As the Spring Festival approaches, domestic demand for dairy products continues to rise, but this year manufacturers have not only refrained from discount promotions but have instead raised prices across the board. Companies uniformly attribute the increase to a significant rise in raw milk prices and surging cost pressures. Currently, Yili, Mengniu, Panda Dairy, and One Cow Raised by One Person have all implemented price hikes to varying degrees. Some consumers have reported that a certain brand's 250g×24-box pure milk has risen from 60 yuan per carton to 75 yuan per carton. Once upon a time, dairy companies that championed "a cup of milk a day keeps Chinese people healthy" have now, after continuous price increases, left many netizens sighing, "Can't afford to drink!" According to a research report from Anxin Securities, the upward trend in domestic milk prices may continue until mid-2021. Stimulated by the price surge, the dairy sector has been booming, with multiple listed companies such as Yili, Mengniu, and Panda Dairy experiencing consecutive limit-ups. As of January 25, Yili's share price stood at 48.8 yuan, with a market value of approximately 300 billion yuan. The dairy sector has always been a track closely watched by investors and new consumer entrepreneurs. Changes in market demand and pricing positioning will have profound impacts on brand channels, scale, and product competitiveness. The rise in the baseline of raw milk prices not only creates profit margins but also raises consumer expectations for popular brands. -01- Epidemic and Environmental Protection Intensify the 'Milk Grab' Battle Over the past year, terminal prices of milk in the market have risen by 15%-25%. However, distributors claim that this increase is unreasonable compared to the normal growth rate in previous years. The fundamental reasons for the milk price increase are surging demand and a sharp decline in milk sources. The market changes brought about by the epidemic have forced dairy companies to 'grab milk sources' and raise prices to protect profits. The global pandemic has affected the supply chains of dairy companies, directly leading to increased costs across the entire chain, including raw material procurement, milk production and packaging, and logistics transportation. Data from the Ministry of Agriculture shows that the current price of raw fresh milk has risen consecutively to 4.18 yuan per kilogram, very close to the historical peak of 4.27 yuan per kilogram in 2014. On January 5, leading manufacturers such as Mengniu and Yili raised prices for basic white milk (typically pure milk) by about 5%. However, the various expenses incurred by dairy companies are passed down layer by layer to channel distributors, so in supermarkets and convenience stores, retail prices of dairy products have risen significantly compared to before. Domestic consumers' focus on health and wellness, coupled with consumption upgrades, has opened up a broader dairy product track for brands. The competitive demand for diversified products and the influx of hot capital have further pushed up raw milk prices. In 2019, retail sales of liquid milk reached 128.5 billion yuan, accounting for 31% of total dairy products. Among this, the sales proportion of low-temperature milk is still lower than that of room-temperature milk, but its market growth rate has already surpassed that of room-temperature milk. New Hope Dairy once disclosed that its low-temperature fresh milk growth rate in 2019 was 28%. Companies such as Yili, Mengniu, Sanyuan, and Nongfu Spring have also accelerated their layout in the cheese and plant-based yogurt sectors. Producing low-temperature fresh milk and cheese requires large amounts of raw milk. The emergence of various new brands and dairy products has led to a continuous increase in domestic manufacturers' demand for milk sources. The state has proposed achieving a scale farming proportion of over 65% for herds of 100 or more by the end of 2020, and maintaining a milk self-sufficiency rate of over 70%. However, due to the pandemic and constraints such as capital and land, the current milk self-sufficiency rate of leading domestic dairy companies is about 65%. The milk source structure remains relatively single, relying mainly on major milk-producing regions such as Inner Mongolia and Heilongjiang. At the same time, environmental protection policies, increased feed costs for dairy cows, and rising beef prices have led many dairy farmers to slaughter cows for meat, resulting in a rapid decline in the actual number of dairy cows. In 2019, the domestic dairy cow inventory hit a low of only 6.1 million heads, far below the 8.4 million heads in 2015, and it is difficult to close the gap of one million heads in the short term. The rising demand for domestic fresh milk and high-end dairy products, coupled with increased costs of imported raw milk, has intensified the competition among dairy companies for milk sources. In the first half of last year, there was a "milk grab battle" among Yili, Mengniu, and Huishan for milk source bases, with significant offline expenses. In the second half of the year, large dairy companies increased their control over milk sources, and the demand for profits from both manufacturers and merchants became increasingly strong. Every year from November to January is the stocking period for Spring Festival dairy products, when consumer demand for milk is strong. After brands like Yili and Mengniu reduced promotions and raised prices, their stock prices rose one after another, which is expected to improve annual operating performance. -02- Giants Position Themselves: How Can New Brands Break Through? Domestic consumers have a huge demand for dairy products, with the milk market exceeding 100 billion yuan. However, leading brands such as Yili, Mengniu, and Bright Dairy account for over 70% of the market share, with the rest being mostly regional brands. The industry exhibits a strong "Matthew effect." The success or failure of a brand is closely related to channels. Appropriate pricing helps brands maintain profit margins, attract stakeholders such as distributors, dairy farmers, and manufacturers, and gradually expand ToB services and C-end market share. Currently, popular classic brands like Yili and Mengniu mainly rely on large-scale, hierarchical offline distributor channels to secure favorable shelf positions in supermarkets, reach consumers in urban and rural areas, and expand sales. Their e-commerce channel layout is a process of shifting from offline to online. New brands like One Cow Raised by One Person and One Yogurt Cow started from e-commerce channels such as Tmall and JD.com. They are more flexible in market tactics than leading dairy companies, excelling in planning activities on content platforms like Xiaohongshu and Douyin to increase brand awareness. However, Zhu Danpeng, an analyst at China Food Industry, believes that the "cow raiser" model of "One Cow Raised by One Person" is essentially "formalized micro-commerce, marginalized direct sales." Currently, the company is still in a state of "burning money for growth." The impact of the pandemic, fluctuating demand, and rising costs in the second half of the year may trigger a new round of industry reshuffling, with small and medium-sized dairy companies being accelerated out of the market, while large dairy companies seize share by strengthening control over milk sources and channels. In Q3 2020, Yili's market share in room-temperature milk and low-temperature milk was 39% and 15%, respectively. To consolidate channels, brands need to balance the interests of multiple parties, especially on the sensitive issue of pricing. For example, Shengmu once weakened its market competitiveness after raising prices due to increased raw milk prices. As the basic business of Yili and Mengniu, the room-temperature milk business has recently seen both companies raise prices to increase profitability and maintain profit margins, which also raises the expectation of price increases across the industry's upstream and downstream. The vicious cycle of "milk price rises - dairy farmers buy cows - milk surplus leads to price cuts - cows are slaughtered and milk dumped" has occurred multiple times. The "milk shortages" in 2007 and 2013 were closely related to conflicts of interest among brands, channels, and manufacturers. Even worse, due to loopholes in production, testing, and sales processes, the "melamine" milk powder quality incident occurred. According to predictions from the Shenzhen Price Certification Center, the expansion cycle for dairy cows from calves to lactating cows is about two years. Even if expansion started in 2019, it will take at least until 2021 to see an increase in production. Therefore, the upward trend in domestic milk prices may continue in 2021. As traffic costs on traditional e-commerce platforms continue to rise and promotion expenses on content platforms increase, it is becoming increasingly difficult for FMCG brands to create hit products through marketing. Coupled with the rapid growth of traffic in lower-tier markets, exploring new distribution channels such as community group buying is playing an increasingly important role for brands. Given the current general rise in milk prices, new brands must not only survive the "milk shortage" cycle but also seize the opportunity of price adjustments by leading companies, strengthen supply chain construction, and develop cost-effective milk, yogurt, cheese, and other products. Small and medium-sized dairy companies need to unite with new channels and scattered milk sources, coordinate the distribution of interests between upstream and downstream, and unify quality standards to avoid direct competition with large dairy companies in scale milk sources and improve their own milk supply capabilities. In addition, the C2M model of producing according to sales can play a certain role in industrial products, but for dairy products that are mainly purchased offline and have immediate drinking/gifting needs, it does not fully match the current distribution system of dairy companies. -03- Surviving by 'Milking' in Highly Segmented Markets Over the past 20 years, the domestic dairy industry has been almost a history of milk source competition. As long as a company controls high-quality upstream milk sources, it can crush competitors with scale and quality and gain a competitive advantage. High-quality milk sources and their supply capacity are the foundation of dairy companies, but the factors affecting industry competition have become more complex. For example, Yili's Q3 2020 financial report shows that its liquid milk business, accounting for 78% of revenue, generated 57.3 billion yuan, a slight year-on-year increase of 2%, indicating a clear slowdown in performance growth. Under the influence of the pandemic and trade wars, the strategic progress of dairy companies in expanding overseas markets has been hindered, leading them to continue expanding domestic sales. Competition between national and regional brands, and between offline and online channels, will further intensify. Now, the domestic market for room-temperature liquid milk is gradually becoming saturated, and scale growth has hit a bottleneck. Consumers' demand for diversified and healthier dairy products is prompting dairy companies to adjust their product structures for specific consumer groups and consumption scenarios. Over the past year, Yili and Mengniu have increased spending to promote new products such as high-end milk, low-temperature yogurt, cheese sticks, and plant-based yogurt. This not only maintains consumers' freshness with the brand and satisfies different flavor experiences but also leverages high-margin categories to create significant revenue growth. In the dairy track, which has scale barriers and highly concentrated industry resources, the "duopoly" pattern of Yili and Mengniu is difficult to break. New brands need to explore opportunities in product segmentation, channel segmentation, or marketing segmentation, refine their positioning and pricing, and create differentiated products that can withstand market testing. Junlebao created the hit cheese yogurt; Lecun and Jane's brands planned the "zero-additive" concept; One Yogurt Cow targets young female white-collar workers; One Cow Raised by One Person expanded its SKUs to include adult milk powder and infant A2 protein milk; Vitasoy and Nongfu Spring cross-sectorally entered the plant milk category... The continuous differentiation of product structures makes brands more attractive in the market. It is worth noting that after internet-famous brands grow to a certain scale in segmented markets, they face the ceiling of a single category. To continue growing, they must expand SKUs and expand online and offline channels to sustain growth. When the growth rate of demand declines and the return on marketing investment begins to decrease, brands return to the traditional consumer goods competition model, having to compete on scale and supply chain efficiency to reduce operating costs and improve food quality and product experience. Through building factories, channel adjustments, and product innovation, if new brands in the dairy track can make consumers 'remember' them in the long term and maintain business growth points that are not wiped out by giants, they can truly open up a new world in the segmented milk market. And from the moment new brands ignite price wars online, perhaps we are one step closer to "milk freedom." Source: Whale Business (ID: bizwhale), Author: Zheng Ruilong Tips will be paid 400-2000 yuan upon adoption.