Recently, the National Health Commission issued the "Nutritional Dietary Guidelines for the Prevention and Treatment of Pneumonia Caused by the Novel Coronavirus," which specifically recommends dairy products: it suggests that the general population consume a variety of milk and dairy products, equivalent to 300 grams of liquid milk per day, with a special recommendation for yogurt. "Money is a worldly possession, but health is the capital of revolution." The outbreak of the pandemic has made us realize the importance of health more deeply, and dairy products that help boost immunity will receive significant attention. Image source: National Health Commission Currently, due to the impact of the pandemic on raw milk production, logistics and transportation, and store sales, coupled with the stagnation of consumption during the Spring Festival, dairy sales have declined in the short term. According to data from e-commerce big data agency ECdataway, from January 24 to February 13, dairy sales on the Tmall platform fell by 22.30% year-on-year, and sales revenue decreased by 3.20% year-on-year. Sinolink Securities pointed out that the daily consumption demand for dairy products has not declined significantly. In the long run, the impact of the pandemic on the dairy industry is relatively small, and there may be a certain degree of rebound after the pandemic. As the pandemic gradually comes under control, the supply chain returns to normal, and consumer demand rises, the dairy market will gradually recover. Chairman Mao once said, "Do not fight an unprepared battle." To win this "opening battle," we need to deeply understand the development patterns and future trends of China's dairy industry. Over the past four decades, China's dairy industry has experienced the budding stage of low-temperature pasteurized milk, the rise of ambient milk, the catastrophe of the "poison milk" incident, and the subsequent "duopoly" competition and the blossoming of multiple categories... Taking history as a mirror, where will the dairy industry go in the future? What opportunities and challenges do dairy companies face? This article will start from the 1980s, review the four main stages of the development of China's dairy industry, discuss the driving forces behind the competitive landscape in each stage, and foresee the next decade of China's dairy industry. -01- Stage 1: In the 1980s, dairy reform began Characteristics of the era: The socialist market economy system was initially established, and market supply was insufficient. Market characteristics: Stable guarantee of residents' demand for milk. Representative category: Low-temperature pasteurized milk. From the founding of New China to the reform and opening-up, the word "barren" could describe all consumer goods industries in China. The market phenomenon of purchasing grain and milk with ration tickets reflected the economic characteristics of the early days of New China, which was severe supply shortage. Image source: 7788 Collection In 1984, the Zhaluteqi Dairy Factory in Inner Mongolia introduced UHT (ultra-high temperature sterilization) technology and equipment. This enabled fresh milk produced in the north to be sold to southern markets. Subsequently, China vigorously developed the dairy farming, production, and processing industries, and the significant increase in milk production alleviated the demand for milk during the planned economy period. In 1992, Deng Xiaoping's southern tour kicked off the socialist market economy system. Under the market economy system, the state encouraged free market competition, and major dairy companies also adapted their business strategies to the changes of the times. The representative company of this stage was Bright Dairy, formerly known as Shanghai Milk (Group) Company. During the planned economy era, this state-owned enterprise was responsible for supplying milk to Shanghai residents. After free market competition, Shanghai Milk (Group) Company, which had been dominant in Shanghai, faced sudden competition from rivals, and its market share dropped sharply. After research, Shanghai Milk made a comprehensive plan covering all of Shanghai: 273 milk stations across the city, each with 20 delivery vehicles, each carrying 200 bottles of milk, and then delivering door-to-door in designated areas, installing milk boxes and delivering before residents went to work. Image source: Bright Dairy Suixinding website In 1996, Shanghai Milk Company and Shanghai Industrial Group jointly established "Shanghai Bright Dairy Co., Ltd." The core strategy of Bright Dairy at that time was to take the Bright brand nationwide, integrate national milk resources, and establish bases in major milk-producing areas across the country. At the same time, Bright Dairy heavily advertised on CCTV, emphasizing its high-quality milk source in the ads: "100% good cows, produce 110% good milk." The slogan left consumers with the impression that Bright Dairy had high-quality milk sources. In 2000, Shanghai Bright Dairy Co., Ltd. completed its shareholding reform and was renamed "Shanghai Bright Dairy Co., Ltd." In 2002, it listed on the A-share market of the Shanghai Stock Exchange (code SH600597), becoming the leading enterprise in China's dairy industry at that time. The characteristics of this stage were quite distinct: the national economy was starting, consumer brands were in the early stages of development, and the dairy market was still in the primary stage of "ensuring supply," with few brands and a single category, and a mature competitive landscape had not yet formed. -02- Stage 2: The rise of ambient milk, ushering in the golden decade of China's dairy industry Characteristics of the era: Residents' living standards improved, and demand for healthy food increased. Market characteristics: Competing for market share and channel expansion. Representative categories: Ambient milk and milk-containing beverages. From 1997 to the melamine incident in 2008, China's dairy market experienced comprehensive growth. Thanks to UHT technology and the full introduction of Tetra Pak aseptic packaging in 1997, the "ambient milk" product rose. With technological development and the improvement of residents' living standards, leading to increased demand for healthy food, Yili and Mengniu, two companies born in Inner Mongolia, quickly expanded channels and advertised across the country, seizing consumers' minds by controlling upstream raw milk resources. Image source: Yili official website Because ambient milk has a shelf life of 6-9 months, it can be transported over long distances and displayed on shelves for extended periods, allowing rapid expansion into the national market. In contrast, Bright Dairy, a city-based dairy company, although it was the largest dairy company in the early 2000s, stuck to its low-temperature pasteurized milk strategy, making it difficult to break through its sales radius, and it quickly fell behind Yili and Mengniu. During the decade of rapid growth in China's dairy industry, Yili and Mengniu covered all first- and second-tier cities nationwide. Around 2005, they began to penetrate third- and fourth-tier cities and rural areas, while expanding their product portfolios. Before 2005, the initial product differentiation of ambient white milk mainly focused on packaging and appearance. After 2005, the variety of flavored milk greatly increased. After nearly 10 years of a single taste, ambient white milk gradually expanded to include flavored white milk, grain and fruit milk, and other products with rich flavors. At the same time, milk-containing beverages quickly spread across the national market through marketing momentum. Major dairy companies all focused on marketing and channels to compete for market share in milk-containing beverages. For example, in 2005, the battle between Yili's "Yogurt" and Mengniu's "Suan Suan Ru" (Sour Sour Milk): Mengniu invested 14 million yuan in naming rights and over 80 million yuan in subsequent support, a total investment of nearly 100 million yuan, which resulted in an increase in Mengniu's brand value, sales of 2.5 billion yuan for Mengniu Suan Suan Ru, and the expansion of Mengniu's sales channels. In contrast, the sales growth of Yili's similar product, Yili Yogurt, was almost zero in 2005. It can be seen that during the stage of comprehensive market growth, competition among dairy companies mainly focused on grabbing market share and channel expansion. When competition further intensified, category expansion and marketing investment became the second battlefield outside channels. -03- Stage 3: After the "poison milk" catastrophe, the duopoly pattern of the dairy industry began to take shape Characteristics of the era: The melamine incident broke out, and food health and safety increasingly attracted attention. Market characteristics: Market channel construction became mature, and major dairy companies expanded categories and deepened competition. Representative categories: High-end white milk and ambient yogurt. From 2008 to 2015, the industry experienced the darkest moment of the melamine incident. At the same time, major dairy companies expanded horizontally in categories and vertically competed for high-quality upstream milk resources. In 2008, the melamine incident brought the credibility of the domestic dairy industry to rock bottom. China's dairy industry ended its decade of rapid expansion. Before 2008, the market growth rate of China's dairy products was double-digit. In 2009, the growth rate of China's dairy products was only 6.5%, and the domestic milk powder market was particularly hard hit. The food safety incident undermined consumer confidence in small and medium-sized dairy companies, while large dairy companies benefited from the process and began to increase their market share. During the four years from 2008 to 2012, Mengniu and Yili further increased their industry market share through mergers and acquisitions, and the duopoly pattern of the industry emerged. In terms of product categories, leading companies such as Yili and Mengniu began to attach great importance to the promotion of high-end products. Around 2005, high-end white milk such as Mengniu Deluxe and Yili Jindian gradually came on the market, achieving high growth around 2013: in 2013, the growth rate of high-end milk represented by Deluxe and Jindian was much higher than the overall growth rate of liquid milk. Image source: Deluxe official Weibo Image source: Jindian official Weibo At the same time, ambient yogurt opened the curtain on a new decade of dairy development. Three representative products—Yili Ambrosial, Mengniu Pure Zhen, and Bright Dairy Moscowian—captured the vast majority of the ambient yogurt market share through strong channel advantages, precise brand marketing, and category (taste) expansion. Image source: Tmall Overall, from 2008 to 2015, leading dairy companies completed the nationwide channel layout in a network-like manner. During the mature period of market channel construction, developing hit categories, increasing precise product marketing, and enriching product tastes were the core elements to strengthen corporate competitiveness. -04- Stage 4: The dairy industry blooms with a hundred flowers, and leading dairy companies move towards a "Chinese Nestlé" Characteristics of the era: China's economy is in a stage of consumption upgrading, and consumers are increasingly concerned about health. Market characteristics: Comprehensive competition in milk sources, products, marketing, and channels, with leading dairy companies diversifying across categories. Representative category: A hundred flowers bloom in categories. From 2015 to the present, the dairy industry has engaged in comprehensive competition in milk sources, products, marketing, and channels. The strategic positioning of leading dairy companies is to become high-quality food health groups, and they have begun to cross into other product categories. Currently, China's economy is in a stage of consumption upgrading, and the public is increasingly concerned about food health issues, leading to increased demand for high-quality low-temperature milk. Thirty years ago, consumers had only pasteurized milk to choose from; thirty years later, dairy products are abundant. Examples include low-sugar, fat-free, high-calcium milk, fruit-flavored yogurt, cereal breakfast milk, functional yogurt for regulating the stomach, and fruit-flavored yogurt. In marketing, Mengniu and Yili are both heavily investing in advertising and marketing, sponsoring popular variety shows to increase brand awareness. For example, Yili Jindian sponsored "I Am a Singer 4," and Mengniu Deluxe sponsored "Back to Field 3." In addition to marketing investment, providing consumers with healthy and high-quality dairy products and ensuring the supply of high-quality upstream raw milk is particularly important for dairy companies, because currently, high-quality raw milk resources are scarce domestically, while the demand for high-quality products is increasing. The main reason for the shortage of milk resources is that from 2015 to 2016, due to over-expansion in previous years, there was an oversupply of raw milk domestically, leading to the phenomenon of dairy farmers being unable to sell milk. During this period, small and medium-sized farms faced difficulties and were forced out. In the following two years, from 2016 to 2018, the government launched an environmental protection campaign, and farms that did not meet environmental standards were forced to exit, causing the number of dairy cows in China to decline year by year for the past three years. The country began to experience a milk shortage again. Therefore, the current duopoly Yili and Mengniu both have important layouts in upstream milk resources. For example, Mengniu is the controlling shareholder of China's largest pasture, Modern Farming. In July 2019, Yili's Youran Dairy acquired 58.36% of Saikexing for 2.278 billion yuan. At the same time, both leading companies are currently entering plant-based milk, functional beverages, coffee drinks, packaged water, and other fields. Now, the two dairy companies look more like a Chinese version of Nestlé, that is, a health food group. Image source: Yili Zhixuan official Weibo Looking back at Nestlé's development history, it was born in 1867, located in Vevey on the shores of Lake Geneva in Switzerland, and currently has more than 500 factories worldwide, making it the world's largest food manufacturer. It started with the production of infant food, is famous for chocolate bars and instant coffee, and now this food giant's industries span coffee, milk powder, mineral water, chocolate, candy, seasonings, milk, etc., with more than a thousand food brands. In the future, the two leading companies are precisely aiming to benchmark against Nestlé and build a Chinese health food group. Essentially, both dairy companies are using existing channels to broaden their product lines, with limited trial-and-error costs, so it will not affect their core business. The choice of product categories is more like the strategic layout of a health food group. -05- The next decade of the dairy industry: Giants lead, new players disrupt Now, the "Grassland Heroes" Yili and Mengniu lead China's dairy industry, and both have entered the top 10 global dairy companies. Their market share has grown from less than 100 million yuan 30 years ago to expected total revenues of over 80 billion yuan and 70 billion yuan respectively in 2019. At the beginning of 2020, Yili's market value exceeded 200 billion yuan. In the future, as the dairy industry enters a new period of explosive growth, more new players are bound to enter and share this big cake. Overall, in the current situation where large dairy companies are continuously controlling upstream milk resources, controlling channels, upgrading products, and spending heavily to capture consumers' minds, new entrants face considerable challenges in trying to share this big cake. Currently, the main offline channels are occupied by large dairy companies Yili and Mengniu. When you go to the supermarket, it's not hard to find that almost two out of three freezers contain dairy products from Yili and Mengniu, while other brands are squeezed into one freezer. A new brand placed in the second or third column in a supermarket is easily overlooked by consumers. For new brands, the channel costs on Tmall and JD.com are also not low, and the main on-site traffic is also swept away by big brands. In terms of marketing, Yili and Mengniu each spend tens of billions of yuan annually on marketing, making it difficult for new companies to compete. In addition, new brands lack the ability to generate sufficient cash flow on their own and need continuous capital support. For example, Lechun Yogurt has monthly revenue of over 10 million yuan, but the company continues to lose money. The main reason is the difference in financial models between new companies and giants. Lechun spends 80% of its funds on the product itself. Giants, on the other hand, already have a channel foundation and generate cash flow by heavily advertising to expand sales, but new consumer brands driven by product sales will accelerate their sales performance through word-of-mouth. Finally, there is the milk source. Currently, high-quality milk resources are scarce domestically, and ensuring control over high-quality milk resources is the only way to ensure quality control and cost stability. Major dairy companies have joined the battle for milk resources, and large, high-quality pasture milk sources are almost all held by large dairy companies. For new entrants, we have the following three tips for the battle: 1. Can't compete head-on? Take a curve overtaking In red oceans such as ambient white milk and ambient yogurt, market share is almost monopolized by leading players, and consumers' brand awareness is deeply rooted. It is difficult for new entrants to share the pie, and head-on competition is difficult. Therefore, choosing a not-yet-mature market segment is a better choice for new brands. Currently, China's dairy consumption is mainly liquid and ambient products, but consumers are increasingly concerned about health and freshness, and need to cultivate a richer dairy consumption structure. Low-temperature fresh milk, low-temperature yogurt, and solid dairy products will become the rising categories in the next stage. In terms of functional segmentation, new brands can develop dairy products with personalized functions for different groups of people, including high protein, low sugar/no sugar, low fat/fat-free, lactose-free, added probiotics, etc. Sleep-aid functions and clean labels are also trends worth paying attention to. Mengniu's "Good Night" sleep-aid milk. Image source: Mengniu official website Second, expand other raw materials. In addition to mainstream cow's milk dairy products, goat milk, camel milk, plant-based milk, etc. are also increasingly popular. Currently, there are no leading brands in these categories, and new entrants have the opportunity to seize market initiative. ** 2. Seek new channels and marketing with higher cost-effectiveness When new entrants start, they cannot compete with leading companies in distribution and promotion. Knowing how to find new channels with higher cost-effectiveness is a necessary skill for a new consumer entrepreneur. For example, Three Squirrels, Inman, Handu Yishe, and Liebo, which rose with the traffic dividend of Taobao, and beauty brands that rose with the dividend of Xiaohongshu. These entrepreneurs all have an extremely keen ability to capture new traffic dividends. The traditional channels for dairy products are supermarkets and convenience stores, but new brands lack advantages. Instead of being placed on the back shelves to collect dust, it is better to move to new channels, making good use of the growth dividends of social e-commerce, new retail, and unmanned retail, and forming a clear differentiation from giants. In terms of marketing, the big spending of giants is like casting a net in a big fish pond. Currently, new companies are more suitable for fishing in small fish ponds. Use social platforms such as WeChat, Weibo, Douyin, and Xiaohongshu to develop and cultivate private domain traffic, seek dividends in the fan economy, drive sales growth with word-of-mouth, and then gradually expand the consumer base. 3. Many hands make light work; small pieces also have great power New brands lack resources and funds, and are relatively weak in conditions such as milk sources, production, and transportation. But many hands make light work. They can strengthen cooperation with other new dairy companies, medium-sized dairy companies, and third-party production and logistics companies to jointly build an industrial ecosystem and achieve cost reduction and efficiency improvement. When they develop to a certain scale, they can consider improving their own supply chain capabilities. Finally, being small in size and scale is actually an advantage for new brands. Currently, young consumers have lower brand loyalty. They pay more attention to the value of the product itself, prefer brands that resonate with them, are innovative and interesting, and have a certain resistance to older brands. This is a favorable situation for new players. In the face of rapid market changes, new brands are more flexible and can adjust strategies in a timely manner, capturing the hearts of young people first. We have seen some start-up brands that have emerged in the past two years, such as Lechun, Jianai, and Adopt a Cow, which have been sought after by young consumers, sending a positive signal to the industry. Image source: Adopt a Cow official Weibo With the outbreak of the dairy market under the pandemic, old players and new players will all join a new round of competition. This is also an upgrade for the industry. Which brands will emerge as dark horses in the future? Let's wait and see. Source: FBIF Food & Beverage Innovation (ID: FoodInnovation)