If we look at the history of China's dairy industry, we cannot fail to mention Yili and Mengniu. The 18-year saga of enmity and friendship between these two companies began with Niu Gensheng's resignation in 1999.

I. 1999 - 2007: The Rise of Mengniu

In 1999, 41-year-old Niu Gensheng was the vice president of Yili Group, in charge of operations and production. Due to conflicts with Zheng Junhuai, then chairman of Yili Group, he resigned and started his own business, ushering in the Mengniu era.

As the citation for China's Economic Person of the Year 2003 put it, Niu Gensheng:

His surname is Niu (meaning 'cow'), but he loves speed. In just 4 years, he went from outside the top 1,000 in the industry to the top three in dairy. In 2003, he keenly seized the aerospace business opportunity; in 2003, he stepped onto the APEC international stage from the grasslands. His surname is Niu, but he ran at the speed of a rocket.

Mengniu's sales grew rocket-like from a mere 40 million yuan in 1999. Niu Gensheng took 8 years for Mengniu's sales to surpass Yili for the first time in 2007:

This was driven by two factors:

  • The overall explosion of the dairy industry, especially liquid milk: China's per capita annual liquid milk consumption increased from less than 6 kg in 1998 to about 28 kg in 2007, a 3.7-fold increase.
  • Mengniu's marketing strategy: On October 15, 2003, when China's first astronaut Yang Liwei went into space, Mengniu became the sole milk sponsor, thus becoming the 'designated milk for Chinese astronauts,' a title it still holds today.

In 2004-2005, Super Girl became a phenomenal TV show in China, drawing huge audiences. Mengniu seized this marketing opportunity, greatly expanding its brand influence.

As for the strategy of using TV advertising, Mengniu had already mentioned it in its 2003 prospectus, and this strategy has been used by both companies ever since:

Thanks to the growth of liquid milk and successful marketing, by 2007, 90% of Mengniu's revenue came from liquid milk. At the same time, Mengniu continuously expanded its market share in liquid milk, holding the top position since 2003:

In 2007, Mengniu's liquid milk market share reached 40.7%, far ahead of its competitors:

The capital market also rewarded Mengniu handsomely: by the end of 2007, Mengniu's stock had risen about 700% since its listing, while Yili's had risen about 200% over the same period.

(White for Mengniu's stock price, green for Yili's stock price)

II. 2008: The Turning Point - The Melamine Incident

In May 2008, a netizen exposed quality problems with Sanlu milk powder he had bought at a supermarket in Taishun County, Zhejiang, in November 2007.

In September 2008, the melamine incident officially broke out. As the leading domestic dairy companies, Mengniu and Yili also had their milk powder found to contain melamine. Suddenly, Chinese-made milk powder became the target of public condemnation.

Facing the melamine incident, Niu Gensheng shed tears and said firmly:

Not only was I unaware, but our team was also unaware, because Mengniu employees also buy dairy products from supermarkets in society.

Sanqian Erliang will not comment on whether melamine was the 'unspoken rule' of the entire Chinese dairy industry at that time, but melamine seems to have become a turning point for Yili and Mengniu. The way Yili and Mengniu treated their distributors at that time also laid the groundwork for future developments:

(Excerpt from an industry insider on Zhihu)

III. 2009 - 2016: Yili's Nirvana

In July 2009, COFCO became the largest shareholder of Mengniu. In fact, as early as 2005, Niu Gensheng had already considered stepping back from Mengniu to focus on philanthropy. In June 2011, Niu Gensheng officially resigned as chairman of Mengniu's board.

As for Yili, its management team had been working together since 2002 and has managed the company ever since. It is worth mentioning that Pan Gang, appointed as Yili's president in 2002, was the youngest president among China's 520 key industrial enterprises at the age of 32.

From a sales perspective, after 2009, Yili recovered quickly from the melamine incident like a phoenix rising from the ashes, and in 2012 surpassed Mengniu to become the leader in China's dairy industry:

Looking at the gross and net margins of Yili and Mengniu, we find that since 2009, Yili's gross margin has been consistently higher than Mengniu's, and its net margin has also been much higher than Mengniu's since 2013.

This situation stems from Yili's product structure upgrade driven by new product launches, which increased the proportion of high-end products, thereby raising gross and net margins:

Especially noteworthy is Ambrosial (Anmuxi), which achieved nearly 1 billion yuan in sales in 2014, nearly 4 billion yuan in 2015, and in 2016 surpassed Mosilian to become the number one in room-temperature yogurt, with sales of nearly 8 billion yuan.

(Ambrosial sponsored Running Man and appeared frequently in the show)

Sanqian Erliang would like to point out that behind all this, it seems that Mengniu, after being taken over by COFCO, lost its former marketing acumen. Yili, on the other hand, used the same marketing strategies that Mengniu had used during its rise, turning the tables:

  • Running Man: Ambrosial
  • Where Are We Going, Dad?: QQ Star
  • I Am a Singer 4: Yili Jindian

The popularity of these TV shows brought Yili substantial gains, while Mengniu seemed to have no choice but to increase selling expenses and promotions to maintain its sales:

As a result, the capital market has given the two companies very different responses since 2009: from 2009 to the present, Mengniu's stock has risen about 200%, while Yili's has risen about 1,500%.

Currently, Yili's market value is 115 billion yuan, while Mengniu's is only 53 billion yuan, half of Yili's. The gap in sales, which had been in Mengniu's favor in 2007, turned into a 10 billion yuan deficit by 2015.

Perhaps seeing this situation, Niu Gensheng could no longer sit still: in September 2016, Niu Gensheng returned to Mengniu as a 'member of the Strategy and Development Committee.'

Sanqian Erliang also looks forward to Niu Gensheng's unconventional return, hoping it will bring new vitality to Mengniu and help it find the 'rocket cow' it once was. After all, with similar sales to Yili, Mengniu's market value being only half is indeed frustrating.

Finally, Sanqian Erliang would like to mention that Niu Gensheng had already donated all his Mengniu shares to establish the Laoniu Foundation. In 2015, he donated another 1.534 billion yuan to the foundation, which is truly admirable!

And the 18-year saga of Yili and Mengniu may have entered a new cycle with Niu Gensheng's return.

Source: Sanqian Erliang

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