This article is approximately 13,000 words and takes about 30 minutes to read.
Preface
Over the past nearly 20 years, what has driven the development of China's dairy industry? Why is it said that Bright Dairy missed two optimal growth opportunities? Since 2012, dairy growth has slowed significantly; which new categories have still achieved high growth, and why? In the next 10 years, who will drive the advancement of China's dairy industry? Why is the low-temperature era coming? Besides category opportunities, where is the broader battlefield for Chinese companies? This article analyzes the factors that have driven the development of China's dairy industry from a category perspective and predicts the categories that will rise in the future. At the same time, it combines the theories of "The Origin of Brands" and "Marketing Warfare" to analyze the reasons for the rise and fall of companies in the past, and proposes strategic recommendations for companies to better grasp the future.
What have we discovered in the Chinese market?
At this year's 23rd Annual Meeting of the China Dairy Industry Association, the list of the top 15 dairy companies by sales revenue in 2016 revealed that only two foreign companies, Nestlé and Mead Johnson, were included, with revenues of 6.52 billion yuan and 5.32 billion yuan respectively, accounting for 6.37% of the top 15's total. The market concentration of the top 15 reached 59.46%, so it can be said that local Chinese dairy companies hold an absolute advantage in both number and scale in the overall Chinese dairy industry. This data is quite surprising to outsiders. Perhaps the most direct reason is that the high exposure of the milk powder category creates the illusion that Chinese companies are struggling under the pressure of foreign companies and imported products. From our aggregated data, it is clear that in the mainstream categories of China's dairy industry, except for milk powder where foreign companies hold nearly 60% of the share, other major categories are dominated by local companies. In addition, the operating revenue of dairy companies above designated size in China grew from 137.595 billion yuan in 2008 to 350.39 billion yuan in 2016, an increase of more than 2.5 times. During this period, the three major dairy companies—Yili, Mengniu, and Bright—also achieved nearly the same multiple of growth. Moreover, the total performance of the three giants in 2016 was 134.607 billion yuan, accounting for 38.42% of the dairy industry's revenue. In 2016, both Yili and Mengniu were ranked among the global top ten dairy companies. Figure 1: Operating revenue and growth rate of dairy enterprises above designated size Data source: National Bureau of Statistics, China Dairy Industry Association Since 2012, China's economic growth rate has dropped from over 10% to 7.7% in 2012. As the overall economy entered a stage of lower growth, the dairy industry also slowed, with an average growth rate of only 8.80% from 2012 to 2016. We also found that despite the economic and industry downturn, some categories still achieved ultra-high average annual growth. In contrast, Yili, Mengniu, and Bright have been nearly flat with the overall industry over the past decade, clearly not sustaining ultra-high growth.
I. In the past, what drove the development of China's dairy industry?
"Innovation" seems to be a concept that is overused and overly mythologized, but we believe the most effective innovation is category innovation—products based on category innovation have more lasting vitality: Coca-Cola created and dominated the cola category; Nestlé created and dominated instant coffee; Red Bull created and dominated energy drinks. Past data has repeatedly validated Ries's theory on categories: "The single function of a company is to create and dominate a new category." The driving force of business development is differentiation, which gives birth to new categories. The continuous rise of new categories is the source of the dairy industry's growth. Based on the high-growth stages of different categories, we have drawn the following chart, showing that different categories have dominated the growth of the dairy industry at different stages. Figure 2: High-growth stages of some categories in the Chinese dairy market Note: Dairy beverages and lactic acid bacteria beverages also had high growth, but this article does not analyze them.
1. The Rise and Fall of Ambient Milk
Figure 3: Yili Tetra Pak pure milk Image source: Feiniu.com In almost every version of Tetra Pak's story, the classic case of the rise of ambient milk (referring to ambient pure milk) is repeatedly mentioned. In the 1990s and before, Chinese dairy companies mainly produced low-temperature fresh milk. However, low-temperature pasteurization technology made it difficult to preserve for long periods, limiting sales radius and hindering company expansion. Tetra Pak helped Yili and Mengniu achieve long-term milk storage. Tetra Pak packaged ambient milk had advantages such as portability, easy storage, suitability for long-distance transportation, and lower prices. At that time, it catered to the explosive growth trend of per capita liquid milk consumption in China, and Mengniu and Yili initiated the most glorious growth era of China's dairy industry. Figure 4: Per capita annual consumption of liquid milk in China Image source: Sanqian Liangliang, Huxiu.com [3] Yili and Mengniu surpassed Bright Dairy in performance in 2003 and 2004 respectively, and by 2009, their performances were more than three times that of Bright Dairy. In 2009, Mengniu and Yili held over 70% of the ambient milk market share [2]. While Mengniu and Yili rapidly expanded nationwide relying on ambient milk, Bright Dairy insisted on low-temperature pasteurized milk as its main focus, with East China as its main battlefield. In June 2008, Bright's then-president Guo Benheng reformed to a strategy of equal emphasis on ambient and low-temperature milk, achieving significant results. However, the dairy industry's landscape had already gradually stabilized and continues to this day. Figure 5: Performance changes of the three giants from 2000 to 2009 Yili's average growth rate from 2000 to 2009 was 36.89%, and Mengniu's was as high as 126.36%. In the ambient milk field, the law of duality basically applied: there are only the top two, no third. As market maturity increased, the growth rate of ambient milk began to decline, and the "high-end white milk" category differentiated. The growth of basic white milk has slowed significantly since 2008, even declining in 2016.
Category Strategy Analysis
1. Ambient milk is the opposite of low-temperature milk; Mengniu is the opposite of Yili The law of opposition: No category can succeed unless it has an enemy. No new brand can succeed unless it has an enemy. Ambient milk established itself as the opposite of low-temperature milk; Mengniu established itself as the opposite of Yili. In its early days, Mengniu used "Creating the Second Brand of Inner Mongolia Dairy" as its slogan. As a result, ambient milk won, and Mengniu not only became the second in Inner Mongolia but also the second in China. 2. Launch in uncontested territory Flanking warfare principle: Launch in uncontested territory. Ambient milk was an uncontested battlefield in the early 2000s. Moreover, Yili and Mengniu were very fortunate that regional giants like Bright and New Hope insisted on low-temperature milk, leaving opportunities for Yili and Mengniu. By the time Bright turned around, eight years had passed. 3. What should Bright have done? After missing the ambient milk opportunity, Bright should have insisted on being the opposite of ambient milk. In 2008, Bright Dairy abandoned its strategy of insisting on low-temperature milk and changed to equal emphasis on ambient and low-temperature milk. This strategy violated the principle of opposition and the principle of "concentrating superior forces." According to the force principle (concentrate superior forces; victory usually belongs to the stronger side), Bright should have insisted on low-temperature milk and expanded its milk sources and channels nationwide, waiting for the low-temperature milk wave to come. Instead, it used its weaknesses to confront competitors' strengths and dispersed its forces when Mengniu and Yili had established national advantages. In the recent ambient yogurt battles, Yili's Ambrosial and Mengniu's Puregen also used their strong low-tier channel advantages (force advantage) to surpass Bright's Mosilian.
2. The Brief Glory of Children's Milk
Figure 6: Want Want Hot Kid's Milk Image source: Want Want JD self-operated flagship store In fact, there is no unified national standard for children's milk so far. Moreover, companies have confusing definitions of children's milk. Children's milk is also inconsistently classified by various research institutions, possibly including both children's dairy beverages and children's milk. [4] Nielsen classifies children's milk under ambient dairy products, including children's white milk, children's ambient yogurt, children's lactic acid beverages, and children's flavored milk. The common saying is that children's milk rose in 2008. The market demand description at the time was: "Children's general picky eating also makes 'comprehensive nutrition' the biggest unmet need for parents, urgently requiring exclusive milk developed for children to fill these gaps" [7]. Mengniu's Future Star opened the battlefield first, followed by Yili's QQ Star, Bright, Want Want, and others. In 2009, while ambient milk overall grew slowly, children's milk achieved a growth rate of 53.2%." [7] Currently, this category is dominated by Want Want Hot Kid's Milk, with a sales share of 59.4%, followed by Yili's QQ Star (23.3%) and Mengniu's Future Star (12.3%) [8]. However, according to current Nielsen data, in 2016 and 2017, children's white milk, children's lactic acid beverages, and children's flavored milk all declined by nearly double digits on average. Only children's ambient yogurt achieved a rolling annual growth rate of 107% as of June 2017. Figure 7: Want Want Hot Kid's Milk sales from 2010 to 2016 Note: The original data for Want Want Hot Kid's Milk is mostly in US dollars; the table converts to RMB. 2010 sales of $931 million converted at the exchange rate of 6.6227 on December 31, 2010; 2011 sales of $1.2396 billion converted at 6.3009 on December 30, 2011; 2012 sales of $1.529 billion converted at 6.9343 on December 31, 2012; 2013 sales of $1.8 billion converted at 6.0969 on December 31, 2013. From 2007 to 2011, Want Want Hot Kid's Milk experienced high growth, with a reported compound annual growth rate of 33% during this period [9]. According to public data collected by FBIF, Want Want Hot Kid's Milk still grew rapidly in 2012, but declined rapidly from 2015. Compared to Mengniu's Future Star, Want Want Hot Kid's Milk was born earlier, established in 1996, and grew continuously for 17 years until its first decline of 0.8% in 2014 [10], after which it declined rapidly.
Category Strategy Analysis
1. Children's milk is not a category When searching for information on children's milk, the author was full of confusion: how exactly is it defined? It is extremely complex. As a consumer, what associations come to mind when thinking of children's milk? From another angle, when mentioning Want Want Hot Kid's Milk or QQ Star, what categories do they represent? I'm afraid many industry insiders cannot answer clearly. Therefore, from a category perspective, when consumers think from a category standpoint, they cannot quickly associate with a brand. Children's milk itself is a very weak category name. 2. Want Want Hot Kid's Milk has no opponent Want Want Hot Kid's Milk has no opponent, and Want Want's internal partners have also recognized this issue. Want Want Hot Kid's Milk has been outstanding for many years, but it seems unsustainable. Nielsen data shows that from the beginning of 2017 to June, Want Want's children's flavored milk market share was as high as 94%. It is understood that Want Want Hot Kid's Milk accounts for about 95% of Want Want's children's flavored milk, so it almost monopolizes the entire children's flavored milk category with a single product. The law of duality may seem mysterious, but it is a universal truth. Coca-Cola and Pepsi, Yili and Mengniu, Federer and Nadal. Great brands and great people need great opponents! Try to recall from a consumer's perspective: why have we almost forgotten products like Want Want Hot Kid's Milk, Nutrition Express, and peanut milk that were once extremely popular? The reason is not only the decline of the category itself, but also the lack of opponents. Without confrontation, there is no attention, and it is easy to be forgotten. 3. Children's milk and children's beverages have high sugar content and rich ingredients, contrary to consumption trends The current consumption trend is to pursue more natural and simpler products. Therefore, products with high sugar and richer ingredients will gradually fade out of consumer choices. This trend also explains the decline of dairy beverages including Wahaha's Nutrition Express.
3. High-end White Milk Follows the Trend of the Times
Figure 8: Not all milk is called Telunsu Image source: Wangjiu.com White milk: Nielsen defines it as milk with protein content not less than 2.9 grams per 100 grams (mainly pure milk). In 2005, Mengniu's "Telunsu" emerged, kicking off the war for high-end milk in China. "Since its launch in 2005, Telunsu has maintained double-digit growth for over a decade" [12]. The slogan "Not all milk is called Telunsu" is well-known and strongly differentiates it from ordinary milk. Following Mengniu, Yili launched its high-end brand Jindian in 2006 to compete. Currently, the high-end white milk field is mainly dominated by Telunsu and Jindian. According to Nielsen data from January to May 2017, Telunsu held a 48.2% sales share in the high-end white milk category, while Jindian held 37.4%. Figure 9: Telunsu performance from 2012 to 2016, with 2015 performance estimated based on media reports Telunsu opened a completely new market for ambient milk. As competition in high-end white milk intensified, Jindian launched "organic milk" to differentiate from Telunsu, raising the competition in the high-end field to a new level. Currently, in the organic milk field, although Telunsu and Shengmu participate in competition, the Chinese market is still a blue ocean. China's organic milk annual growth rate is over 20%. In 2016, China's organic milk is estimated to reach 11.5 billion yuan, and from 2015 to 2020, it will maintain a compound growth rate of 16.2% [13]. According to market research institution Euromonitor International, data also shows that the global organic milk compound annual growth rate from 2007 to 2017 was 9.7%, while China's reached 116.3%. "2016 Global Organic Agriculture Research Report": In 2014, global organic food market sales totaled 62.6 billion euros, while China's organic food sales were only 3.7 billion euros, accounting for only 6% [14]. China's organic milk has broad growth space.
Category Strategy Analysis
1. Telunsu created a new high-end milk category: Mengniu's attack on itself In 2005, Mengniu was only 7 years old, and its performance gap with Yili had narrowed to 1.375 billion yuan, further narrowing to 180 million yuan in 2006, and surpassing Yili in 2007. The emergence of high-end milk occurred when both Mengniu and Yili had surpassed Bright and the ambient milk competition was at its peak. After several years of rapid development, the overall growth rate of ambient white milk relatively declined. In 2005, China's economy was developing rapidly, and consumption upgrade demand was strong. Therefore, high-end milk was an effective category upgrade and differentiation strategy. Although high-end milk may have taken share from Mengniu's own basic white milk, the business strategy is that it is better to take your own market than let others take it. 2. A true brand is the representative of a category Telunsu's launch downplayed its connection with Mengniu, launching a new category with an independent brand name. "Not all milk is called Telunsu" firmly occupied consumers' minds with Telunsu's high-end image. However, Telunsu subsequently launched organic milk and yogurt, which violates category strategy: a brand can only represent one category. Consumers think in categories and express with brands. When consumers think of organic milk and yogurt, Telunsu is not the first association, even though Telunsu represents high-end. But that does not mean it does best in organic milk and yogurt. 3. Strengthening "organic milk" is a beautiful flanking maneuver When it comes to organic milk, I believe many consumers can blurt out: Shengmu organic milk, Jindian organic milk. This shows that both Shengmu and Jindian have achieved some success. Yili Jindian adopted the approach of entering organic milk to avoid direct competition with Telunsu. Flanking warfare principle: Launch in uncontested territory. For emerging companies like Shengmu, to compete with large enterprises, they need to avoid the advantageous positions of leading companies. Organic milk has extremely high requirements for pasture milk sources, so it can effectively establish barriers. This conforms to the guerrilla warfare principle: find a market segment that is defensible.
4. Yogurt: Low-temperature Yogurt Grows Rapidly, Ambient Yogurt Takes Off
Yogurt is divided into low-temperature yogurt and ambient yogurt. Low-temperature yogurt has developed in China for nearly 20 years, while ambient yogurt only started in 2009. Figure 10: Sales and growth of low-temperature yogurt from 2011 to 2017 With consumption upgrade and the development of cold chain, low-temperature yogurt continues to grow in China, with growth rates stable above 10% from 2011 to 2016. However, in the Chinese market, the most dazzling star is "ambient yogurt." Figure 11: Performance and annual growth of ambient yogurt From 2010 to 2017, the compound annual growth rate of ambient yogurt reached 93.21%. Although it declined in 2017, the year-on-year growth from January to May 2017 was still as high as 32% [11]. The ambient yogurt battle is quite classic. Ambient yogurt took off quickly after Bright's Mosilian was first launched. The development of low-temperature yogurt in China's lower-tier cities is severely limited by cold chain, just as low-temperature milk could not expand nationwide in the 1990s. Ambient yogurt avoided the cold chain problem and was able to be widely distributed across the national market. Originally, as the category creator, Bright had a huge first-mover advantage, and performance rewarded Bright: Mosilian's sales soared from 160 million yuan in 2010 to 6.723 billion yuan in 2016. What may have caught Bright off guard was that, seeing the rapid rise of Mosilian (Bulgarian yogurt), Yili and Mengniu quickly took defensive measures. Mengniu launched Puregen (Danish yogurt) in 2013, and Yili launched Ambrosial (Greek yogurt) at the end of 2013. With their deep channel advantages, Ambrosial and Puregen successively overtook Mosilian in 2016 and the first half of 2017. Ambrosial's sales in 2016 are estimated at 8 billion yuan [25]. In the first half of 2017, Yili's Ambrosial ranked first in market share in ambient yogurt, at about 43%, Puregen had 25.8%, and Mosilian only 21.7% [11]. With the popularity of ambient yogurt, it also drove large-scale innovation in the ambient yogurt category, and some achieved notable results. "Caijing Xiaokan" reported that in 2016, Junlebao's Kefir ambient yogurt (Russian yogurt) sales could reach about 1.5 billion yuan [27]. Now almost all of China is about to be occupied by yogurts from various countries: Greek yogurt, Icelandic yogurt, Russian yogurt, Swiss yogurt [26], all European. North America is now popularizing Australian yogurt, and I wonder if there will be "Chinese yogurt." Figure 12: Ambrosial Image source: Shuangxi Mall
Category Strategy Analysis
1. The driving force of business development is differentiation The classic nature of the ambient yogurt battle is almost comparable to the rise of ambient milk in China. While the world was fiercely competing in low-temperature yogurt, China's ambient yogurt quietly rose. However, the opportunity for ambient yogurt lies precisely in the rapid increase in China's yogurt demand, coupled with the incomplete cold chain system, creating a huge market gap (a replica of the ambient milk story). It can be said that the success of ambient milk was a new uncontested battlefield found by Chinese companies. 2. Channel disadvantage caused Bright to miss its second rise opportunity In the ambient yogurt field, it is understandable that Bright was surpassed by Yili and Mengniu, because Bright's main battlefield has always been in South China and East China, while nationwide deep channels are the advantage of Mengniu and Yili. Through Nielsen data from 2015 to 2017, we also found that ambient yogurt growth slowed in key cities but surged in lower-tier cities and counties/townships. At the same time, growth in West China and North China was much higher than in East China and South China. Therefore, Yili and Mengniu avoided direct competition with the category creator Bright in channels, achieving a curve overtaking through channels in lower-tier cities and townships. Channel advantage is the "leader's force advantage." The force principle in "Marketing Warfare": No principle is as fundamental as the force principle. It is a natural law: big fish eat small fish, big companies defeat small companies. Coca-Cola is the world's leading cola brand, so it will become the leading brand in almost every place globally. Bright Dairy's loss of this opportunity is also due to the rapid defense of Mengniu and Yili. For relatively smaller companies to win, they need to fight in battlefields where large companies are temporarily uninterested, too busy, or unable to attend, or they need to achieve a decisive victory before large companies react. Otherwise, they can only hope that large companies are too stupid.
5. Milk Powder: Stable and Continuous Growth, but China's Most Difficult Battlefield
Figure 13: Market share of brands in China's infant formula market Image source: [CITIC Food] Milk Powder Industry Deep Report In China's milk powder market, the ratio of overseas brands to domestic brands is about 6:4 [17]. Among the top 10 milk powder companies, foreign companies occupy 6, and the top 4 are all foreign. Figure 14: China's infant formula continues to maintain high growth China's infant formula market size continues to expand and still maintains high growth. For domestic companies, on the one hand, it is an attractive market, and the implementation of the formula registration system will leave market space due to the exit of small and medium brands [20]. On the other hand, domestic brands shoulder the mission of winning back national trust. Another company worth mentioning is Ausnutria Dairy, which, with its goat milk powder positioning, took a unique path and achieved an average annual growth rate of 38.68% from 2012 to 2016. In 2016, its Kabrita infant formula goat milk powder sales were 799 million yuan, with domestic sales of 664 million yuan, up 43.9% year-on-year, and overseas sales of 135 million yuan, up 71.6% year-on-year. Ausnutria Dairy's sales in the first half of 2017 were 1.7 billion yuan, up 36% year-on-year. In the first quarter of 2017, Ausnutria's own infant formula goat milk powder sales in China increased significantly by 72.7% [22]. Figure 15: Ausnutria Dairy's revenue maintains high growth Song Kungang, chairman of the China Dairy Industry Association, said: "Currently, children's milk powder only accounts for 6%-10% of the 70 billion yuan milk powder market. In addition, in recent years, goat milk powder's high nutritional value, such as not causing heatiness and being easily absorbed, is increasingly accepted and recognized by high-end consumers, and the market may see a blowout." [23] Figure 16: Milk powder sales from 2012 to present and forecast for the next two years (17-18) Data source: China Baby Network
Category Strategy Analysis
1. Find the leader's weakness Feihe Dairy Chairman Leng Youbin said in a speech that Feihe's positioning is to study the strengths and weaknesses of foreign brands, differentiate for brand positioning, and seek breakthroughs. "The strength of foreign milk powder is also its weakness: the core strength of imported milk powder lies in its global brand, global quality, and formula. The weakness accompanying this strength is that imported milk powder finds it difficult to emphasize that their milk powder is more suitable for the nutritional needs of Chinese babies." Xie Weishan, chairman of Junzhi Consulting, said that domestic milk powder emphasizing quality is a wrong strategic positioning. From the perspective of consumer psychology, although domestic milk powder meets quality standards, why should consumers take the risk to try it? 2. Create new categories Whether it is goat milk powder, special formula milk powder, organic milk powder, etc., they all belong to high-end milk powder, and they each created new categories. With consumer upgrade, demand for high-end milk powder continues to expand, so it has greater growth space. Although Ausnutria Dairy is not the creator of goat milk powder in China, nor the leader, before the category is widely recognized by the public (how many consumers know the number one goat milk powder?), its international brand image has given Ausnutria higher exposure. Therefore, we predict that Ausnutria has more advantages to become the leading company in goat milk powder in the future. 3. Junlebao did not win by quality
II. In the future, who will drive the advancement of China's dairy industry?
What drives China's category changes?
With the improvement of China's economic level, accelerated urbanization, and significant increase in per capita consumption capacity, the millennial generation is gradually becoming the main consumer force. These are the most fundamental factors driving China's category changes. At the same time, China's current characteristics include:
- Consumption upgrade is not simultaneous: China has developed markets and developing markets;
- Cold chain is mainly in first-tier cities, but the cold chain system is gradually improving;
- The proportion of lactose intolerance in China is over 90%;
- China's economic slowdown means limited growth space, and large and medium-sized enterprises have the motivation for internationalization. Figure 17: Future trends in China's dairy industry Note: Gray represents categories that are already declining or will decline; blue represents categories that are rising or will rise in the future. Based on the above changes in the consumer market, we predict China's future main battlefields:
Future Battlefields
1. The Low-Temperature Era Arrives
There are countless debates about low-temperature versus ambient. However, in over 90% of countries globally, low-temperature pasteurized milk is the main type, and low-temperature pasteurized milk accounts for over 70% of global consumption share [28]. Except for a few countries that mainly use ambient milk, including France, Belgium, etc., there is no doubt that low-temperature pasteurized milk is destined to become the global mainstream. Marketing warfare is about seizing consumers' minds. In consumers' minds, "fresh" is always better, and brands should not expect to win debates with consumers. This is why NFC and HPP juices in the beverage industry can grow rapidly now, because they are "fresher." With the improvement of cold chain, low-temperature milk will grow significantly in the future and will replace ambient milk as the mainstream. Figure 18: Historical data of pasteurized milk, basically maintaining high growth Data source: Zhiyan Consulting Group and Nielsen Nielsen data shows that in 2016, China's pasteurized milk market was about 34.5 billion yuan, with low-temperature yogurt accounting for the vast majority and also the fastest growing, reaching 23.25 billion yuan, up 9% year-on-year. From 2011 to 2016, the growth of low-temperature milk basically exceeded twice that of ambient milk. In the future, at least three low-temperature sub-categories have significant growth opportunities: low-temperature yogurt, low-temperature lactic acid bacteria beverages, and chilled white milk.
a) Low-temperature Yogurt Attracts Attention, Low-temperature Lactic Acid Bacteria Beverages and Chilled White Milk Usher in Opportunities
Low-temperature yogurt: Currently, the high growth of ambient yogurt in China actually indicates the growth potential of low-temperature yogurt. Figure 19: Changes in US yogurt market share from 2010 to 2016 General Mills Loses the Yogurt Wars | Fortune.com Of course, Chobani cleverly adopted strategies such as reshaping consumption scenarios and developing new categories, including developing drinkable yogurt "Dink Chobani" for defense (self-attack). According to Mintel data, drinkable yogurt has grown 62% in the past 5 years (2011-2016) and will reach $10 billion by 2021, compared to $8.2 billion for spoonable yogurt in 2016 [30]. Chobani's CMO Peter McGuinness also confidently stated that drinkable yogurt will eventually occupy 30-40% of the yogurt market share [29]. In North America, it is expected that niche categories such as Icelandic yogurt and Australian yogurt will share the market, but it is unlikely to shake the position of Greek yogurt. Because consumers can no longer distinguish the differences between various types of yogurt. But drinkable yogurt is more likely to become an independent and powerful category, competing with spoonable yogurt. Because, according to Ries's category theory, only drinkable yogurt is a more significant opposite of spoonable yogurt, and consumers can easily remember and distinguish it. In the Chinese market, the ambient yogurt landscape is basically set. In the low-temperature yogurt field, there is still no national leading brand. In the high-end category, there are Greek yogurts represented by Le Chun, but they are still niche. With the demonstration effect of Chobani in the US market, and Ambrosial becoming the representative of ambient yogurt in China, both are Greek yogurt. It is expected that in the future, Greek yogurt has a better chance to win in the low-temperature field in China. Figure 20: Le Chun yogurt Low-temperature lactic acid bacteria beverages and chilled white milk: Figure 21: Sales growth comparison of different categories from 2016 and January-May 2017 Image source: Food and Beverage Big Consumption Huang Fusheng According to Nielsen and Pacific Research Institute data, from January to May 2017, ambient yogurt and ambient lactic acid bacteria beverages grew by about 32% and 31% year-on-year respectively, making them the fastest-growing sub-categories in the dairy industry [11]. Chilled white milk currently does not show obvious growth. According to Nielsen data, as of June 2017, chilled white milk only grew 6%. Bright's fresh milk brand Youbei's performance overall rose, but not smoothly. In 2014, Youbei fresh milk achieved sales of 1.16 billion yuan, up 29% year-on-year [31], but in 2015 it fell 2.33% [32], and in 2016 it rose 10% again, with its performance mainly coming from sales in East China [33]. This article holds the same view on the growth potential of low-temperature lactic acid bacteria and chilled white milk, including ambient yogurt. The development of ambient milk benefited from the incomplete cold chain system in the past. When the cold chain becomes more mature, low-temperature lactic acid bacteria beverages and chilled white milk will usher in a new round of explosion.
b) Regional Dairy Enterprises Grow Rapidly, Mergers and Acquisitions Intensify, and the Biggest Comeback Opportunity Arrives
"Due to short shelf life and high requirements for cold chain transportation equipment, raw milk for low-temperature pasteurized milk must be sourced nearby, and the entire cold chain transportation is required, with a sales radius of only 300-500 kilometers." [34] These factors have led to the current low-temperature pasteurized milk industry in China being highly fragmented with low market concentration. This means that local dairy enterprises have a better chance to defend their local markets, then attack nationwide, and even have the opportunity to overtake dairy giants with low-temperature milk. In the past, low-temperature milk was mainly represented by regional enterprises such as Bright, New Hope, and Sanyuan. But facing the slowdown of ambient milk and the rapid growth of the low-temperature milk market, Mengniu and Yili started early and are already in the first camp. Yili's 2016 annual report shows: low-temperature liquid milk retail market share was 16.2%, up 0.6 percentage points from the same period last year; while Mengniu, as of the end of June 2015, its joint venture brand products had a market share of 24.1%, ranking first in China's low-temperature dairy industry. In March 2017, Mengniu increased its stake in China's largest raw milk producer, China Modern Dairy, to 61.3%, further expanding its control in the low-temperature milk field. Currently, regional dairy enterprises are not content to stay in their corners. New Hope Dairy, Fujian Changfu, Chongqing Tianyou, Beijing Sanyuan, Huishan Dairy, and Kedi Dairy are growing rapidly. The prospects for low-temperature milk are promising, and even Uni-President has crossed over to join. A new round of dairy war and acquisition war is about to unfold. In the future, whoever controls the largest amount of milk sources may dominate China's future low-temperature battlefield!
2. Premiumization
The aforementioned low-temperature yogurt and fresh milk are high-end categories. Premiumization is an unstoppable trend under China's current rapid economic development and the growing middle class. In addition to yogurt and fresh milk, there are more categories that can be classified as high-end, including the previously mentioned goat milk powder, organic milk, and special formula milk powder. In addition, simulated breast milk powder, cheese, and lactose-free or low-lactose categories also have huge potential.
a) Simulated Breast Milk Powder
b) Cheese
Figure 22: Luoyi Sea Fish Cheese Snack Image source: Tmall Luoyi flagship store Cheese is known as the "high-end product at the top of the dairy pyramid." Market research institution Euromonitor International data shows that from 2007 to 2017, cheese grew 841.4% in China, with a compound annual growth rate as high as 25.1%. The current Chinese market is relatively fragmented, mainly dominated by foreign companies, with Savencia (parent company of Breguet brand) at 25.9% and Fonterra at 9%. With the rise in Chinese income, Chinese people who have only heard of cheese in "Tom and Jerry" or "Who Moved My Cheese?" are eager to try it.
c) Lactose-free or Low-lactose Dairy Products
Figure 23: Lactose-free high-end dairy brand Fairlife Image source: www.packagingstrategies.com The proportion of lactose intolerance in China is over 90%, which largely explains why China is the world's largest plant protein beverage market. With the awakening of consumer awareness, milk with lactose-free or low-lactose concepts will have great prospects. East Asians have the highest rate of lactose intolerance globally, while Europe and the US generally have rates below 20%, but the lactose-free concept emerged earlier in Europe and the US. Euromonitor data estimates that the global lactose-free dairy market will grow at an average compound annual rate of about 7% from 2015 to 2020, and by 2020, the market size will account for 80% of the overall lactose-free food market (sales of about $8.8 billion). Products featuring lactose-free concepts are selling well. Finns have a relatively high lactose intolerance rate in Europe, reaching 17%, and it seems that lactose-free products became popular earlier there. In 2000, Valio invented lactose-free production technology that removes lactose while retaining the fresh natural flavor of milk, reducing lactose in milk to 0.01% [35]. In 2001, Valio's lactose-free liquid milk products were launched in Finland and sold well. In 2012, net sales of lactose-free milk products reached 150 million euros. Interestingly, consumers without lactose intolerance also choose lactose-free products because they are "healthier and safer." Coca-Cola's Fairlife is also a lactose-free high-end dairy product, with sales reaching $90 million in 2015 and growing 79% in 2016 [36]. Currently, many domestic companies have launched lactose-free brands, including Yili's Shuhua milk, but most brands are very low-key (not occupying consumer minds), and no leading brand has emerged. Perhaps it is related to weak consumer awareness, but for companies, it is an opportunity. For dairy companies, lactose-free or low-lactose products may not be the only choice: goat milk powder and plant protein beverages can also serve as substitutes. Of course, dairy giants have already acted. In the plant protein field, in 2014, Mengniu cooperated with WhiteWave to launch Zhimu Mofang, and Yili launched walnut milk. Of course, in the high-end field, there is still no national leading brand, which is another opportunity.
3. Globalization
Globalization is an inevitable choice for Chinese companies at present. Companies like Huawei, Lenovo, and Xiaomi have achieved relative success, which is encouraging for Chinese companies. In the dairy industry, companies including Yili, Mengniu, Bright, and Ausnutria are also actively expanding. Globalization is not only a way to achieve performance growth, but also means using global resources for innovation to gain more lasting competitiveness. Globalization is no longer a topic to discuss whether to do it, but a necessary action for Chinese companies. The essence of globalization is "channel expansion." Mengniu and Yili succeeded in China and can maintain the duopoly situation. The important or even fundamental factor lies in channel control; the two are the dairy companies with the widest and deepest channels. But globalization still cannot escape "category strategy." When a category matures in one market, the strategy to achieve growth can be to innovate and upgrade the category in the original market, or to expand the existing declining category to lower-end markets, and this can be repeated or done simultaneously. This is why Coca-Cola (referring only to the cola category) can still achieve long-term growth globally even when the US market has low growth or declines: the power of globalization. What is the law of "category strategy" in globalization? High-end attacks low-end.
a) The internationalization of Chinese dairy enterprises is still in its infancy
Overall, the internationalization of Chinese dairy enterprises is still in its infancy, mainly focusing on expanding milk sources, with overseas revenue accounting for a very small proportion. However, some companies have shown slight improvement. Bright Dairy: In the first half of 2017 financial report, operating revenue was 10.923 billion yuan, up 6.36% year-on-year, of which overseas revenue (referring to "New Zealand Synlait," OEM production of nutritional products and special dairy ingredients) achieved operating revenue of 2.003 billion yuan, up 39% year-on-year, contributing nearly a quarter of Bright Dairy's profits, with overseas performance accounting for 18.34%. Compared to 2016, when overseas accounted for 14.35% of overall revenue, the proportion has significantly increased. On May 30, 2017, Synlait Milk announced the completion of the acquisition of 100% of the shares of New Zealand Dairy Company, further expanding its products. It can be foreseen that Bright Dairy's overseas revenue will further increase in the future. From Bright Group's frequent overseas layouts, including the acquisition of Israel's largest comprehensive food company (also the company with the highest market share in Israel's dairy market), it can be seen that Bright intends to make up for the gap with Yili and Mengniu in the dairy sector through internationalization. This move has achieved some results. Yili Group: Yili's internationalization has gained high exposure in recent years, but currently it is more about expanding milk sources or creating R&D centers, and overseas performance has not yet been reflected. If the acquisition of Stonyfield had succeeded, high-end organic yogurt would have been an excellent entry category for Yili into the European and American high-end markets, but unfortunately, Danone sold it to Lactalis, and the deal failed. Murray Goulburn is the second largest supplier in the world dairy market, with its products exported to over 100 countries, accounting for 8% of global dairy trade. If the acquisition succeeds, it will not only provide Yili with richer global milk sources but also significantly boost Yili's overall performance. Ausnutria: Ausnutria Dairy's overseas revenue is second only to Bright Dairy, but its overseas performance proportion is relatively high. According to Ausnutria Dairy's 2016 annual report, the group's annual revenue was 2.74 billion yuan, with overseas sales of 920 million yuan, accounting for 33.6%. Through "Ausnutria's business layout and sales network," we can find that its business covers more than 30 countries. With goat milk powder, Ausnutria can not only enter the Chinese market, but the high-end category of goat milk powder also has advantages for global expansion. In addition, Mengniu Dairy, New Hope Dairy, Feihe, and others are also on the path of internationalization.
b) What strategies should Chinese companies adopt when going global?
Whether it is foreign companies entering China, or current Chinese companies expanding global milk sources, or acquiring high-end categories for global expansion, they all cannot escape a category strategy: High-end attacks low-end! - Global milk sources: This actually solves the problem in consumers' minds that foreign milk is better than Chinese milk; - Yili's attempt to acquire Stonyfield was to enter the high-end market (Europe and America) through high-end categories; In summary, for Chinese dairy companies going global, there are two feasible strategies for different markets: - Emerging markets: Find gaps in emerging markets and extend channels (equivalent to going deeper into lower-tier markets in China); - Developed markets: Acquire high-end categories, enter developed markets, and expand globally. Emerging markets: Figure 24: McKinsey's forecast of dairy market gaps around the world Image source: Got growth? Opportunities and challenges for U.S. Dairy industry In January 2016, McKinsey released a strategic report on the US dairy industry, "Got growth? Opportunities and challenges for U.S. Dairy industry," urging US companies to expand to emerging markets as soon as possible in response to the sluggish US dairy market. The attached chart "Dairy market gaps around the world" shows the dairy gaps in various countries. In Asia, India is the market with the largest gap after China. But compared to Africa, Russia, Latin America, and the Middle East, China's market is clearly no longer the most growth-potential market. Of course, not all companies will listen to McKinsey's advice. Then the data came out: in 2016, US dairy exports were sluggish with excess inventory [37]. For Chinese companies, they are currently facing a similar situation to the US back then, with overall dairy growth slowing. Therefore, they can look globally. Coincidentally, the largest dairy gap markets mostly fall along the "Belt and Road" route. Global market gaps are opportunities for Australian, New Zealand, European, and American companies, and also for Chinese companies. Therefore, Chinese companies' strategy of "global milk sources, Chinese market" can be completely changed to "global milk sources, global market." The correct approach for Chinese companies is to choose a market, find categories where China has relative advantages, and attack the market. At present, China's "ambient yogurt" has a strong category advantage in emerging markets, because the cold chain systems in India, Africa, Latin America, and the Middle East are probably not as complete as China's. Developed markets: European and American dairy development is relatively mature, and trends that used to emerge in Europe and America have gradually shifted to China. The opportunity for Chinese companies in European and American markets also lies in high-end categories, such as goat milk powder, organic milk, lactose-free, etc. Therefore, the best strategy for Chinese companies in the near term is to acquire targets with advantageous categories and then try to enter. Otherwise, Chinese local categories do not have advantages in European and American markets. When Bright acquired Israeli food company Tnuva, its strategy was also clear: to promote Tnuva's high-end dairy products (cheese) to expand into European and American markets. Yili's previous attempt to acquire Stonyfield had a similar strategy.
Summary
Category strategy determines not the performance of this year or next year, but the performance of the next 3, 5, or even 10 years. The successful implementation of category strategy requires companies to have foresight and the determination to burn their boats. To obtain the highest and lasting returns, companies should always choose high-growth categories and invest heavily in resources (R&D, channels, marketing, etc.). In the current Chinese market, any emerging category, as long as there is no representative brand, or the brand has not become the representative of the category, has the opportunity to reshape the landscape. Twenty years ago, ten years ago, there were only a few tracks in the dairy industry competition. Now, more companies have grown into national companies, more foreign companies have entered China, and more Chinese companies will go global. The competitive battlefield may evolve into dozens or hundreds. In the future, the more intense competition will not be brand versus brand, but category versus category warfare. Marketing warfare is ever-changing. For large companies, they only have advantages; for small companies, there are never a lack of opportunities. Source: FBIF Food & Beverage Innovation The 3rd (CFIC) China FMCG + Internet Conference will be held in Chongqing in November 2017. The conference will closely focus on the theme "New Forces, New Ecology," inviting 1000+ distributors, 500+ brand owners, 200+ B2B platform founders, and 100+ investment and financing institutions to jointly explore a new chapter of cross-border integration! Core topics of this conference:
How can the FMCG industry leverage B2B to achieve new growth opportunities
How to build the new supply chain behind new retail
How can intra-city logistics help B2B achieve leapfrog development
Highlights of this conference:
The industry's first "2017 China FMCG B2B Industry Competitiveness White Paper"
Excellent transformation and upgrade distributor case sharing
Conference + exhibition upgrade, Hall 6 Internet Technology Exhibition strengthens docking
Leaders from various fields, including JD New Path, PGL Finance, Alibaba Retail Link, EASIA Supply Chain, Zhongshang Huimin, Best Store Plus, Yijiu Pi, and Haiding, will deliver speeches and share pioneering views.
November 8-9, 2017 Xinyue Hall, Chongqing Yuelai International Conference Center Registration is now open. Long press the QR code below or click "Read Original" to register. Add friend with note "Conference Registration" Click the links below to review the highlights of the first and second FMCG + Internet conferences: 2016 "FMCG + Internet" Summit Forum -END-