Reprinted with authorization.**** Mengniu, Yili, Nongfu Spring, Coca-Cola... beverage companies are increasingly venturing into cross-industry products with more novel directions. Why do these companies pursue such products? Will consumers pay for the products of these cross-industry newcomers?**** Dairy company Mengniu has long been known to consumers for producing dairy products such as milk, yogurt, and ice cream. However, in August, the company launched a product that completely deviates from its previous product logic: taurine drinkable jelly. Foods with added taurine are not ordinary snacks but functional snacks. As a giant in China's dairy industry, Mengniu is attempting to enter the functional food sector beyond dairy, competing for market share with energy drinks like Red Bull and Dongsheng Teyin, which also contain taurine. Mengniu is not the only company becoming increasingly adventurous in its products. In July, Mengniu's competitor Yili entered the highly competitive coffee market with two bottled coffee products. Earlier, Yili had also entered the drinking water market, where veteran player Nongfu Spring launched China's first plant-based protein yogurt in April this year, counterattacking Yili's territory, and even attempting to make strides in the moisturizing mask sector. Mengniu sells energy jelly, Yili launches coffee products, Nongfu Spring makes yogurt and masks... These Chinese beverage companies are entering new fields they have never touched before. What is the logic behind their cross-industry moves? Will consumers pay for the products of these cross-industry newcomers? Cross-Industry Experience of International Giants In fact, engaging in cross-industry business and diversifying product portfolios is a growth trajectory followed by many global food and beverage giants. By continuously entering new fields and categories, they have gained more opportunities and larger scale. Nestlé, the world's largest food and beverage company, was originally a dairy company when founded over 100 years ago, starting with condensed milk and infant milk products. More than 30 years after its establishment, Nestlé began expanding its product portfolio, first entering chocolate production and sales, then gradually expanding into beverages, coffee, water, snacks, pet food, and more. Through continuous cross-industry entry into new product categories, Nestlé gradually grew into a highly diversified food and beverage empire. Danone, a French food and beverage giant founded in Spain, launched the world's first glass-bottled yogurt 100 years ago, but the company did not stop at dairy products. Similar to Nestlé's path, Danone continuously expanded its product lines, extending from dairy to beverages, infant food, medical nutrition food, and other areas with higher technical content and profit margins. Of course, not all food and beverage companies follow the path of product cross-industry expansion. For example, beer maker Anheuser-Busch InBev achieved growth by continuously executing cross-border mergers and acquisitions, expanding its global market share within the single beer category. However, it is undeniable that extending from existing product lines to new categories through acquisitions or independent R&D has brought many food and beverage companies the possibility of a snowball effect. Risk diversification is a major consideration for beverage companies choosing cross-industry moves. In recent years, carbonated beverage companies have been the most active in cross-industry moves. Coca-Cola has entered energy drinks, coffee, tea, alcoholic beverages, and even sought opportunities in the new cannabis beverage market through acquisitions and independent R&D. PepsiCo's cross-industry scope is even broader, with products like Lay's potato chips and Quaker oats. The main reason for Coca-Cola and PepsiCo's cross-industry moves is the gradual decline of the carbonated beverage market. With the development of health concepts, consumers are increasingly conscious of controlling sugar intake, thus shunning high-sugar carbonated drinks. When the overall category is on the decline, even industry giants like Coca-Cola and PepsiCo cannot remain unaffected. Diversifying and spreading risk become their inevitable choices. How Beverage Companies Cross Industries A mineral water production line at a company in Jilin. Photo/IC Chinese local food and beverage companies have a relatively short development history and relatively thin product lines. In the past 20 years, they have completed channel expansion and consumer base growth. Channels and consumer numbers are no longer the growth magic weapons for enterprises, with compound growth rates dropping from double digits around 2010 to 3%-5%. The industry is entering a long autumn. At the same time, some Chinese companies with stable revenue have profit margins far below those of international giants: Nestlé's five-year operating profit margin is nearly 18%, while its Chinese counterpart Yili is less than 8%, and Mengniu is less than 5%. However, this also means that Chinese companies still have significant room for growth. By adjusting product structures, they can accumulate in tracks with growth potential. The functional snack market that Mengniu has chosen to test the waters is still a blue ocean in China, but it can draw lessons from the development of functional beverages. In recent years, China's functional beverage market has become a major growth driver in the beverage industry, maintaining a compound growth rate of 15%. In addition, the drinkable jelly product form chosen by Mengniu is relatively novel in China's snack market. Functional drinkable jellies that replenish energy, collagen, etc., have developed well in the Japanese market, but in China, this is still an emerging market. Like Mengniu, Nongfu Spring has also chosen a new track in a large market. The market demand for yogurt is very large. Nongfu Spring avoided the traditional cow's milk yogurt market, which is mature and highly competitive with many players, and started from the plant-based protein yogurt market, which is still blank in China. Plant-based yogurt is growing rapidly globally, with the US and European markets expected to see compound growth of 15% and 17% over the next five years. Danone has announced plans to triple sales of plant-based yogurt and beverages by 2025. For Nongfu Spring, entering yogurt production through cross-industry moves, the barrier to making plant-based yogurt is lower. The supply chain for plant-based yogurt is much shorter than that for traditional dairy products. Companies do not need to invest in upstream farms or consider milk sterilization and freshness issues. They can simply purchase plant-based protein raw materials and complete production in food factories. Furthermore, Nongfu Spring has also drawn on its purified water product image, launching multiple moisturizing mask products since 2018. In April 2019, it launched a birch sap mask, inviting celebrity Cai Xukun as spokesperson, making it a viral product. Using product cross-industry moves for creative marketing also helps companies change their monotonous brand image. Previously, Chinese liquor company Luzhou Laojiao launched perfume products, which instantly went viral on social media. Coca-Cola, KFC, and McDonald's have also collaborated with beauty brands to launch perfumes and cosmetics. These companies may not genuinely intend to make such drastic product breakthroughs, but through brief cross-industry forays into beauty and fashion, brands strengthen communication with young people. Risks of Cross-Industry Moves The biggest risk of cross-industry moves is that products may not be accepted by the market. Market research firm Nielsen conducted a survey on the food and beverage industry and found that out of 25,000 new products launched in a year, only about 200 generate significant sales and are accepted by consumers. Only 50 maintain growth in sales volume, distribution rate, and sales revenue. In other words, more than 99% of products will be eliminated by the market. Currently, these companies making cross-industry product moves are not yet enough to change the landscape of the fields they enter. For example, Yili has only launched two coffee products, which appears to be a "test the waters" move, not like Luckin Coffee's entry into the coffee industry to challenge Starbucks and Nestlé. At the same time, when more companies choose to broaden their product boundaries beyond their main business, they will inevitably find that former non-competing peers may become today's competitors, and competition between companies is occurring on more and more tracks. In December 2018, Yili announced an investment in a mineral water project in Changbai Mountain, entering the water market, becoming a competitor to Nongfu Spring in the drinking water market. Nongfu Spring, which has started making yogurt, will also become a challenger to Yili. However, companies making cross-industry products can help activate industry competition. As Chinese consumers become increasingly willing to pay for healthy, high-quality, and interesting innovative products, even paying higher premiums, food and beverage companies need to gradually broaden their horizons and make product breakthroughs through continuous experimentation. Large enterprises making cross-industry products also have brand and channel advantages. They can leverage their long-term accumulated brand reputation and channel resources to quickly distribute products and make further adjustments based on market feedback. Perhaps in the near future, we will see these companies evolve from "cross-industry test the waters" to true diversified development. Tips will be paid 400-2000 yuan upon adoption.