| China Dairy Industry Competition Landscape |
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The Chinese dairy industry has entered a stage of fierce competition. Large companies have raised the competition barriers and further segmented the market, making developments of small-to-medium enterprises (SMEs) even harder. While national brands are competing in the first tier market by all kinds of means, the flame has also spread to the second and third tier markets. SMEs, which are forced to participate in the war between large brands, have to choose those unsustainable methods to maintain or expand their market shares.
Market dominated by 3 big players
According to the latest statistics, the top three dairy heavyweights, Yili, Mengniu and Bright Dairy, have controlled more than 50% market shares in China. Industry experts have pointed out that in the next 3 years, China’s dairy product industry consolidation will be completed, “by then, the difference between first and second tire brands will be even larger, as market and resources will be further concentrated”.
In fact, first tier brands like Yili, Mengniu and Bright Dairy have aggressively pushed their national strategies in recent years, most notably pushing into key regional markets. They also launched a diversified range of products to further suppress market space for local second tiers brands. As listed companies, the giants possess formidable funding advantages, enabling them to cope with any acquisition and marketing activities. Contrary to the fast growing dairy market, gross margin in the dairy industry have been declining since 2002, suffering from ongoing price wars and rising raw ingredient costs. Statistics showed that by the end of 2006, profit margin in Chinese dairy industry has declined to 5%, and over 45% regional dairy companies were making losses. The biggest dilemma facing second tier brands at the moment is that on one hand, these companies are not as flexible as those much smaller players in adjusting business directions; while on the other hand, they don’t have the abundant resources of first tier companies to expand their influence. In this competitive market, their only weapons are geographic and social closeness to their customers. “So it is actually a battle between location advantages and capital advantages,” said industry insiders. |
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Analysis of first tier dairy companies
Mengniu
Mengniu has partnered with Danish Arla Foods to venture into the milk powder sector, and partnered with French Danone to expand yogurt products. In its home region of North China, Mengniu is building a liquid milk production line in Heilongjiang Province. In Chengdu City of western China, Mengniu is ramping up its dairy ingredients supply base, as well as a few other production line projects and acquisitions in central regions. So Mengniu is attacking on three major business lines, namely liquid milk, cold products and milk powder. Mengniu’s brand marketing campaigns of sponsoring Super Girl Contest (similar to American Idol) and Shenzhou V Space Program were also very successful.
Yili
Yili has won a large OEM order from Fujian Changfu Dairy Group, which is strategically located between East China and South China, two of the major dairy consumption regions in China.
In July 2005, Yili began constructing its liquid milk production park, which would double its production capacity when it is completed. In November 2005, Yili outbid Mengniu to won the title of 2008 Beijing Olympics Sponsor.
Bright Dairy
Bright Dairy suffered from a major scandal in Jun 2005, when a journalist exposed Bright Dairy’s practice of “reprocessing expired milk” in one of its subsidiary factories in Henan Province. But 3 months later, Bright Dairy was starting to build its dairy production base in Chengdu City, intending to consolidate its position in south western region. Bright Dairy this year has narrowed its focus to East China region.
Beijing Sanyuan Group
Sanyuan conducted a company recapitalisation last year. It also closed and relocated some inefficient plants out of Beijing, reducing the number of plants in Beijing from 7 to 4. Sanyuan currently has cut its product ranges from 240 to 130, focusing on higher margin products such as yogurt, pasteurized milk and cheese, and reduced non-core products like frozen foods.
Hebei Sanlu Group Mengniu expanded into the Hebei Provincial market with low pricing in 2003 and Taiwan Wangtwant Group established its milk powder project in Hebei in 2006. So the Hebei-based Sanlu Group has chosen a strategy of buying out local retailers, utilising its geographic advantage to defend its position in the home market. Sanlu also launched its high profile “four-year strategy”. By 2010, it aims to become the national number one in selling formulated milk powder, functional foods and liquid yogurt, and top three in liquid milk and milk drinks. It plans to lift its production scale, financial performance and overall competitiveness. In Jun 2007, New Zealand dairy giant Fonterra announced it was acquiring 40% of Sanlu Group.
Nanjing Weigang Dairy Group The Nanjing, East China-based Weigang mainly relies on its geographic advantage and local consumers’ appetite for pasteurized milk. A survey indicated that the percentage of household pasteurized milk consumption in Nanjing is among the highest in Chinese cities. In Jun 2006, sales of Weigang pasteurized milk amounted to 16 billion bottles, thus pasteurized milk is the defence for Weigang against the invasion of national brands.
Many small local brands rely on convenient transportations, local familiarity, long time accumulated customer resources and low prices to entrench their home market and consumers. But some companies, such as Xi’an Yinqiao Group and Gansu Zuuangyuan Group, are expanding blindly with their backward products and formats, copying tactics from other companies to expand their territories in unorganised manners.
Forecast
In the funding and geographic competition game, medium companies have to give up expanding outside their home market to compete with national heavyweights, and instead choose to focus on defending their own territories. With enormous funding resources, large companies can only become more competitive. So the future landscape of Chinese dairy industry will be large companies winning more market shares and higher brand recognition with funding advantages, while geographically focused companies will use their local advantage and consumer familiarity to consolidate their local market positions, building up brand loyalties. So the Chinese dairy market in the future will be dominated by these two kinds of players. Dairy exports are large dairy enterprises ease the pressure of market competition effective way. Over the past two years, China's dairy exports continued to maintain its high growth, dairy leading enterprises also continue its efforts to open up the international market, and gradually seen results. In the first half of this year, China's dairy exports continued to maintain strong growth, and is expected dairy products in recent years the volume of exports growth will be kept at about 21 percent, this is also large-scale enterprises to develop and also a steady growth in the expansion of the road. Dairy product exporting is one way to ease the market pressure for large dairy companies. In the last two years, China’s dairy export has maintained a high growth rate, and leading dairy players have been gradually expanding international markets. It is estimated that dairy products from China will grow at 21% pa in the next few years, and this is also another expansion channels for large dairy companies in China.
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