---
title: "Yili and Mengniu Hold Sway in Dairy Market, Can Fonterra's Fresh Milk Entry Break the Local Landscape?"
description: "The dairy market landscape is largely settled, and both foreign and domestic brands face significant challenges in making headway in the fresh milk segment. Historically, China's fresh milk market has been dominated by domestic players, with foreign companies unable to establish a presence due to factors such as milk sources, cold chain, logistics, and distribution channels. However, this status quo may be shifting. On April 15, New Zealand's Fonterra launched its first Anchor-branded fresh milk (pasteurized) product in China, initially in Tetra Brik packaging, targeting markets in East and South China."
author: "王言"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
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published: "2019-04-19"
language: "en"
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# Yili and Mengniu Hold Sway in Dairy Market, Can Fonterra's Fresh Milk Entry Break the Local Landscape?

> The dairy market landscape is largely settled, and both foreign and domestic brands face significant challenges in making headway in the fresh milk segment. Historically, China's fresh milk market has been dominated by domestic players, with foreign companies unable to establish a presence due to factors such as milk sources, cold chain, logistics, and distribution channels. However, this status quo may be shifting. On April 15, New Zealand's Fonterra launched its first Anchor-branded fresh milk (pasteurized) product in China, initially in Tetra Brik packaging, targeting markets in East and South China.

The dairy market landscape is largely settled, and both foreign and domestic brands face significant challenges in making headway in the fresh milk segment.
Historically, China's fresh milk market has been dominated by domestic players, with foreign companies unable to establish a presence due to factors such as milk sources, cold chain, logistics, and distribution channels. However, this status quo may be shifting.
On April 15, New Zealand's Fonterra launched its first Anchor-branded fresh milk (pasteurized) product in China, initially in Tetra Brik packaging, targeting markets in East and South China. This marks the first large-scale entry of a foreign brand into this product category in the Chinese market.
**Rapidly Growing Fresh Milk Market**
With the upgrading of China's consumer market, fresh milk is becoming a focal point in the dairy market.
According to Nielsen data, over the three years starting from 2018, fresh milk products in the Chinese market are expected to grow at a compound annual growth rate of 18.5%, with the market size projected to reach over 7 billion RMB by 2021. Meanwhile, demand for fresh milk is shifting toward high-end products. In 2018, high-end and ultra-high-end fresh milk saw rapid growth in their share of the overall fresh milk category, with growth rates of 20.3% and 56%, respectively.
Currently, fresh milk accounts for only 10% of liquid milk sales in the domestic market, and even in first-tier cities, this proportion is only 30%. In contrast, in mature dairy markets like the US, UK, and Japan, fresh milk accounts for as much as 90%.
At the Anchor new product launch on April 15, Fonterra's China R&D Director Xu Desheng stated: "Mature markets like the UK, US, and Australia are nearing saturation. China is one of the few rapidly growing markets globally, with particularly fast growth in the low-temperature fresh milk segment, which has reached a consumption tipping point."
"Thanks to the promotion by major dairy companies like Yili and Mengniu, consumer awareness of dairy products is mainly focused on sterilized milk, with limited knowledge of fresh milk. However, compared to sterilized milk, fresh milk is indeed a better category," Zhang Ji, chief consultant at Shanghai Zhihui Marketing, told Time Finance.
Zhang Ji believes that unlike sterilized milk, which is a grassland-type dairy product, **fresh milk is an urban-type dairy product with shorter production times and radii, higher nutritional value, and better taste, making it the future direction of the domestic dairy market.** Additionally, although there is not much price difference between fresh milk and sterilized milk, there is room for profit improvement as manufacturers promote this category and upgrade packaging.
However, there are differing views within the industry.
Dairy analyst Song Liang told Time Finance that the market demand for fresh milk has not truly peaked. He believes that fresh milk consumption is mainly concentrated in first- and second-tier cities, which are nearing saturation, while third- and fourth-tier cities are still limited by cold chain issues and cannot yet access this category.
**Market Barriers Broken**
Unlike room-temperature milk, fresh milk products are made using pasteurization. Due to the need for low-temperature storage and short shelf life, this category is constrained by factors such as distance between milk sources and factories, terminal cold cabinet configuration, and logistics.
Currently, the leading fresh milk companies in terms of market share are mostly regional brands. These dairy companies have high visibility and consumer bases in their local regions, and combined with years of channel development and transportation distance limitations, they have formed barriers in the industry.
Due to these factors, foreign brands and other large national dairy companies have been unable to scale up in the domestic cold fresh milk market. However, with companies' investments in their own milk sources and factories, as well as improvements in cold chain systems and logistics, the barriers in the fresh milk market are gradually being broken down.
National dairy companies like Yili and Mengniu have been building and acquiring pastures nationwide to secure milk sources.
In 2017 and 2018, Mengniu completed acquisitions of Modern Farming and Shengmu Gaoke, a subsidiary of China Shengmu, respectively. These companies operate self-owned pastures in Inner Mongolia, Sichuan, Shaanxi, Heilongjiang, Anhui, and Shandong. Yili, on the other hand, has over 2,000 self-built, under-construction, and cooperative pastures in Heilongjiang, Sichuan, Hubei, Anhui, Henan, Zhejiang, and other regions outside Inner Mongolia.
In January 2018, Mengniu launched three sub-brands—"Mengniu Fresh Selection," "Daily Fresh," and "Fresh Factory"—all of which are pasteurized low-temperature fresh milk. Meanwhile, Yili's pasteurized fresh milk brand "Baigete" is also operating in the Northeast market.
Foreign dairy companies are also taking action.
To address milk source challenges, in July 2014, Fonterra partnered with Abbott to invest 1.8 billion RMB in building a dairy farming base in mainland China, including five pastures. It has now established two major pasture clusters in Hebei and Shanxi, with a total of seven pastures, over 60,000 dairy cows, and an annual output exceeding 350 million liters of milk.
Currently, foreign-invested pastures include not only Fonterra and Abbott but also Nestlé, which established pastures in Heilongjiang in 2012, and KKR, which partnered with Modern Farming in 2013.
In 2018, Fonterra collaborated with Hema Fresh and Carrefour as an OEM supplier to launch fresh milk products. The launch of the Anchor new product marks Fonterra's first foray into the fresh milk market under its own brand.
Dairy analyst Song Liang revealed to Time Finance that Fonterra's three pastures in Shaanxi and Hebei had previously supplied milk to Mengniu and Yili. As demand from these customers decreased, Fonterra utilized excess capacity to launch new products, with these three pastures primarily supplying the North China market.
According to him, the fresh milk products Fonterra sells in East China are actually produced in cooperation with New Hope Dairy's OEM factory in Hangzhou. Fonterra may also partner with companies like Shandong Jiabao and Hangzhou Shuangfeng to gradually expand fresh milk products in North and East China.
Regarding Fonterra's fresh milk expansion in South China, Song Liang believes that **the logistics radius is too long, which will place high demands on its cold chain.** "Technically there is no problem, but costs will certainly be high."
With national dairy companies aggressively expanding and foreign brands entering, competition in the domestic pasteurized fresh milk market has evolved from "regional competition" to a "national competition" involving both Chinese and foreign brands.
**What Lies Ahead?**
New entrants like Fonterra not only face competition from national companies like Mengniu and Yili but also regional dairy companies' defense of their local markets.
Fonterra stated that its Anchor fresh milk will first be launched in Shanghai. In the East China market, represented by Shanghai, Fonterra will have to compete with local giant Bright Dairy, trying to carve out a share of its pie.
According to Nielsen data, due to its long-term focus on the fresh milk market, Bright Dairy holds a 48.5% share of the domestic fresh milk market, ranking first in the industry and dominating the East China market. In the Pearl River Delta, the fresh milk market is divided among the "three giants": Fengxing, Yantang, and Chenguang. In the Southwest and East China markets, as well as the Beijing-Tianjin-Hebei region, New Hope Dairy and Sanyuan Foods are the representatives.
For regional dairy companies, they have their own survival strategies in the face of external pressure.
An anonymous sales manager at a Shandong dairy company told Time Finance that the operation of low-temperature fresh milk is completely different from room-temperature milk. He revealed that **low-temperature fresh milk needs to be cooled immediately after leaving the cow, and the entire process is "milked, transported, and processed on the same day." Even at the final sales outlets, the milk temperature must be continuously maintained within an appropriate range.**
"Just ensuring the milk doesn't spoil due to heat requires a significant management cost. Expanding nationally would be too costly. Moreover, with a 7-day shelf life, it's impossible to push inventory to distributors like room-temperature milk," the person said.
Indeed, the market strategy for fresh milk products differs greatly from that of room-temperature milk.
According to a research report from China Merchants Securities, **unlike the model of "high brand investment + rapid channel coverage" that creates big single products for room-temperature milk, the growth rate of low-temperature milk is constrained by two factors: first, the speed of outlet expansion, such as the deployment of low-temperature cold cabinets; second, consumer education and cultivation, such as brand awareness.** Therefore, low-temperature products are less likely to experience the explosive growth curve of room-temperature single products and require higher investment to achieve growth above natural rates. To excel in these two aspects, long-term upfront investment is necessary.
In addition, as the "last mile" of fresh milk sales, home delivery has been a core channel for fresh milk products, accounting for the majority of fresh milk dairy companies' sales. For new entrants to make a mark in this field, the home delivery channel is definitely a key focus.
Zhang Ji told Time Finance, "Take Nanjing's local fresh milk brand Weigang as an example. Its daily home delivery volume is about 600,000 portions, accounting for the vast majority of its fresh milk sales. Previously, home delivery channels accounted for over 90% of all fresh milk brand sales; now it has slightly declined but still holds an absolute position."
It is not easy for foreign brands to extend their reach into the home delivery channel. Subscriber resources require companies to deeply cultivate local markets, engage in long-term operations and promotion, and after becoming familiar with local consumer preferences, cultivate and guide them.
Zhang Ji believes that to engage in home delivery, foreign brands must establish milk stations and delivery teams, but this will lead to higher operating costs and correspondingly higher product prices. "The dairy market landscape is largely settled, and both foreign and domestic brands face significant challenges in making headway in the fresh milk segment."
Source: Time Finance (ID: tf-app)
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