Suddenly, Kedi Dairy, the 'internet-famous milk' brand from Henan, has entered bankruptcy reorganization. On September 9, Kedi Dairy, which had recently been delisted from the A-share market, announced that it had received a 'Civil Ruling' issued the previous day by the Intermediate People's Court of Shangqiu City, Henan Province. The court, in accordance with the Enterprise Bankruptcy Law of the People's Republic of China and other relevant regulations, ruled to accept the bankruptcy reorganization application filed by the applicant Hutong Hezhong against the respondent Kedi Dairy. Kedi Dairy stated that it would fulfill its information disclosure obligations in a timely manner according to the progress of the reorganization. Given that the application for bankruptcy reorganization has been accepted, during the reorganization period, there is a risk that the company may be declared bankrupt and undergo bankruptcy liquidation. Public data shows that Kedi Dairy's main business includes the research, development, production, and sale of dairy products, milk beverages, and drinks, as well as supporting dairy cattle breeding, reproduction, and sales. It was listed on the Shenzhen Stock Exchange in June 2015. The company's founder, Zhang Qinghai, once publicly stated his ambition to build Kedi Dairy into a 'central dairy aircraft carrier' comparable to Mengniu and Yili. Although Kedi did not achieve this goal, from the popular advertising slogan 'Kedi Tangyuan, Reunion and Harmony' in the 1990s to the 'Little White Milk' created in 2016, its several internet-famous products won over many consumers. As soon as the news of Kedi Dairy's bankruptcy broke, many netizens expressed their reluctance to see it go. On Weibo, comments such as 'But it's really delicious,' 'It's clearly a good milk, much better than some well-known brands,' and 'No way, this is so good; I was planning to switch my child's fourth-stage formula milk to this one' were everywhere. As the saying goes, 'Grand words of the past cannot sustain daily necessities.' Many dairy giants have faced similar experiences to Kedi Dairy. Over the past decade or so, former regional dairy giants such as Prince Milk, Dadi Dairy, Huishan Dairy, Shuangwa Dairy, and Yingxiong Dairy have all 'disappeared.' These local 'internet-famous milk' brands, which carry the hometown memories of many, have vanished one by one.

01

Kedi's Former Glory Is Hard to Sustain

Zhang Qinghai, founder of Kedi Dairy, was born in 1955 in Yucheng County, Shangqiu City, Henan Province. At the age of 30, Zhang decided to start his own business and founded the Yucheng County Canned Food Factory in his hometown. Later, he renamed the factory after himself—'Qinghai Canned Food'—and the products gradually gained fame, expanding from Henan to most markets in Northeast and North China. In 1994, when Zhang was 39, his canned food business exceeded 100 million yuan. Wanting to grow the business further, in 1995, Zhang officially renamed 'Qinghai Canned Food' to 'Kedi Food Group,' with the name derived from 'Science Inspires the Future,' and launched frozen food and instant noodle production lines the same year. At that time, Kedi Group had many products; for example, its tangyuan (glutinous rice balls) became famous nationwide thanks to the advertising slogan 'Kedi Tangyuan, Reunion and Harmony.' But Zhang always wanted to produce milk. In his view, milk was an immortal industry; as consumption levels rose, milk would become a necessity, and compared to per capita milk consumption in developed countries, China still had great potential. So he plunged into the dairy industry. Kedi Dairy began production in 1999. From the start, Zhang set a unique development model for Kedi Dairy: unified construction of breeding communities with 'six unifications' management—unified planning and design, unified breeding varieties, unified technical services, unified disease prevention and control, unified pollution control and harmless treatment, and unified product sales. On June 30, 2015, Kedi Dairy was listed on the Shenzhen Stock Exchange, becoming the first listed dairy company in Henan Province. At the end of 2015, Kedi Dairy acquired Luoyang Juer Dairy, which had a 60-year history, through a 100% equity acquisition, achieving a strategic layout in central China's dairy industry. In April 2016, Kedi Dairy implemented a 10-for-10 stock bonus; in May, its annual production of 400,000 tons of liquid milk officially went into operation; and in June, the construction of its second 10,000-head modern pasture was basically completed. Kedi Dairy's peak moment came in 2017, but 'the moon waxes only to wane, and water overflows only when full'—the company's decline also began then. At the end of 2016, Kedi Dairy innovatively launched the transparent-bag 'Little White Milk.' With its unique packaging and moderate taste, it attracted a large following in a short time, becoming a true 'internet-famous milk.' In 2017, Kedi Dairy achieved sales revenue of 1.239 billion yuan, a year-on-year increase of 53.92%; net profit attributable to shareholders was 127 million yuan, up 41.56%. Revenue outside its four traditional sales regions (Henan, Shandong, Jiangsu, and Anhui) surged by 678.95%. Among these, sales of ambient dairy products increased by 65.8%, largely thanks to Little White Milk. (Image source: JD.com) At that time, Kedi Dairy not only opened flagship stores on Tmall Supermarket and JD Supermarket but also authorized dozens of individual e-commerce sellers in Zhengzhou, Shangqiu, and other places to sell its products. In East China, Kedi Dairy used e-commerce promotion to attract offline distributors to proactively sell its products. 'During that period, Kedi Dairy's Little White Milk was indeed very popular in the market. Even though its price was slightly higher than similar milk, buyers kept coming in an endless stream,' recalled a supermarket manager in Beijing. However, many market observers believed that 'Little White Milk' was essentially ordinary ambient milk with no special technical threshold. On Zhihu, a netizen certified as a food industry practitioner commented on this milk: 'I drank this product once, but I forgot how it tasted. Then I checked its nutritional information on Taobao; it's of average quality, with low protein content and average butterfat. It shouldn't be touted as more fragrant than other milk.' 'To be honest, zero additives and health are not selling points for pure milk; that's a common feature. Kedi's biggest selling point is actually the packaging.' Sure enough, in 2018, Mengniu, Yili, New Hope, Wandashan, and other companies launched their own 'Little White Milk.' The brand appeal of major brands was stronger, and consumers' attention to Kedi Dairy's Little White Milk gradually decreased. On the other hand, the company's neglect of distributor management also accelerated Kedi Dairy's decline. In terms of marketing strategy, Kedi Dairy always adhered to channel sinking, surrounding cities from rural areas, and adopted a 'one county, one distributor' model. The large number of distributors promoted the hot sales of Little White Milk to some extent. But due to lax management, conflicts among distributors were obvious, with cross-regional selling in some areas, price wars among distributors, and wholesale prices in some regions far lower than flagship store retail prices, leading to a chaotic sales market. By 2018, Kedi Dairy's ambient dairy business, represented by Little White Milk, saw a year-on-year revenue decline of 25.62%, and gross margin fell by 7.46%. Affected by this, Kedi Dairy's full-year revenue was 1.285 billion yuan, a year-on-year increase of only 3.76%; net profit was 129 million yuan, up 2.05%. Subsequently, Kedi Dairy was exposed to cash flow problems and arrears to dairy farmers. In August 2019, according to The Beijing News, Kedi Dairy had tight cash flow, and funds were suspected of being misappropriated by Kedi Group, with the group's debt problems worsening. Almost simultaneously, the incident of Kedi Dairy 'owing 140 million yuan to dairy farmers' continued to ferment online. A series of events triggered a concern letter from the Shenzhen Stock Exchange, and the China Securities Regulatory Commission filed a case against Kedi Dairy. The subsequent notice showed that Kedi Dairy had falsely reported revenue of 836 million yuan and inflated profits by 299 million yuan for three consecutive years from 2016 to 2018. At the same time, it illegally provided 6.674 billion yuan to Kedi Group, all of which was returned; however, of the 6.767 billion yuan transferred out in 2019, only 4.792 billion yuan was transferred back. In 2021, Kedi Dairy was issued an audit report with a disclaimer of opinion for its 2020 financial report, and its stock was subject to delisting risk warning from May 6, with the stock abbreviation changed to '*ST Kedi.' On June 1, 2022, Kedi Dairy entered the delisting arrangement period, and on June 23, it was delisted. Until this bankruptcy reorganization, the name Kedi Dairy may soon become a memory for many.

02

Crisis for Regional Dairy Enterprises

Kedi Dairy's decline seems self-inflicted, but it is also inseparable from the transformation of the upstream and downstream of the domestic dairy industry. From the 1970s to the early 2000s, a large number of dairy enterprises emerged across the country. Whether it was Yili and Mengniu in Inner Mongolia, Huayuan, Tianrun, Xinnong, and Maiquer in Xinjiang, Junlebao in Hebei, Kedi in Henan, Xiajin in Ningxia, Huang's and Baifeiluo in Guangxi, Haihe in Tianjin, or Bright in Shanghai, most were established during that period. The reason for this situation of separate dominance was mainly the limitations of fresh milk preservation technology at the time. The initial milk-drinking habits of ordinary Chinese consumers were mostly formed in the 1960s, when most provincial capitals had fresh milk supply points, mainly with door-to-door delivery. Milk delivery workers delivered dairy products to subscribers' doorsteps every morning, and this milk was mainly pasteurized milk (fresh milk treated by pasteurization). At its peak, pasteurized milk accounted for over 70% of the national market share. Pasteurization can better preserve the nutrition and natural flavor of milk, meeting consumers' needs for nutrients and taste. However, its shelf life is only 2-7 days and requires cold chain storage and transportation throughout, limiting the sales radius to about 200 kilometers, thus contributing to the regional dairy enterprise dominance. Later, milk sterilization technology became more mature. In 1956, the combination of ultra-high temperature instantaneous sterilization (UHT) technology, born in the UK, with aseptic filling technology improved the overall process of sterilized milk. In the 1980s, Sweden's Tetra Pak aseptic composite paper packaging technology was introduced to China, and UHT milk began to spread across the country. In 1997, Yili used funds raised from its listing to introduce the first Tetra Pak liquid milk production line, leading Chinese dairy enterprises into the ambient milk era. Since then, dairy enterprises across the country began to introduce foreign sterilization and packaging technology on a large scale, extending shelf life to 6-9 months, allowing nationwide transportation, and overcoming the sales radius problem of pasteurized milk. After 2000, the output of ambient white milk increased significantly, and in 2005, liquid milk output exceeded 10 million tons, a 7.5-fold increase from 2000. From 2006 to 2014, the consumption of ambient white milk continued to rise (CAGR 5.52%), and in 2014, the sales share of ambient white milk reached 86.55%. (Image source: Huaxi Securities) In this round of fierce competition, Yili and Mengniu were the undisputed winners. By taking the lead in introducing and applying UHT technology, ambient milk with long shelf life, no need for cold chain in circulation, safe and convenient, was quickly distributed to the national market, helping them complete nationwide channel and brand layout, leaving competitors far behind. By the end of 2021, the domestic ambient liquid milk market had basically formed a 'duopoly' pattern, with Yili and Mengniu holding 38% and 27% market shares respectively, and Bright ranking third with only 8%. 'There are too many milk brands now. When I go to the supermarket, I still choose big brands like Mengniu,' said Longlong, born in 2000, a millennial. Mengniu's TV commercials ran through almost his entire childhood. He still remembers the Mengniu ad content shown on TV when he was a child: a boy in an astronaut suit with the slogan 'Aerospace quality milk, nutrition and health for 1.3 billion Chinese people,' which left a deep impression on him. (Mengniu 2017 print ad) The ambient milk market was quickly dominated by Yili and Mengniu, and local dairy enterprises at a competitive disadvantage could only avoid their edge, focusing on the 'low-temperature milk strategy' and leveraging the advantage of proximity to milk sources to achieve differentiated competition. Although low-temperature fresh milk is fresher and loved by consumers, due to constraints of milk sources and cold chain, it can only cover a certain sales radius. Long-term isolation further made it difficult for regional dairy enterprises to expand outward and break through, forming a 'vicious cycle.' Zhang Xiang, who once studied in Nanjing, liked the local brand Weigang very much. 'Both its milk and yogurt are delicious.' But after graduating and working in Beijing, he could no longer drink Weigang milk. Every time he went to the supermarket, he would take an extra look at the shelves to see if Weigang was there, but he never found it, which became a small regret. In addition, the operations of some regional dairy enterprises are inseparable from milk sources, as can be seen from revenue and distributor numbers. Tianrun Dairy, based in Xinjiang, had revenue of about 1.123 billion yuan within Xinjiang in 2020, while outside Xinjiang it was only about 640 million yuan. Similarly, Western Pastoral had 254 distributors within Xinjiang and only 18 outside. As of the first half of 2021, Yantang Dairy's revenue within Guangdong Province was about 927 million yuan, accounting for about 98% of the total, while revenue outside Guangdong was only about 20.39 million yuan. Shen Meng, executive director of Xiangsong Capital, believes that 'if regional dairy enterprises want to expand their sales geographic scope, they need to establish a complete production and sales network in the target area. The production and sales radius of low-temperature fresh milk is the radius of profit balance; that is, once beyond this radius, business cannot be carried out profitably.' 'For regional dairy enterprises, they have a deeper understanding and control of the local market and can better leverage the advantages of producing low-temperature milk, but they also face the problem of difficulty in expanding nationwide,' said an industry insider. Therefore, the dilemma for regional dairy enterprises lies in balancing 'temperature' and 'breadth.'

03

How Long Can the 'Local Strongmen' Laugh?

To alleviate a series of pressures, regional dairy enterprises have begun 'self-rescue.' First, these companies choose to start with milk sources. Since the resources (especially milk sources) of Mengniu and Yili are still relatively concentrated in the north, there is a certain gap in the south, and the cost of 'southward transportation' of high-quality fresh milk is too high. Therefore, in the fresh milk market, the two leading dairy enterprises leave considerable room for the 'local strongmen.' For example, in the area around Shanghai, Bright still occupies more than 40% of the fresh milk market, a proportion much higher than that of Mengniu and Yili. From the prospectuses of 14 dairy companies that have launched IPO plans this year, it can be seen that building production bases, expanding production capacity, and marketing network construction have become the main uses of IPO funds. In the final analysis, only by mastering sufficient milk sources upstream can they fill sufficient ammunition for downstream production development. Second, break up small and medium-sized pastures to reduce costs. Currently, the high cost and low efficiency of small and medium-sized pastures in China are common phenomena. Moreover, 70% of China's total dairy cattle inventory is still in small and medium-sized pastures and farming households with fewer than 1,000 heads, generally facing problems of low yield per cow, low efficiency, low breeding level, and high cost, high risk, and high management difficulty—the 'three lows' and 'three highs'—directly restricting the development of dairy enterprises. High feeding costs are directly transmitted to milk costs, making domestic milk costs almost 50% higher than abroad. For example, the cost of milk in New Zealand is about 2.6 yuan, while the domestic cost is about 3.5 yuan, and the purchase price is about 3.4 yuan. Regional dairy enterprises, due to insufficient funds, find it difficult to negotiate with large-scale farms with more than 1,000 heads, so breaking up small and medium-sized pastures is one of the most effective ways to reduce costs and increase profits. (Image source: 2022 Dairy Industry Status and Development Prospects Report) Finally, the promotion approach for dairy products is consistent with FMCG. Regional dairy enterprises, due to limited funds, find it difficult to conduct nationwide promotional campaigns, so they can only focus on deeper and more segmented markets. Mengniu and Yili are financially strong; through advertising and sponsorship, they can quickly build influence, and through coverage of large supermarkets, they can also compensate for channel deficiencies to some extent. In 2014, the marketing expenses of Mengniu and Yili were 10.99 billion and 13.26 billion yuan respectively, rising to 23.488 billion and 19.31 billion yuan by the end of 2021, an increase of 113% and 46%. This amount is even ten times the annual revenue of many small and medium-sized dairy enterprises. Representative regional dairy companies such as Sunshine Dairy, Tianrun Dairy, Panda Dairy, and Junyao Health had full-year revenues of only 631 million, 2.109 billion, 857 million, and 914 million yuan in 2021. Taking Mengniu Dairy as an example, the company has invited spokespersons for almost every mature product line: Xiao Zhan for Xinyangdao and Zhen Guoli, Lang Lang and Chen Daoming for Telunsu, TFBOYS for Suansuanru, Tian Yucheng (Cindy) for Weilaixing Children's Organic Milk; in the yogurt category, Sun Li for Guanyiru, Zhang Xincheng for Youyi C, and Zhang Yixing for Chunzhen; Deng Chao for Mengniu 1.88m Children's Growth Formula Milk Powder; in ice cream, Xiao Zhan for Dilanshengxue and Gong Jun for Lvsexinqing. At the same time, Mengniu has been keen on sponsoring various sports events, including the 2018 and 2022 FIFA World Cups. Variety show sponsorships have also been continuous; since 2015, Mengniu has sponsored 15 variety shows including 'Qipa Shuo,' 'Go Fighting!,' and 'Sheng Ru Ren Xin.' Since 2019, Mengniu has been the total sponsor of the super IPs 'Youth With You' and 'Produce Camp' for three consecutive years. The segmented product Chunzhen also sponsored 'Chinese Restaurant,' and Telunsu became the total sponsor of 'Back to Field,' among others. A consumer in Beijing found that her 5-year-old son, who often watched 'Back to Field' with adults, had the Telunsu ads deeply imprinted in his mind, and later he actively asked to buy Telunsu milk. This shows the power of the promotional offensive of dairy giants like Mengniu. Regional dairy enterprises, with limited funds, cannot support such large-scale marketing and promotion, so they can only choose to promote moderately in their own 'territory,' leading to an invisible 'cognitive cycle' in branding: the brand has some influence within the region, but once outside the specific region, its influence rapidly declines, even to the point of being unknown. This has become a crux for regional dairy enterprises unable to 'break the circle.' In terms of fame, they cannot compete; in marketing investment, they are stretched thin. Regional dairy enterprises have no choice but to lay out deeper and more sinking channels. Bright Dairy has established 26 modern cold chain distribution centers centered on East China, covering about 16,000 terminal outlets. The head of Sunshine Dairy revealed at the IPO hearing that it plans to raise 601 million yuan for projects such as 'Jiangxi Base Dairy Expansion and Testing R&D Upgrade' and 'Anhui Base Dairy Phase II Construction,' adhering to 'door-to-door milk delivery' as the main sales channel. However, after reviewing the semi-annual reports of dairy companies this year, Value Planet found that more than 70% of companies saw revenue growth in the first half of the year, but less than 40% saw profit growth, and less than 30% had net profits exceeding 100 million yuan. The three leading companies—Yili, Mengniu, and Bright—accounted for over 80% of the total net profits, with the trend of the strong getting stronger and the weak getting weaker intensifying. In other words, the current competitive landscape of China's dairy market has taken on a typical pyramid shape. The first tier is represented by Yili and Mengniu; the second tier includes regional large dairy enterprises such as New Hope Dairy, Bright Dairy, Sanyuan, and Junlebao; the third tier is represented by local dairy enterprises such as Tianrun Dairy, Kedi Dairy, and Baifeiluo, which are more regional and segmented. Coupled with the impact of the pandemic, dairy sales have declined, and the entire industry is under tremendous pressure; but compared with large dairy enterprises, small and medium-sized regional dairy enterprises have been more affected, with some already facing the risk of cash flow chain rupture. Zhu Danpeng, a Chinese food industry analyst and senior researcher at the China Brand Research Institute, believes that the key to survival for regional dairy enterprises is how to focus on core markets, core products, core channels, and core customers. Only by doing so can they have their own 'one acre and three parts of land.' Many people also do not want the local milk brands that have accompanied them through growth and are full of life memories to disappear. As Hong Kong writer Li Bihua once described the significance of Beijing yogurt to her: a small bottle of Beijing yogurt, sweet with a hint of sour, sour with a hint of bitter, bitter with a hint of sweet, carries the 'homesickness' of the human world.

References: [1] 'Yili: The King of China's Dairy Industry Will Be Better Tomorrow,' Puyin International [2] 'Where Did It Come From, Where Is It Going—A Review of the Development and Changes of Various Dairy Categories,' Huaxi Securities [3] 'China Dairy Economy Monthly Report August 2022,' National Dairy Industry Technology System Dairy Economy Research Office [4] '2022 Dairy Industry Status and Development Prospects Report,' Consumption Circle & Lemon Brand Agency [5] 'Little White Milk Follows the Same Path as Tangyuan, How Did Kedi Dairy Become the Group's 'Cash Cow',' FMCG This article is based on public information and is for information exchange only, not constituting any investment advice.

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Live Topic: 'Discussion: Is RFID + Digitalization the Evolution Direction of FMCG Supply Chain?' Time: September 29 (Thursday) 20:00-22:00 Host: Chen Siting, CEO of New Distribution Guests: Xu Ming, General Manager of Cainiao Logistics Technology IoT; Weng Zhangxian, Technical Director of Digital Center, Uni-President Enterprises China; Cao Zhimin, General Manager of National Operations Center, China Resources Snow Breweries; Zhao Haoyu, Senior Expert in Digital Supply Chain, Cainiao Logistics Technology With the digitization of products brought by RFID, how can we build a supply chain digitalization system for FMCG manufacturers on this basis? How can we solve the deep-rooted problems of traditional supply chains mentioned earlier? New Distribution has invited several brand managers, marketing experts, and professional service providers to connect to the live room to discuss the evolution path of FMCG supply chains in the new era and new market environment.