It is widely acknowledged that the dairy industry serves as the pillar in people’s livelihood. It is a highly integrated industry, and at the same time, it extends from the primary industry (agriculture) to the secondary industry (food processing industry) and the third industry (distribution and logistics). China, as one of the world’s largest economies, has witnessed the surge of the dairy industry, prompted by economic, social and many other factors. Despite the fact that the whole development history is not very long, the status of dairy products in people’s dietary structure has been greatly improved.
China’s dairy market has witnessed a steady and substantial growth since the beginning of 1990s and even with the widespread 2008 Melamine scandal which disrupted consumer confidence as well as domestic production, the market only experienced a short period of turbulence after the Chinese government has taken several measures, including cracking down on illegal producers, enforcing new regulations to better ensure the safety and quality of domestic dairy products. At the same time of the restructuring process, China is becoming the most dynamic sector in the global dairy market and the whole industry has gradually shifted from scale growth to quality upgrading. The total revenue of the dairy industry of 2017 is 359.041 billion yuan with an increase of 7.85 percent. Currently, China ranks second in terms of market volume after the US while it is estimated to overtake the US as the largest dairy market in the world by 2022 according to a research by Euromonitor International.
Expanding middle class are consuming more dairy products
The national economic strength undoubtedly plays a significant role in the rapid development of the dairy industry. The below chart illustrates the change in per capita disposable income of urban and rural residents from 2013-2017, which implies the improvement of living standards. Consumers now have higher purchasing power and are increasingly exposed to international trends, resulting in a shift in lifestyles that towards westerners.
Growing health awareness accelerates consumption
Another main factor that influences diary consumption health consciousness. Dairy products are a useful source of protein, calcium, vitamins and several minerals. Although China has a vast majority of lactose intolerant people, thanks to the development and innovation, they are still spending more and more money in other dairy products with distinctive health positioning such as yogurt, lactobacillus drinks or cheese. Yogurt is one emerging category that has catered to Chinese’s growing health awareness as it is often believed to help digestion and strengthen the immune system.
As a result, yogurt has experienced an explosive growth which fueled the general demand for dairy products. According to China Daily, the total yogurt sales in 2017 has overtaken the milk sales for the first time in the country. As depicted in the below chart, the total domestic yogurt sales have risen by 108.6 percent from 2013 to 2017, whereas milk sales grew by just 18 percent in the same period.
Furthermore, among all yogurt sector, the ambient yogurt maintains the fastest growth. The craze initially started with the Momchilovtsi(莫斯利安) from Brightdairy in 2009 then Yili introduced Ambrosia(安慕希) in 2014, successfully generating buzz in the country.
The ability to store and transport at room temperature is the major characteristic of ambient yogurt, which seems quite exotic to westerners since they consider chilled yogurt as mainstream. Nevertheless, being able to transport at room temperature is important as the chilled chain infrastructure is still underdeveloped in China. This entirely new wave is providing a wider distribution network as well as offering convenience for both retailers and consumers. At present, this sector is soaring up not only in the dairy market but also in the food and beverage market. It is mainly targeted at young consumers, both male and female. One famous example is Yili Ambrosia(安慕希), it is endorsed by Chinese popular actress Angelababy and has been the title sponsor of the popular Chinese reality show Running Man(奔跑吧兄弟). It took advantage of the celebrity effect to achieve precision marketing and dramatically increased the total sales and now occupies the first place in that segment.
Since the scale as, as well as the technology of chilled chain, all need to be improved, ambient yogurt will continue to appeal to Chinese consumers. The potential for the total yogurt sector is still huge and the trend would probably lie in the innovation of flavors and premium products.
Will the emerging cheese market be the next leader
Apart from the outstanding performance of yogurt market, cheese also drove the growth of dairy market. We have already carried out research in China’s Cheese market in 2013 and 2015 and compared with that time, Chinese consumers are becoming more and more aware of the health benefits of cheese. Cheese and other dairy products which are rich in protein and calcium offer a more nutritious, healthy choice over many other food types. This segment is thus receiving attention from dairy players.
The cheese market in China now relies heavily on import and the import volume boosts steadily throughout the years. In terms of top three cheese exporters to China in 2017, they are New Zealand (55,329 tonnes), Australia (20,012 tonnes), and the United States (12,841 tonnes).
Despite consistent sales growth for cheese led by great interest in the particular category, the per capita consumption is still lagging behind compared with other neighbouring Asian countries, let alone with western standards.
In all, the cheese market in China is expected to continue positive retail value growth over the following years. Cheese’s development in China is still in the early stage with low per capita consumption. And most cheese offered in China are processed cheese, such as Anchor(安佳) from the Netherlands, La Vache Qui Rit (乐芝牛) from France. With Chinese, especially Millennials’ lifestyles, moving towards westerners, the demand will keep increasing. The adaptation of the taste of cheese will be crucial and future improvement would also lie in the spread of relevant knowledge, information, digital marketing campaigns and health-focused innovations.
Various channels intensified battle between domestic and import products
Since the central government has approved the universal two-child policy, the demand for milk as well as other dairy products will still be strong in following years. China dairy major players have accommodated to diversified needs and implemented innovation constantly, including Mengniu Dairy, Inner Mongolia Yili Group Co Ltd, and Brightdairy for East China. However, the fierce competition has been intensified with the appearance of foreign brands. According to Mintel, Chinese consumers still prefer imported products over domestic ones, due to the lack of trust and price advantages.
Traditional supermarkets and hypermarkets
The battle between domestic or imported dairy products has been escalated due to the development of e-commerce. Online platforms have played a critical role and facilitated the efficiency of the distribution network. In addition to that, the trend of cross-border commerce or buying dairy products by Daigous(代购) is becoming more popular especially among younger generations in urban areas.
Against the slow-down in the growth of the overall FMCG, the import dairy market still maintained rapid growth. The official import figures of dairy products for the first quarter of 2018 has shown an increase by 15.3 percent year-over-year, with rises for Bulk and Packaged Milk, Whole Milk Powder (WMP), Whey, Skimmed Milk Powder (SMP) and Infant formula. Chinese dairy imports exceeded 750,000 tonnes between January and March 2018. Moreover, China’s growing appetite for high-value-added products resulted from increasing disposable income suggests that consumers are putting more emphasis on the quality.
Unequal regional consumption implies room for improvement
Regarding Chinese consumers’ consumption structure and occasion, generally different consumers have their own preferences. Common consumption occasions include between-meal snacks, at breakfast, as a dessert or beverage. According to a survey by Mintel, 40% of Chinese consumers said that they consume yogurt at least once every day and 17% consume lactobacillus beverage at least once every day while contrarily, those figures were only 15% and 11% in 2013.
The research also found that different age groups of consumers have their own preference. For example, young white-collar workers prefer one-time consumption and 1-2 bottles each time and are willing to choose a slightly more expensive product. Family members have a fixed habit of dairy consumption, a dozen or more each time, favoring fruit-flavored or calcium-rich products for children and paying more attention to promotions.
The acceptance of dairy products also varies from region to region. Northwest China is the main raw milk production area in China, so the per capita consumption is higher. In addition, the per capita consumption of Beijing, Tianjin, the Yangtze River Delta region and the Pearl River Delta Region is also higher due to the prosperous economy. But in Northeast China, Southern China, central China and southwest China, the consumption of dairy products per capita still has room for improvement. Also, it is evident in China that UHT milk is way more popular than pasteurized milk. The market performance of the latter is fairly limited to coastal cities because of its relatively short storage period and costly logistic fees.
Likewise, more and more urban residents are willing to purchase premium products and therefore generating a lucrative niche market for certain high-end products for instance, organic, low fat, low calorie, since health concern remains the key determinant in consumer purchasing behaviour. Whereas, in rural areas, a large proportion of people used to drink soy milk but now more are inclined to consume milk since the penetration of dairy advertising as well as sales channels.
Distribution is also facing great evolution. First-tier city consumers are more inclined to shop online and the penetration rate is over 90 percent while lower-tier city or rural area only got 20 percent as the penetration rate for dairy products. Such kind of unequal distribution implies that dairy manufacturers have to extend their sales channels both offline and online, which is a great challenge for retailers.
Future trends continue to flourish the market
In general, China’s dairy market has entered a slow-speed development stage and is shifting from scale growth to product upgrade. The country’s dairy consumption has been fluctuating in the past decades yet the market’s total value and volume are huge. Compared with western countries, China possesses a large amount of fresh milk and milk powder but a lower amount of butter and cheese.
There already exists a great number of domestic and foreign brands in the market and several local brands such as Shengmu(圣牧), Xinxiwang(新希望), Junlebao(君乐宝), Huishan(辉山) are rising quickly. These young brands took share from the largest players and therefore lowered the concentration of the top brands. It is true that low loyalty is a macro trend in FMCG as consumers are provided with even more options. As a result, dairy players need to identify and cater to the diversified yet changing needs of consumers and apply the corresponding marketing strategy.
Pan Gang, chairman of the Yili Group, once said that there are only two kinds of people in his eyes. One is a person who drinks milk, the other is a person who doesn’t drink milk. And his wish is to convert the second kind of people into the first kind – “milk drinking man” – people who enjoy milk nutrition and health. For the time being, it is still domestic dairy companies that are leading the market. With the booming economy, accelerated globalization and rising health concern, future product transformation will be mainly focused on the flavors, quality, and variety of the products. Premium product market will thrive under the selling points like organic, health, and nutrition. The ambient products stick to be the mainstream in the following years while chilled ones are also expected to expand their market share to better foster the growth of China’s dairy market.
Author: Jeffrey Craig
Daxue Consulting has a robust background in the dairy industry in China:
Our market research team has already carried out research for the cheese industry and various food and beverage industries in China. If you want to know more about these industries in China do not hesitate to contact us at firstname.lastname@example.org