Chinese dairy companies dominate the country's highly consolidated liquid milk sector. A focus on quality and innovation is driving growing sales in the market as milk continues to emerge from the long shadow of the 2008 melamine scandal. But international firms – and most significantly imported milk – do have a role to play in shaping the future of China's milk market. Jens Kastner reports.
In 2008, the then-emerging Chinese dairy market was delivered a devastating blow by the melamine scandal, which was triggered by dairy suppliers fraudulently adding melamine, a material used in the production of plastics, to raw milk they were selling to some of the countries largest processors. This artificially boosted the protein count of the raw milk and enabled the ingredient to be watered down. The scare had a significant impact on the Chinese dairy sector, prompting higher regulation and consolidation in the market.
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By GlobalDataToday, seven years on, as a consequence of the scandal, smaller dairy companies no longer play a significant role in China’s drinking milk market, virtually leaving the business to four players. In 2014 Yili Group and the Mengniu Group held 25% and 21.7% market share respectively, with the Hangzhou Wahaha Group and Want Want Holdings following with 7.6% and 7.1% respectively, according to London-based market researcher Euromonitor International.
"After the melamine scandal, the government has taken measures to get rid of unreliable, irresponsible companies and supported the big ones, especially Mengniu and Yili," Peter Peverelli, director of Eurasia Consult, a Netherlands-based consultancy focusing on China’s food industry, tells just-food.
"These big companies have managed to improve their image by quality, lifting the Chinese dairy industry from its lowest point in history," he elaborates.
In previous decades, conventional wisdom held that many Chinese consumers were lactose intolerant, encouraging misconceptions that the dairy business would never make significant profits in China. Betraying this assumption, Euromonitor’s stats show that from 2009 to last year, annual consumption of liquid milk and flavoured milk drinks grew by 31.6% and 78.1% to 10m tonnes and 9.3m tonnes respectively. In 2014, flavoured milk drinks posted 13.2% growth to Chinese Yuan Renminbi CNY94.2bn (USD15.2bn), outpacing the 11.6% growth noted for the drinking milk category.
"The Chinese people recognise that milk is healthy and spend money on it, especially families with children and elderly," says Torsten Stocker, partner of AT Kearney's Asian consumer goods and retail practice, based in Shanghai.
"Accordingly, brands’ focus is on innovation, promoting the premium segment and milk with higher calcium and protein content, or catering specifically to the different age groups," he observes.
Eurasia Consult's Peverelli explains the stellar growth rates of flavoured milk products with the brands’ need to "cover the creamy milk taste the Chinese consumer dislikes".
Euromonitor identifies another factor prompting brands to add a higher non-milk content. In its latest report on drinking milk in China, the market researcher says that 2013 saw a rise in the price of beef, which led to a shortage of milk because herdsmen slaughtered their dairy cows. The resulting supply difficulties, in combination with manufacturers’ poor risk management, made food manufacturers consider reducing milk content in certain products, replacing it with a wide range of other elements.
This, Euromonitor suggests, led to the widening of Yili’s QQ Star range and Mengniu’s Future Star Organic Milk last year, both using non-milk natural ingredients, such as fish oil (QQ Star) and walnut (Future Star), as selling points.
Whether the result of consumer taste preferences or supply constraints, this trend looks set to continue. In the first quarter of this year, Mengniu entered China’s drink-based meal market with an extension of its premium segment Telunsu (Deluxe) range, a milk product containing oat and wheat grains.
"It’s all about different flavours, quality, nutrition content and health promotion," observes James Roy, associate principal with China Market Research Group (CMR), in Shanghai. "But what you don’t see here yet is differentiation in the milk fat category, like in the US, where all bottle caps feature a 1%, 2% and so forth."
This could be an avenue for future product development. Roy predicts that this is a direction "you might eventually see the China market taking for young women."
Given such a shifting market, foreign players are interested, but are aware they might need local help. Multinationals are seeking strategic partners within the dairy sector. While many of these strategic tie-ups focus on areas outside liquid milk, such as infant formula, ultimately international dairies could leverage these relationships to help build the value-added drinking milk sector.
For example, France’s Danone invested in Mengniu in order to cooperate with an experienced domestic player, while Mengniu, in return, can utilise Danone’s advanced manufacturing technology and management theories. A partnership that began in yoghurt has thus spread to encompass fresh chilled dairy – and Danone has subsequently invested in Mengniu's infant formula unit Yashili.
Yili is also working to capitalise on international R&D expertise. Last year the Chinese dairy signed a research agreement with the Netherlands’ Wageningen University, which is internationally renowned for its studies on healthy food and living environments.
Amid the Chinese people’s growing health awareness and rising disposable incomes, Euromonitor forecasts sales of mainland China drinking milk products will reach 28.2m tonnes in 2019, representing 6.4% growth CAGR. Value-wise, growth will reach 7.2% CAGR.
As demand is expected to outstrip supply, China’s big dairy companies are investing overseas in order to acquire more production outside China. Yili, for example, in late 2014 announced plans to invest in processing and packaging projects in New Zealand. Elsewhere, Mengniu acquired land in Australia for dairy production. Signalling how significant to national strategy these overseas investments in dairy production has become, Yili’s projects were personally endorsed by Chinese President Xi Jinping during his visit to New Zealand.
"Mengniu will ship that milk back to China, but at this stage it is not clear whether they will create separate brands for these imported products," says Roy. Suggesting that separate brands will be created, Euromonitor forecasts imported milk will play a significant role by 2019, owing to its perceived trustworthiness as well as increased availability.
