In the scorching summer, what can ease your worries? An ice cream, perhaps. From the early fragmented market with local brands like Guangming, Beibingyang, and Wuyang dominating their regions, to the market elevation driven by foreign brands Wall's and Nestlé, and then to Yili and Mengniu seizing the core market through raw material, channel, and brand advantages, Chinese ice cream has completed its first half. The 'ice cream assassin' Zhong Xue Gao stirred the waters, bringing an opportunity for comprehensive premiumization of local brands and opening the second half of the Chinese ice cream market. Now, industry pillars like Yili and Mengniu are moving upward, while Zhong Xue Gao, caught in the middle, is testing downward, and more new players are entering the fray, with foreign brands also staying to seek new opportunities. In the new consumption era, every industry is worth redoing.

Foreign Brands Educate the Market

In the 1950s, Guangming was undoubtedly the leader in the ice cream market. However, similar to the history of beer and soda, due to storage and transportation constraints, the early ice cream market was extremely fragmented, with almost every region having its own brand. Beijing had Beibingyang and Shuangbang, Guangdong had Meiyile and Wuyang, Heilongjiang had Laodingfeng, Jilin had Hongbaolai, Shaanxi had Zhonglou, Gansu had 504, and so on. At that time, the primary function of ice cream was to cool down, so there was little innovation in products. This initial market structure was broken in the 1990s when a group of foreign ice cream brands tested the Chinese market. The pioneer was American M.D. (Meidenggao), followed by Wall's and Nestlé. Compared to M.D., Wall's, backed by a wealthy parent, was quite lavish, boldly implementing the 'freezer strategy'—providing free freezers with its iconic logo and red-and-white umbrellas to merchants to expand offline channels. More crucially, the freezers provided by Wall's could only hold its own products, squeezing out competitors. It is said that in Shanghai alone, Wall's deployed 13,000 freezers. Such heavy investment naturally paid off. In 1996, two years after entering China, Wall's held an 18% market share. By 1999, its market share had soared to 36%. Wall's swept the Chinese market, making Nestlé envious. Besides copying the freezer strategy and engaging in price wars with Wall's, Nestlé also used acquisition as a trump card. By acquiring Guangzhou Wuyang, Nestlé captured the Guangzhou market that Wall's had long struggled to conquer. Wall's followed suit, acquiring Mandelin to strengthen its presence in the Yangtze River Delta while launching low-priced products to encroach on the mid-to-low-end market through its sales network, further expanding its base. Many regional ice cream brands were left defenseless and gradually faded into obscurity. For a long time thereafter, the Chinese ice cream market was dominated by foreign giants.

Local Ice Cream Rises Strongly

The decline of foreign brands like Wall's in the Chinese market was largely due to Yili and Mengniu. In the 1990s, Yili, a local dairy company, began its national expansion and diversification. In 1993, it established a cold drinks division focusing on ice cream and popsicles. At that time, Yili adopted a strategy of using its flagship product 'Yili Bitter Coffee' to drive sales of other products, advertising on major TV stations, sponsoring the Atlanta Olympics, and vigorously expanding channels and promotional activities. Just four years later, Yili's cold drinks revenue soared to 700 million yuan in 1997. Subsequently, Mengniu rose and replicated Yili's product, channel, and brand strategies, including the ice cream business. Chinese dairy giants have a long history in ice cream, from Guangming to Yili and Mengniu, largely leveraging their raw material advantages. Yili and Mengniu also engaged in a head-to-head competition in cold drinks. Yili had Xiaobuding, Mengniu had Pudding; Yili launched Ice Factory, Mengniu launched Ice+; Mengniu launched Green Mood, Yili had Yili Mood. In addition to aggressive channel expansion and advertising blitzes, Yili and Mengniu improved upon Wall's freezer strategy, deploying freezers at any cost. Unlike Wall's, which refused to share freezers with other brands, Yili and Mengniu allowed any brand's products in their freezers, winning over small shop owners. Coupled with their more affordable prices, even when foreign giants like Wall's and Nestlé felt the pressure and engaged in price wars, they could not change the fact that Yili and Mengniu firmly controlled the core ice cream market.

Premiumization Breakthrough

However, Yili and Mengniu did not want to stay in the mid-to-low-end ice cream market. After all, moving up not only means higher profitability but also capturing the crown jewel of the industry. Simply put, they wanted both 'small profits, quick turnover' and 'high profits, low turnover'! In 2015, Yili launched the Zhenxi series priced at 7 yuan, and two years later, Qiaolezi introduced 'Qixuan' priced at 6-10 yuan, while Mengniu launched Dilan Shengyue fruit yogurt ice cream at 20 yuan. However, these premiumization attempts were not very successful. In 2018, the 'ice cream assassin' Zhong Xue Gao burst onto the scene with prices often exceeding ten yuan, inadvertently raising consumers' price ceiling for ice cream. A better opportunity for premiumization arrived. In 2019, Yili launched the national trend premium brand Xujinhuan, and Mengniu further defined Dilan Shengyue's target audience, with basic products priced around 15 yuan. Last year, Mengniu partnered with Moutai to launch a premium ice cream priced over 60 yuan. This year, Yili's premium brands Xujinhuan and Qixuan released multiple new products, and Mengniu invested 1.5 billion yuan in a new 8-line ice cream production facility in Sichuan to focus on the high-end market. The two dairy giants' push in the ice cream market is related to liquid milk hitting a bottleneck and the urgent need for new growth points. The market performance has not disappointed them. Driven by the overall premiumization of ice cream products, in 2022, Yili's cold drinks revenue reached 9.567 billion yuan, a year-on-year increase of 33.61%, becoming one of the company's main growth drivers; the gross margin was 38.48%, far higher than its core liquid milk business. During the same period, Mengniu's ice cream revenue was 5.652 billion yuan, up 33.3% year-on-year.

New Forces Move Down

While local ice cream leaders continue to move up and target the high-end market, Zhong Xue Gao, the pioneer of premiumization, is now entering the mid-to-low-end market dominated by giants. At the end of March, Zhong Xue Gao launched its sub-brand Sa'saa, with basic products priced at 3.5 yuan, the lowest in its history. It is mainly sold offline, with four flavors: red bean, mung bean, milk, and cocoa. The short-term reason for Zhong Xue Gao's move into the mid-to-low-end market is to repair its brand image after the 'ice cream assassin incident' offended consumers, using low-priced products. In the long run, it is because consumer novelty for Zhong Xue Gao is fading, and it cannot sustain user attraction amid the squeeze from Wall's, Nestlé, and Yili and Mengniu's high-end products. According to Whale Data, during the peak ice cream season from May to August 2022, Zhong Xue Gao's sales declined 10% year-on-year. Launching low-priced products could give Zhong Xue Gao new growth points in a broader market and gain greater brand momentum. After all, although Zhong Xue Gao's scale has reached the billion-yuan level, it is still dwarfed by Yili and Mengniu. It is important to note that Zhong Xue Gao's strength in social marketing has almost no advantage in lower-tier markets. The mid-to-low-end market has long been divided by Yili and Mengniu with their strong channels. Even if Zhong Xue Gao wants to continue improving the freezer strategy, small shops do not have much space. In previous years, it could still rise quietly in markets that giants did not pay much attention to. Now, with all cards on the table, Zhong Xue Gao, caught in the middle, may soon face its growth crisis. After foreign brands paved the way and local giants took control of the core market, the Chinese ice cream market is about to enter the second half, with premiumization stimulated by new forces and more players joining.