iiMedia Research analyst believes that domestic infant formula brands have occupied a certain position among global brands, and imported formula is no longer the main pursuit of Chinese consumers. In 2020, domestic brand Feihe's market share reached 14.8%, ranking first. Its high-end formula revenue share increased from 27.7% to 77.8% from 2014 to H1 2020.
This means that the time for domestic infant formula brands to explode has come, and the infant formula business lines of dairy companies like Yili and Mengniu will also usher in a new spring. But it cannot be ignored that **the "big-head infant formula" and "melamine" incidents have long made domestic consumers distrustful of domestic infant formula brands.**
With the introduction of the new national standard for infant formula, although it is a severe test for some small and medium-sized enterprises, it is actually beneficial to the entire industry.
On one hand, stricter policies have gradually increased the concentration of the domestic infant formula industry, which is conducive to the development of leading enterprises. On the other hand, market standardization is also a major boost to the penetration rate of domestic infant formula brands.
So from this perspective, Yili, which is trying to become the "No. 1 in China's infant formula industry" after acquiring Ausnutria, may have greater development potential in the future with complementary advantages in supply chain, brand, and channels. But it also needs to overcome issues such as increasingly stringent policy controls and the reputation of domestic infant formula brands.
Mengniu, on the other hand, needs to find a suitable development path for its infant formula business line. Whether it is acquiring new infant formula companies or launching its own infant formula products, Mengniu also needs to firmly adhere to safety standards.
But Feihe, which is in a leading position in the infant formula industry, is not passively defending. The company proposed a medium- and long-term development goal last year, planning to achieve a medium-term target of 35 billion yuan in revenue by 2023. At the same time, Feihe is also increasing its M&A layout, acquiring the goat milk formula brand Xiaoyang Miaoke last year.
Overall, against the backdrop of slowing dairy market growth and the industry entering a stock market, the dairy giants need more new stories or products to achieve their strategic goals or consolidate their positions. M&A has become a necessary means for them to quickly expand business lines, find second growth spaces, and solidify their positions. But whether this method can conquer the infant formula market and become their respective "right-hand men" remains to be further verified by the market.
References:
"Yili Becomes the Largest Shareholder of Ausnutria! Will the Strong Alliance Change the Global Infant Formula Industry Pattern?" - FBIF Food & Beverage Innovation
"Yashili's Stock Price Plunges, Market Value Evaporates by Over 300 Million, Privatization Pricing Criticized as Too Low, Long-Term Poor Performance" - Finance World Weekly
*Images in this article are sourced from the internet.
Source: Tanglang Observation (ID: TanglangFin)
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