A decade ago, the milk powder industry was reshaped by quality and credibility issues, instantly determining winners and losers. Now, the battle has reignited, a clash of titans. To understand the current state of the milk powder market, read on. The 2008 melamine scandal completely transformed China's milk powder market landscape. Nestlé Wyeth, Mead Johnson, Abbott, and Danone—four "foreign generals"—hoisted the banners of "health" and "no additives," swiftly capturing the first- and second-tier city markets. At that time, domestic brands like Yili and Beingmate were implicated by Sanlu, unable to recover under a barrage of public criticism. Was the defeat of domestic milk powder brands sealed? Ten years later, Feihe and Junlebao, born from obscurity, have become heroes, dominating third- and fourth-tier cities. The "foreign generals," led by Nestlé Wyeth, could not tolerate their growth and, leveraging the "new milk powder policy" and the two-child policy, moved into their territory. In close combat, who will win and who will lose? Crossing the Line The third- and fourth-tier milk powder market began to reshuffle with the introduction of a new policy. In early 2018, the infant formula registration system was officially implemented, restricting each dairy company to no more than three series and nine formulas. This move left small and medium-sized milk powder brands, which had been scraping by in the third- and fourth-tier markets, in despair; those without registration qualifications had to exit. Who would fill the void? Through competition, of course. The third- and fourth-tier market, rife with "unbranded" products, was already a "fat piece of meat." A 2017 report on China's infant formula market share showed that "other" categories accounted for about 20% of sales, supported by a large number of small and medium brands. Notably, Nestlé, the industry leader, held only 15%, while newcomer Feihe had just 6.5%. Moreover, for milk powder, more children mean more opportunities. According to the National Bureau of Statistics, China saw about 17 million newborns in 2017, with over 60% in non-first- and second-tier cities. Thus, after the "new milk powder policy" forced out a batch of small and medium brands, it left a nearly 30 billion yuan gap in the market. Foreign brands struck first. However, for them, deploying enough personnel to run terminal channels in third- and fourth-tier cities and townships would not yield significant results, so they mostly opted for e-commerce models, launching "exclusive" products on online platforms. FrieslandCampina launched Zimu, a sister brand to Friso, in 2016, targeting the third- and fourth-tier market; Nestlé Wyeth developed the "SMA Zhenyun" series, entering the fray with a posture of being more suitable for Chinese infants and more affordable; in June this year, Mead Johnson partnered with JD.com, leveraging JD's robust logistics to sell its products in third- and fourth-tier cities. Domestic brands like Feihe and Junlebao, though reluctant to see their "cheese" moved, felt somewhat helpless. Their strategy for capturing the third- and fourth-tier market relied on offering multiple series to give consumers price choices, but the registration system significantly weakened this advantage. One side's loss is another's gain. With fewer series and foreign brands encroaching with ammunition, it might be better to pivot to the high-end market in first- and second-tier cities. Thus, Junlebao and Feihe began raising prices and intensifying branding efforts. Both foreign and domestic brands have their own strategies, and a fierce battle is brewing. Fighting for Mother-and-Baby Stores The key battleground: mother-and-baby stores in third- and fourth-tier cities. Feihe and Junlebao captured half of the third- and fourth-tier market not only through low prices and quality but also through a large ground promotion team. Hearing that foreign brands were coming for the mother-and-baby store channel, they employed "human wave" and "clearance sale" tactics. Feihe deployed a 3,000-person consumer education team and 12,000 sales guides to go into stores and "help sell products"; Junlebao also conducted various maternal and infant knowledge training and formula preparation sessions online and offline to win over mothers. Additionally, they ran promotions like "buy three get one free" and "buy five get one free" to attract consumers with low prices. Domestic brands have "people," while foreign brands have money. Nestlé Wyeth directly used "carrots," such as rebates and "channel customization." Channel customization means a specific series is only available in certain mother-and-baby stores, allowing those stores to earn higher gross margins; in return, the brand gains favor and market share. In comparison, Mead Johnson's "team-building" approach was more complex. Mother-and-baby stores in third- and fourth-tier cities face pain points like unreliable supply sources, transportation and storage difficulties, and lack of after-sales service. From ordering to delivery could take over ten days, and goods often had issues like stale dates or damaged cans. So, Mead Johnson partnered with JD.com to solve these problems. Store owners in third- and fourth-tier cities could join the "Mead Johnson Mother-and-Baby Store Club," order online, and receive products within 48 hours. This seamless connection from brand to sales terminal allows stores to have more flexible inventory management. Additionally, some are capturing market share through "friend circles." In third- and fourth-tier markets, many parents rely on recommendations from friends or store owners when choosing milk powder. Targeting this small-circle culture, FrieslandCampina used store owners as "brand ambassadors" to promote and sell their Zimu milk powder, developing communities. Store owners would deliver milk powder to mothers' groups early in the morning, a service that significantly boosted repurchase rates. The "rural plan" for Zimu has clearly paid off, with sales doubling year-on-year, and 60% coming from township mother-and-baby stores. Foreign brands are using various tactics to accelerate their expansion, while domestic brands, relying on people, can achieve deeper channel penetration but must learn to counterattack. Milk Powder with Chinese Characteristics The ad "Feihe, more suitable for Chinese babies' constitution" marked the beginning of a differentiated, brand-building response from domestic brands. For domestic brands like Feihe and Junlebao, brand awareness and recognition may be key to winning this market battle. But compared to foreign brands' dense advertising, variety show sponsorships, and higher consumer trust, how can they turn the tide? The "200% suitable for Chinese babies' constitution" ad is one of Feihe's competitive strategies. The implication is that no matter how high-end foreign brands are, they don't understand Chinese babies' constitutions as well as domestic brands. Additionally, Feihe invested in a factory in Canada to ensure high-quality milk sources, but the formula is entirely "Chinese-baby-oriented." Emphasizing product advantages from the "suitability" angle resonates well with consumers. Thus, Junlebao also adopted slogans like "Let the next generation of China drink good milk powder" and launched the "Little Luban" series. Both ads and product names have increasingly incorporated "Chinese elements," winning over a large number of consumers. Furthermore, milk powder brands tend to prefer sponsoring parent-child variety shows. For example, Royal Friso, under FrieslandCampina, secured sponsorship rights for "Take My Brother Away" and "Mother is Superman"; Mead Johnson produced its own show, "Kids Say"; Yili Jinlingguan sponsored "Amazing Kids 3"; Beingmate signed with "Mamma Mia"... But Feihe took an unconventional approach—preferring film and TV IP dramas and popular variety shows over parent-child programs, advertising in "Zhu Xian: Qing Yun Zhi," "Ruyi's Royal Love in the Palace," and "I Am an Actor." For endorsements, they heavily invested in actress Zhang Ziyi. First, compared to parent-child shows, these programs have a broader audience; second, unlike Wyeth's endorsements from Kun Ling and Wu Chun, Zhang Ziyi's fan base spans a wider age range. Both factors give Feihe an advantage in raising national awareness. Domestic brands are rebuilding their brand image in consumers' minds, and the current strategy is to gain recognition from parents and, through rising brand awareness, force channels to "have to sell" their products. When foreign and domestic brands are at a stalemate in channels and brand awareness, where is the "shadow war" being fought? The More Expensive, the More Reasonable A 700g can of Feihe Star Feifan Stage 1 costs 368 yuan, while a 900g can of Wyeth Illuma Stage 1 costs 348 yuan—20 yuan less than Feihe. Are domestic brands more expensive than foreign ones? In the high-end market, domestic brands like Feihe and Junlebao have executed a brilliant counterattack. While foreign brands focus on third- and fourth-tier cities, domestic brands are advancing into the high-end segment. In first- and second-tier cities, buyers are less price-sensitive and more quality-conscious; in the context of consumption upgrading, they tend to believe "more expensive is better." Thus, Feihe launched the "Star Feifan" series, priced on par with or slightly higher than giants like Nestlé Wyeth. This star product contributed nearly half of Feihe's 2017 sales. This year, Feihe continued with the high-end "Super Feifan" series; Junlebao, known for low prices, also changed its "130 yuan/can" approach, launching a product at 298 yuan/can. In fact, domestic brands have long eyed the high-end market. Feihe introduced the Zhenzhi series years ago, priced between 300 and 450 yuan; with the reduction in total formulas, domestic brands need to produce high-end products with multiple tiers and segments to compensate for scale. Foreign brands are not about to neglect the high-end market share. Since 2017, Nestlé Wyeth has accelerated new product launches, promoting the ultra-premium Illuma "1% Limited Edition" and entering the organic market with Illuma Organic. With intense competition and homogenization in the industry, everyone is seeking new profit growth points, collectively pushing toward high-end products. The battle between foreign and domestic brands over the third- and fourth-tier market has begun, but clearly, this contest is just starting. In the next two years, this "big fish eat small fish" competition will intensify until the "reshuffle" is complete and leading brands emerge. In short, the "big fish" have a tough fight ahead. Source: Business World Magazine -END-