---
title: "The New White Battlefield: Dairy Growth Goes Beyond Miaokelanduo"
description: "Once overlooked, 'nutrition' has become the decisive factor. Consumption upgrading can be considered from two dimensions: concept and quality. In the dairy industry, it mainly means recognizing the health value of dairy products. Objectively, domestic companies have been slow in this regard. To meet the demand of 'letting all Chinese people drink milk,' early operations and marketing focused more on brand building than on better products, gradually deviating from the core value of 'nutrition.' As consumption upgrading accelerates, consumers are shifting from brand focus to product focus, with increasing demands for nutrition."
author: "元气酱"
publisher: "New Distribution"
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published: "2020-07-06"
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# The New White Battlefield: Dairy Growth Goes Beyond Miaokelanduo

> Once overlooked, 'nutrition' has become the decisive factor. Consumption upgrading can be considered from two dimensions: concept and quality. In the dairy industry, it mainly means recognizing the health value of dairy products. Objectively, domestic companies have been slow in this regard. To meet the demand of 'letting all Chinese people drink milk,' early operations and marketing focused more on brand building than on better products, gradually deviating from the core value of 'nutrition.' As consumption upgrading accelerates, consumers are shifting from brand focus to product focus, with increasing demands for nutrition.

**Once overlooked, 'nutrition' has become the decisive factor.**
**Consumption upgrading can be considered from two dimensions: concept and quality. In the dairy industry, it mainly means recognizing the health value of dairy products.**
Objectively, domestic companies have been slow in this regard. To meet the demand of 'letting all Chinese people drink milk,' early operations and marketing focused more on brand building than on better products, gradually deviating from the core value of 'nutrition.' As consumption upgrading accelerates, consumers are shifting from brand focus to product focus, with increasing demands for nutrition. Segments such as low-temperature pasteurized milk, yogurt, and cheese sticks are showing high growth trends.
In this context, Yuanqi Capital believes that product differentiation in the dairy industry will further increase, and consumer profiles will become more precise and focused. To this end, companies will inevitably further develop new categories that better meet different consumer needs to satisfy growing new demands.
For Chinese dairy companies that have focused on brand building, this requires higher R&D investment, stronger market insight, and better cross-category management capabilities. Compared with international dairy and food giants, Chinese dairy companies also lag in brand internationalization and going global.
From a macro perspective, the dairy industry is mainly divided into three categories: **global comprehensive food processing companies, global dairy and nutrition companies, and regional dairy and nutrition companies**. Domestic leading dairy companies Yili and Mengniu currently belong to the third category, while Nestlé and Danone belong to the first. In the future, domestic dairy companies will inevitably transform into the first and second categories, a process that implies brand globalization.
If we broaden the perspective further, successful examples of brand globalization in other domestic industries, such as Huawei and Geely, all started with 'replicative innovation'—learning from global benchmark companies, then combining independent innovation to catch up and build their own brands and markets.
But how can they learn from the expansion paths of international giants? In the unique local market, where should the growth focus of Chinese dairy companies be? This article will focus on analysis.
**-01-**
**Nestlé and Danone: One Horizontal, One Vertical**
According to the 2019 global dairy top ten list released by Rabobank, Nestlé ranked first with dairy sales of $24.3 billion, but dairy only accounted for 14.3% of Nestlé's total revenue, showing the strength of this food 'empire.'
Global dairy company ranking (Source: Rabobank, Yuanqi Capital)
Nestlé's development history can be summarized as **a microcosm of the food market development history in developed countries.**
Founded in 1866, Nestlé's initial products were condensed milk and infant formula. In 1868, Nestlé set up sales points in Paris, Frankfurt, and London, **establishing a strategy of selling globally at that time.**
During World War I, Nestlé first seized the opportunity of surging milk powder demand, expanded overseas markets, and acquired factories in the United States and Australia, which were far from the war, taking the first step toward globalization.
Then Nestlé invested heavily in R&D, successfully developed instant coffee just before World War II, and became a ration for the U.S. military during the war. By the end of World War II, Nestlé had become a global company spanning five continents. It can be said that **Nestlé's success is inseparable from its grasp of global situations and persistent R&D investment.**
On the other hand, Nestlé has always placed **localization strategy** in a very important position, from talent cultivation, market cultivation to raw material supply.
For example, in South America, Nestlé patiently helped local farmers grow coffee beans to solve raw material supply issues; in India, to ensure the quality of dairy factories, Nestlé lent money to local farmers to dig wells and plant grass, providing free veterinary drugs and veterinary technology;
In China, to solve the milk source supply problem in Shuangcheng, Heilongjiang, Nestlé not only sent an entire expert team from Europe to help farmers care for cows and milking techniques but also provided interest subsidies for farmers' loans. This localization strategy made Nestlé more favored by governments in global competition.
With the end of World War II, Nestlé began to advance its capitalization strategy and carried out global mergers and acquisitions. By acquiring condiments, ice cream, frozen food, drinking water, and even mining and hotels, it rapidly expanded its business territory.
This indiscriminate 'barbaric expansion' seems to be a common operation for many companies when they suddenly become rich, and it can easily have a negative impact on operations due to bloated assets. Fortunately, in the 1980s, then-CEO Helmut Maucher realized this.
This period was actually Nestlé's **first turning point—upgrading from 'bulk' acquisitions to more precise acquisitions (mainly food companies) to achieve economies of scale**, divesting many non-related businesses, even selling Alcon, the world's number one in eye care, in 2010.
The second turning point occurred after Peter Brabeck-Letmathe took over Nestlé. Brabeck first established Nestlé's values of 'nutrition, health, and wellness' as the 'Millennium Strategy.' Since then, Nestlé has tilted resources toward nutritional health products, eventually developing into the food empire we see today with seven major segments and balanced proportions.
If Nestlé is a food empire that has taken horizontal expansion to the extreme, then Danone is a dairy giant that has deeply cultivated the upstream and downstream of the dairy industry.
Founded in 1966, Danone initially produced yogurt and cheese. With advantages in the complete industrial chain of cheese and low-temperature yogurt, Danone has always focused on four major business segments: fresh dairy products, water and beverages, baby nutrition, and clinical nutrition. **Its fresh milk market share ranked first globally in 2019.**
Danone is undoubtedly the most successful international giant in vertical deep cultivation, holding high-quality upstream milk sources, building supply chains, and developing an extensive cold chain network.
From the dairy development of the two companies in recent years, Danone recovered to faster growth in 2016 after experiencing price pressure on fresh milk in Europe, while Nestlé has not yet achieved positive growth in dairy due to its focus on water and health foods.
Although both Nestlé and Danone started with dairy, they ultimately took completely different development paths. **Nestlé** positioned itself as a comprehensive company from the start, building itself as a quality platform for operating products, **committed to horizontal expansion**; while **Danone** fully utilized its deep operational experience from yogurt and dairy resources, **choosing to deeply cultivate dairy products.**
M&A has played a significant role in the development of both companies and is an important way to expand scale. Nestlé tends to acquire and then cultivate, while Danone prefers joint ventures with leading companies in specific fields.
Danone often enters emerging markets by establishing subsidiaries in cooperation with local leading companies—taking the Chinese market as an example, Danone successively established joint ventures with Bright, Wahaha, and Mengniu. Cooperation with local companies, providing technical and marketing support, often yields quick returns; Nestlé's model of acquiring and cultivating is more long-term.
Under different strategies and paces of international expansion, Danone and Nestlé have gradually moved from highly homogeneous competition to differentiated competition. Even competition in the same market has weakened. The two companies have found their own paths, and business overlap has continuously decreased.
From the perspective of market regional overlap, in terms of international layout, Danone's main advantage region is Europe, while its share in the Americas and Asia is not high. Nestlé's relatively stable advantage region is the Americas, while business in Asia and Oceania is growing rapidly.
**-02-**
**Three Strategic Dimensions to Learn From**
According to Rabobank's 2019 data, Yili and Mengniu ranked 8th and 10th globally in sales scale. Compared with international food and dairy giants, domestic dairy companies can learn from Nestlé's **M&A** path in three dimensions: improving existing product systems, developing new product systems, and seizing new markets.
First, improve existing product systems.
Mengniu previously expanded its low-temperature market by acquiring Junlebao and filled the gap in milk powder business by acquiring Yashili and Dumex. In the future, pasteurized milk will benefit from consumption upgrading and cold chain logistics development, with significant growth potential. Yuanqi Capital believes that domestic dairy companies such as Yili and Mengniu may acquire regional dairy companies, leveraging local brand penetration, **to gain a share in the new blue ocean of pasteurized milk.**
In 2016, Mengniu restructured its functional departments into independent business units for ambient, low-temperature, ice cream, and milk powder, focusing on category depth development. As one of the engines for achieving Mengniu's 2020 double-billion goal, the low-temperature business unit was highly anticipated and entrusted with important tasks. In the first half of 2018, Mengniu launched seven new low-temperature products.
With the two sub-brands 'Danone' and 'Junlebao' (Junlebao has now been divested), Mengniu's low-temperature yogurt market share exceeded Yili's, and it has now launched the pasteurized milk brand 'Daily Fresh.'
At the same time, Mengniu is laying out high-quality pastures upstream. Its Fuyuan Animal Husbandry, Modern Farming, and China Shengmu will further guarantee high-end milk supply, with contributions to low-temperature products gradually becoming prominent.
In terms of acquisitions, **Mengniu prefers to make industrial chain layouts**, while also laying out low-temperature product distribution networks downstream. In 2016, Mengniu took over the troubled Community 001, a move precisely to prepare for the last-mile delivery of low-temperature products in communities. Mengniu valued the company's last-mile delivery capabilities in first- and second-tier cities, as well as the operational space to replicate this model in third- and fourth-tier cities.
Low-temperature products have limited transportation radius and short shelf life, especially pasteurized milk. Therefore, merely building regional cold chain distribution is far from sufficient. Yuanqi Capital believes that while building the low-temperature supply chain, it is also necessary to integrate regional dairy resources, ensure regional milk supply, and leverage the synergy of milk sources and low-temperature channels to establish new barriers in the low-temperature market.
Second, develop new product systems.
One example is Yili's layout in the bottled water sector. Yili invested 740 million yuan in the Changbai Mountain natural mineral water project, which is a small step in its differentiation strategy. Compared with building a factory independently, acquiring quality companies is clearly a more convenient and effective means, and it can also create synergies with the acquired company's brand and channel network.
In terms of structure, Yili established a Health Beverage Business Unit in 2018. Currently, relatively mature products include Changyi 100% lactic acid bacteria beverage and Huanxingyuan functional drink. It has also launched Yiran beverage, mainly for trial sales in Guangdong.
According to distributor research, this product achieved nationwide distribution in 2020, with good sell-through. In Q2 2020, channel inventory was about half a month. Yili is also actively laying out new businesses, entering the functional energy drink, plant protein beverage, and drinking water markets.
The life cycle of beverages is very short, with few brands lasting more than ten years. In recent years, the life cycle of beverage categories has been shortening, from 3-4 years to about 2 years. Yili has a large product R&D team, **and is superior to small-scale enterprises in new product launch capability.**
However, because beverage channels differ somewhat from dairy channels—beverages have a certain sales proportion in tobacco and alcohol stores, wholesale markets, etc., while dairy products are mainly concentrated in KA and traditional circulation channels—expanding new channels is the company's primary task.
In terms of bottled water, the market space is large. In 2018, China's per capita bottled water consumption was 32L (calculated at 550ml per bottle, about 116.7 bottles, only 0.3 bottles per day), far lower than the United States (100L+), lower than neighboring South Korea (58.5L), and lower than Hong Kong (55.1L), not yet reaching the global average. Based on a medium-to-long-term per capita consumption of 55L, the bottled water market still has at least 70% room for growth.
Therefore, in the short term, in addition to focusing on high-end products in ambient, beverage and bottled water business growth will also become one of the performance drivers in the future. This is a major step for Yili to step out of the dairy field and expand horizontally.
Third, seize new markets. Yili acquired Thailand's largest ice cream brand to enter the Southeast Asian market. Just as Nestlé expanded its Chinese market share by acquiring Hsu Fu Chi and Yinlu (China now accounts for 7.5% of revenue, becoming the largest market outside the U.S.), the emerging AOA region also maintains good revenue growth. The neighboring Southeast Asia is rich in resources, populous, and has great economic development space.
On the other hand, local companies have weak foundations, and international giants like Nestlé have limited presence, making this an important strategic market for Yili and Mengniu's overseas M&A.
In terms of specific M&A methods, in the short term, **the lack of quality targets and the financing structure dominated by indirect financing** will limit the M&A process. Yuanqi Capital judges that a joint venture model similar to Danone's will be the 'curve-saving' path for Yili and Mengniu's external expansion in the short term.
Currently, Danone and Mengniu have merged their low-temperature yogurt businesses, further consolidating Mengniu's advantage in low-temperature yogurt. **In 2018, its low-temperature yogurt market share reached 35%, far higher than Yili's.** At the same time, Mengniu also established a joint venture with Danone's U.S. subsidiary WhiteWave in China, launching plant-based drink 'Zhipu Mofang' to expand into plant protein products.
In the expansion process, **a significant issue is the insufficient R&D investment of Chinese dairy companies.** Once facing global competition, core competitive advantages are not significant.
Nestlé invests heavily in R&D, has the world's largest food and nutrition R&D network, with 40 R&D centers and a team of over 4,800 researchers. In recent years, R&D expenses have accounted for more than 1.7% of its operating revenue. Danone's R&D centers manage Danone's global R&D resources, with two world-class large R&D centers and other R&D centers worldwide, investing over 200 million euros annually in health and nutrition project R&D.
Domestically, **in 2019, Yili and Mengniu's R&D investment accounted for only 0.55% and 0.30% of operating revenue**, still at a low level. As Yili and Mengniu further upgrade their product structures and diversify product categories, the strategic significance of R&D expenditure will become more prominent. The proportion of R&D expenditure to main business revenue must be increased, and R&D center settings should gradually align with international giants.
But independently developing new products, in addition to R&D investment, also poses the challenge of separating from existing product channels. New products need cultivation, which means cash consumption—behind which lies the allocation of corporate resources, sharing with existing brand and channel resources. According to grassroots research, Anmuxi's overall distribution rate has reached 98%-99%, while Zhixuan's overall distribution rate is only 40%-50%, directly affecting its sales.
Yuanqi Capital believes that product diversification strategy requires internal pathways and increased R&D investment. At the same time, new products face challenges such as resource and channel sharing. For example, Yili established a health beverage business unit to enter the beverage field. Since beverage channels differ somewhat from dairy channels—beverages have a certain sales proportion in tobacco and alcohol stores, wholesale markets, etc., while dairy products are mainly concentrated in KA and traditional circulation channels—channel construction remains a long-term proposition for Chinese dairy companies.
**-03-**
**Shelf War: Single-Product Breakout Strategy**
In essence, **China's dairy processing industry is still in a stage of rough processing and high homogeneity.** Therefore, before Yili and Mengniu products show obvious differentiation, intense short-term competition will continue.
For the two 'oligarchs' Yili and Mengniu, the market competition pattern is as follows: First, because the growth of ambient milk in their original advantageous areas has slowed and channel penetration is already high, the incremental market has turned into a stock market;
Second, the two companies currently have high product overlap, and their future development directions and strategies are not fully established. Product similarity will inevitably bring competition;
Third, the domestic duopoly has a high frequency of new product launches, and new product promotion relies on marketing expenses. The probability of continued duopoly competition in the short term is high, so Yili and Mengniu's sales expenses are unlikely to decrease significantly in the short term.
The early domestic dairy competition pattern can be called a 'shelf war,' where higher shelf presence means higher sales—simple and crude. Even as dairy products move toward high-end and diversified development, shelf space remains important; displaying more categories of dairy products can cover more consumer groups.
**But when ambient milk consumption approaches saturation, more shelves cannot drive sales growth.**
At this point, dairy companies face two choices: **one is to horizontally expand products on the shelves they have already won**, strengthening existing ambient shelf barriers. For example, Nestlé once gained absolute dominance on ambient shelves by continuously broadening product categories;
**The second is to build new supply chain barriers to gain the initiative in laying out products on low-temperature shelves**, such as Danone actively promoting low-temperature product placement, with outstanding performance in yogurt and fresh milk products.
Ambient expansion saves some channel construction costs, leaving more room for product R&D and advertising marketing, and the possibility of a 'blockbuster single product' that generates revenue growth points in the short term is greater. For example, Anmuxi was launched in 2014 and, with Yili's strong channel network, exceeded 20 billion yuan in sales by 2019. Ambient expansion brings product diversification and has a higher fault tolerance rate; products with weak market response can be stopped at lower cost.
On the other hand, ambient expansion has lower barriers. Facing fierce competition from numerous imitators after product success, companies need to cultivate consumer brand loyalty. For example, Mosilian was quickly overtaken by Anmuxi and Chunzhen, with only a 3.4% yogurt market share in 2019.
Low-temperature supply chain construction faces a longer investment period and larger capital expenditure, with lower short-term returns and fault tolerance. But the advantages are also obvious: once successful, product barriers are high, and companies gain first-mover advantage in competition.
On the other hand, the future low-temperature market in China has significant growth space. Per capita consumption of low-temperature yogurt and pasteurized milk is still low. With the gradual improvement of cold chain infrastructure, partial iteration from low-temperature milk to UHT milk may occur.
Currently, Yili and Mengniu's revenue growth mainly relies on sales volume growth, which comes from deep channel cultivation. Yili began its 'Weaving Net Action' in 2006, and by 2019, its downward expansion achieved remarkable results, serving nearly 1.039 million township outlets, a year-on-year increase of 8%.
Mengniu, on the other hand, began introducing a branch company system to empower channels in 2017, and signed a framework cooperation agreement with Alibaba's Lingshoutong, increasing market share in offline retail stores.
Inevitably, the two are also competing in online channels. According to Wind data, the proportion of liquid milk online sales has increased from 0.3% in 2010 to 9.5% in 2017. Nielsen data shows that the online channel share of infant formula has also reached about 20%.
Combining online and offline sales data, the majority of Yili and Mengniu's current revenue still comes from dairy products. Liquid milk, cold drinks, and milk powder are the main revenue sources, with Yili's liquid milk accounting for 82.46% and Mengniu's liquid milk accounting for 85.9%. As growth of traditional products slows and becomes the norm, Yili and Mengniu have begun to focus on high value-added products.
In 2005, Mengniu opened the domestic high-end liquid milk market with 'Not all milk is Telunsu,' maintaining over 20% growth in 2019. In 2007, Yili successively launched three single products under the high-end brand 'Jindian,' reaching a 45.7% market share in 2019, ranking first in the corresponding segment.
Greek yogurt is another stimulus for revenue growth. Chunzhen, launched in 2013, and Anmuxi, launched in 2014, quickly captured market share with brand and channel advantages.
Currently, Yili's key products such as 'Jindian,' 'Anmuxi,' 'Changqing,' and 'Jinlingguan' account for over 40% of revenue, and product structure optimization contributes significantly to revenue. In 2019, sales revenue of 'Jindian,' 'Anmuxi,' 'Changqing,' 'Jinlingguan,' 'Qiaolezi,' 'Changyi 100%,' etc., increased by 22.3% year-on-year. In 2019, Jindian organic ambient liquid milk retail market share reached 45.7%, further strengthening the company's advantage in high-end milk business.
The strategy of focusing on high value-added products aligns with the strategies of international companies. In recent years, among Nestlé's seven major business segments, two have seen significant increases in revenue share: one is nutritional health products, and the other is pet care products. Both types of products have high added value, with nutritional health products having the highest gross margin at 21.15%, and pet care products at 18.25% and on the rise.
**-04-**
**Overtaking on the Curve: Where is the New Blue Ocean?**
**Pasteurized low-temperature milk and cheese** may become important tracks for China's dairy industry to overtake on the curve.
First, look at **pasteurized low-temperature milk**.
Pasteurized milk is liquid milk sterilized by pasteurization (heating at 72-90°C for 10-15 seconds). This sterilization method can maximize the retention of nutrients and active substances in fresh milk. Ambient milk is made using ultra-high temperature sterilization, processing at 120-150°C for 0.5-4 seconds of instantaneous sterilization.
Due to the lower sterilization temperature, pasteurized milk contains more nutrients than UHT milk, such as immunoglobulins and lactoferrin.
According to Wind data, the pasteurized milk market was 34.3 billion yuan in 2019, a year-on-year increase of 11.6%. **It is expected to have a compound growth rate of 8.9% from 2018 to 2024, higher than the 4.2% for ambient white milk.** The driving factors are increased consumer health awareness, consumer education by domestic and international large dairy companies, and improved distribution efficiency by e-commerce platforms.
But the entry barriers to the pasteurized milk business may deter many dairy companies. From the supply perspective, in 2018, the number of dairy cows in North China (including Hebei, Inner Mongolia, etc.), Northwest (including Ningxia, Xinjiang, etc.), and Northeast accounted for 26.7%, 26.8%, and 14.4% of the national total, respectively, together accounting for 67.9% of the country.
From the consumption perspective, in 2012, the largest consumption areas were East China, represented by Shanghai, and North China, represented by Beijing, with dairy consumption accounting for 34.7% and 17.8% of the national total, respectively.
Due to the uneven distribution of milk sources between north and south, regions such as South China and Southwest have more net milk inflows. In 2012, the top three provinces with net milk inflows were Guangdong, Zhejiang, and Chongqing, while the provinces with more net outflows were mainly Inner Mongolia and Hebei.
In recent years, the number of cows in the Southwest has increased, due to environmental pressure reducing the number in core cities. In 2018, the number of dairy cows in the Southwest was 1.43 million, accounting for 13.8%. Due to environmental pressure, core cities have implemented retirement for small-scale and non-compliant dairy farms, reducing the number of dairy cows in Shanghai, Beijing, and some cities in Zhejiang.
Scarce urban milk sources constitute entry barriers for dairy companies' pasteurized milk business. Pasteurized milk requires high-quality raw milk, plus refined supply chain needs. Stable, high-quality, and close milk sources are key. In recent years, the reduction of dairy cows around core cities, increased environmental requirements raising farming costs, and dairy companies' increased control over upstream pastures **make milk sources scarce, especially around core cities, becoming entry barriers for the pasteurized milk business.** In this regard, Mengniu and Bright Dairy have advantages.
Pasteurized milk is mostly consumed at home. As a daily nutritional product, it has high consumption frequency, short shelf life, and high freshness requirements, leading to smaller purchase quantities and inability to stock up.
The home delivery channel, through daily delivery, meets consumers' high-frequency consumption needs and has become the main channel for pasteurized milk consumption, accounting for 27%. Daily delivery also makes it easier to cultivate heavy milk-drinking habits, and consumers educated through home delivery have extremely high loyalty.
In recent years, e-commerce channels have developed rapidly, mainly due to online traffic dividends, gradual improvement of cold chain logistics, and the rise of new models such as community e-commerce and fresh food e-commerce. The main consumers are concentrated in first- and second-tier cities and economically developed areas. On the one hand, pasteurized milk is priced about 1.5-2 times that of ordinary white milk. Residents in first- and second-tier cities and coastal developed areas have higher consumption levels and stronger health awareness, making pasteurized milk more favored;
On the other hand, because pasteurized milk requires a full cold chain, and cold chain infrastructure in first- and second-tier cities is relatively complete, demand is high, and economies of scale further reduce transportation costs. According to Kantar data, the penetration rate of pasteurized milk in Shanghai is 72%, significantly higher than the national 31%. In Shandong and Yunnan, major pasteurized milk consuming provinces, the low-temperature milk share in the provincial capital Jinan is 50%, and Kunming's pasteurized milk consumption reaches half of Yunnan's total.
Similarly, pasteurized milk also has obvious pain points.
Pain point 1: Fragmented consumer demand + high cold chain transportation costs. To inhibit bacterial growth, pasteurized milk requires full cold chain transportation and storage (2-6°C). Excluding cold storage costs, **cold chain transportation costs are more than 80% higher than ambient transportation.** With short shelf life and limited delivery volume per outlet, this creates the pain point of fragmented demand and high cold chain costs, requiring extremely refined supply chain operations.
Furthermore, compared with first- and second-tier cities, lower-tier cities have weaker pasteurized milk consumption bases (and are more fragmented) plus incomplete cold chain logistics facilities, which to some extent restricts the downward channel expansion of pasteurized milk.
Pain point 2: Scarce milk sources + high initial channel development costs, leading to low industry concentration. Pastures around core cities are scarce. At the same time, in the early stage of channel development, transportation costs are difficult to fully amortize. Due to extremely short shelf life, high product damage (sales are difficult to predict, and companies lack experience in local market operations), and other factors, initial channel development costs are high. These two aspects constitute high entry barriers for the pasteurized milk business. Therefore, the pasteurized milk market is often dominated by regional dairy companies, with low concentration nationwide, but competition in a single region is less intense than in yogurt and ambient white milk.
Now is a good time to enter the pasteurized milk business, as the development of cold chain logistics reduces the regional nature of pasteurized milk. According to data from the China Federation of Logistics & Purchasing Cold Chain Committee and iResearch, China's cold chain logistics market reached 303.5 billion yuan in 2018, a year-on-year increase of 19%, with an expected compound growth rate of 24.4% from 2018 to 2020. Improved cold chain logistics efficiency will extend the transportation radius of pasteurized milk, breaking regional restrictions, and the scale increase of cold chain logistics will also help amortize transportation costs.
In addition, **fresh food e-commerce provides an efficient sales platform for pasteurized milk.** From 2014 to 2018, the fresh food e-commerce scale had a compound growth rate of 65%. Under the pandemic in early 2020, consumer shopping habits accelerated. Pasteurized milk has a short shelf life but high consumption frequency, requiring high turnover. Fresh food e-commerce acts as terminal outlets and milkmen, directly connecting manufacturers and consumers, reducing intermediate links, which is equivalent to reducing losses and improving turnover efficiency.
At the same time, the high frequency and high freshness requirements of pasteurized milk align with the needs of fresh food e-commerce target groups. The products are relatively standardized, which can increase the average order value of e-commerce platforms and reduce unit distribution costs. For example, Bright's cooperation with fresh food platforms Miss Fresh and Hema Fresh, and New Hope's strategic agreement with Miss Fresh are evidence.
Currently, China's pasteurized milk market has initially formed a '2+N' pattern, namely two quasi-national companies, Bright Dairy and New Hope Dairy, and numerous regional dairy companies. Industry giants Mengniu and Yili have both ventured into pasteurized milk. Mengniu has a large pasteurized milk base in Anhui, and Yili launched several pasteurized milk products in 2019, but they have not yet formed strong competitiveness.
According to grassroots research, pasteurized milk shelves in major cities across the country generally display Bright and more local dairy products, and Bright's product freshness is comparable to regional dairy companies, indicating that Bright's pasteurized milk has gradually achieved national presence within nearby factories or delivery radius.
**Cheese** is another blue ocean that has recently emerged domestically.
According to processing methods, cheese can be divided into natural cheese and processed cheese. Natural cheese is made directly from milk and has higher nutritional value. Processed cheese is further processed on the basis of natural cheese to meet consumer requirements for taste, with richer flavors.
Western countries mainly consume natural cheese, with sales accounting for over 80%. Unlike Western countries, China's current cheese consumption is mainly processed cheese. According to Euromonitor data, in 2019, processed cheese sales accounted for 84.9% of China's total cheese market sales.
The blue ocean market cannot lack policy support. In 2018, the State Council issued the 'Opinions on Promoting Dairy Industry Revitalization and Ensuring Dairy Quality and Safety,' which clearly proposed optimizing dairy product structure and developing cheese products. This policy brought opportunities for the development of the cheese industry.
In addition, at the 2019 Cheese Development Summit Forum, Yu Kangzhen, Vice Minister of Agriculture and Rural Affairs, also pointed out that a glass of milk strengthens a nation, and a piece of cheese prospers an industry. **Promote the transformation of consumers from 'drinking milk' to 'eating milk.'** With the continuous introduction of cheese support policies, China's cheese industry is expected to accelerate development.
From the data, China's per capita cheese consumption in 2019 was only 0.1kg, far lower than the developed country average of 12.91kg and the world average of 3.13kg. Compared with other Asian developed countries with similar eating habits, Japan and South Korea have reached 2.66kg and 3.23kg, respectively.
From the proportion of cheese in dairy consumption, China's cheese consumption currently accounts for only 1.5%, but Japan and South Korea, with similar dietary structures, have reached 18% and 47%, respectively. In contrast, China's cheese consumption has broad room for improvement.
Currently, overseas brands dominate, and local brands started later in cheese, but there is still hope for overtaking. In 2019, the CR5 of China's retail cheese market was 47.1%. The top five market share holders were Baijifu, Lezhi Niu, Anjia, Kafu, and Miaokelanduo, with market shares of 22.7%, 7.7%, 6.4%, 5.5%, and 4.8%, respectively. Among them, the top four are overseas brands, and only Miaokelanduo among domestic brands made it into the top five.
Other domestic brands are in the second tier: Duomeixian, Mengniu, and Bright ranked 7th, 8th, and 10th, with market shares of 3.6%, 2.8%, and 0.9%, respectively.
It is worth noting that **China's retail cheese market is mainly children's cheese**, which is the main entry point for processed cheese retail growth. Kantar Worldpanel research found that as of September 2017, children's cheese accounted for as much as 55% of retail sales. Compared with natural cheese, processed cheese is more suitable for children.
Natural cheese contains more bacteria, but children's stomachs are more sensitive, and excessive bacteria can be harmful to children's gastrointestinal health. Processed cheese kills some bacteria through high-temperature sterilization, while nutrients such as calcium and protein are still preserved.
Moreover, compared with adults, children's consumption habits are easier to cultivate. The children's population is large, and with the promotion of the 'second child' policy, the future children's cheese consumption market is broad. In addition, the high profit of children's cheese is also an important factor driving the rapid development of the category. The gross margin of children's cheese can be as high as 40%, far higher than ordinary ambient white milk.
**Miaokelanduo** is a pioneer among domestic dairy companies in the cheese market. Miaokelanduo launched a cheese stick product in 2018, entering the children's snack segment. The product is positioned as 'more suitable for Chinese babies' tastes.' Compared with imported brands, Miaokelanduo's taste is lighter and more suitable for Chinese eating habits. With high nutrition and delicious children's complementary food attributes, coupled with nationwide advertising and marketing, the cheese stick achieved sales of 100 million yuan in its first year of launch in 2018. In 2019, the cheese stick exploded rapidly, with revenue reaching 460 million yuan, a year-on-year increase of 250%.
Why can Miaokelanduo run first in this market? We believe the reasons for the company's rapid channel expansion and continuous cheese business explosion are mainly: high-standard selection of distributors, Amoeba model for flat channel management, multiple support policies for distributors, a complete assessment system, and requiring distributors to achieve effective display and effective tasting.
When selecting distributors, the company mainly considers three aspects: Hardware: priority is given to distributors with low-temperature cold storage, low-temperature freezers, and vehicles with refrigeration and freezing conditions. It is also a necessary condition for vehicles to cover all outlets within a cycle.
Second, consider whether the distributor has experience in operating similar products and can quickly lay out products to terminals. From the historical situation of distributors, most of the company's distributors are former distributors of Baijifu and those who previously operated yogurt. Such distributors have rich experience in cold chain distribution.
Finally, examine the number of outlets and channel sinking capabilities of distributors. The company eliminates distributors annually to ensure the quality of the distributor team.
It is worth mentioning that Miaokelanduo's channel construction strategy differs from competitors. **The company focuses on channel sinking, adopting a first-level agency model for distributors whether in big cities or county-level areas.** The company adopts the Amoeba model in channels, and flat channels ensure distributor profits and terminal product profits.
At the current crossroads of dairy development, the development paths of international giants often cannot be fully replicated. The differentiation of domestic dairy strategies and products will gradually emerge. As Michael Porter defined competitive strategy as 'being different,' **the differentiation of dairy companies will determine market position in the next decade, and the huge market space makes China's dairy industry worth expecting.**
Source: Yuanqi Capital (ID: yuanqicapital)


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