The world is facing a demographic change currently. This is affecting the western hemisphere, this is affecting China. China is even more special, due to the former one-child, now two-child policy, implemented by the government and the expected amount of over 329 million elderlies till 2050. Barely any industry is as much affected by this trend than the dairy industry. The competition in the infant market is fierce and the chances for healthy nutrition products are elevating.
The Agenda for this webinar is the following one. We will have a look at the dairy market in China in general. Then we get insights about China’s infant formula market. We will find out about the milk industry situation after that. Some information about the booming cheese market will be revealed. And at last see the development of the alfalfa market in China.
Dairy in general
Looking at the goals of the Dairy Products Industry Policy from China’s government, they all have been achieved by China’s dairy industry. However, that doesn’t mean China’s dairy industry is facing a high time at the moment. In fact, there is a sluggish consumption in the domestic market, still high costs for the raw materials, an increasing reliance on dairy imports, an unbalanced product mix in the market, and overall low reputation of the quality.
The main goals of the Dairy Products Industry Policy have been the development of an effective and environmentally sustainable growth of the industry with increased consumption and higher technology use. So, let’s have a look at the actual figures: The production of dairy products from 2009 to 2015 went up by 44%, while the industry profit in the same period increased by 210%. In the first three quarters of 2016, the output increased again by 7.5% year on year. The number of dairy manufacturers went down in the last years, resulting in a concentrating of sales by the top 20 producers in 54% of the national sales.
Output of Dairy Products, 2009-2015
Source: 2016 China Dairy Statistical Summary
Nevertheless, China’s dairy industry still needs to deal with several problems, which could not be solved yet: Tight agricultural resources, increasing costs of environmental protection, and lack of knowhow is keeping costs for raw milk high. Imports of dairy products keep rising, due to domestic high costs and lack of quality and reputation. Finally, China is still depending on liquid milk instead of milk protein based nutritional derivatives, according to CCM’s research.
If we are looking back at the year 2016, related to the sluggish market trend of the dairy industry in China, due to increasing imports of products with low prices, manufacturers were seeking new opportunities to prevent themselves from losses. One way to avoid getting caught in losses was the move into higher quality markets. Several Chinese dairy producers, including Shaanxi Guanshan, Yili, and Biostime, entered the goat milk and organic products market in China. In general, the market of goat milk infant formula is expected to double by the year 2020 with a total sale of 10% in the whole infant formula market. Other companies are choosing the way of diversification, to escape low profits in the dairy market. It is not far-fetched for companies dealing with infant formula to also enter the healthcare market. An example for this new strategy is Biostime, who is going to sell health products and nutritionals together with baby products from March ongoing.
One event in China will affect the infant formula industry decisively. The switching from the famous one-child policy to the now two-child policy. Looking at 2016, the year where the new policy was implemented, China was witnessing a growth of births by 11.5%. Of them, the share of second children have been 45%. However, the sales of infant formula even declined by 2%.
The main reasons can be found in the inventory clearance of certain brands and a fierce market situation, which is facing surging imports. The clearance of some brands occurred before the implementation of a new infant formula registration policy announced on June 8, 2016, which elevated the competition.
Rising imports on the other hand, also including online sales from overseas, are threatening the domestic brands. In the year 2016, China imported more than 221,000 tonnes infant formula, which represents a year on year increase of 25.8%. The most popular exporting countries, making up almost 75% of total imports in China, are the Netherlands, Ireland, France, Germany, New Zealand, and Australia. The graphics show the data of the 10 biggest exporting nations of formula milk powder in share and export value. This shows, how monopolized China’s import situation is, with the biggest focus on the Netherlands in overall imports. The total import value exceeded 3 billion USD, with over 1 billion coming from the Netherlands alone.
However, China is also exporting some formula milk powder, even most of the exports are going to the Chinese special administration zones Hong Kong and Macao. Surprisingly, Germany is on the second rank for formula milk powder from China. The total export value in 2016 was almost 29 million USD, with about 75% of it going to Hong Kong.
The China National Committee for the Wellbeing of the Youth have published the Blue Book of the China Infant Industry in December 2016. The Blue Book mainly deals with product quality as well as changing sales channels in China. In the growing wealth of China’s middle class, more attention is paid to product quality in connection to physical and psychological health. Hence, increasing product quality is crucial for suppliers in China, to meet the high demand of Chinese parents. When we are looking at the sales channels, we can divide them into three main categories: mother & baby stores, e-commerce, and supermarkets. All other channels can be neglected.
Sales of Infant Formula by Channel (2002-16)
Source: 2016 Blue Book of China Infant industry
CCM’s research reveals, that the supermarket is the first established channel for infant formula sales with a historical big share. It happened in 2013, when the share of mother and baby stores surpassed it. During the year 2016 till June, it shows mother and baby stores as biggest channel with a share of 45%. E-commerce was granting a share of 31%, while supermarkets dropped down to 11%.
According to CCM, the impressing leadership of mother & baby stores can be explained by the professionality of the sales team in the shops, giving the possibility to consult the parents and share their experience and knowledge, as well as the convenient access to all relevant products in one shop. This trend is expected to rise, looking at a growing middle-income group of Chinese parents, having more money but less time to buy. The increasing share of these stores also leads to a nationwide boom of more mother & baby stores, surpassing the yearly increase of 10%.
The prices of infant products in mother & baby stores have even undergone those of supermarkets. The number of products with price falls increased 5% points compared to 2015. This overall trend leads in fact to a decreasing market value of this industry in general.
E-commerce businesses can thank their share increase to their convenience of ordering and deliver to the house, together with the easiest price comparison online and also the cheapest prices in general. CCM’s analysts state, that business to customer sales make up two-third of the whole e-commerce business of infant products, opening chances especially for small brands and companies with an online distribution channel.
The product mix of e-commerce businesses contains mostly large packs and multipacks. This strategy gains this sales channel the lowest prices of all channels. Involved companies are facing a price war at the moment, also due to the effort of cleaning their inventory. The continuing loss of supermarkets in shares is explained in the lack of price and service competitiveness, according to CCM. If supermarkets want to keep or even increase the share again, these are the two most important adjusting screws to move.
E-commerce is the fasting growing channel for infant formula in China. It is remarkable, that the online sales of infant formula is dominated by mostly foreign brands, namely 7 out of the top 10 are foreign ones. The only Chinese brands in the top 10 are Beingmate, Yili, and Junlebao. It may be notably also to mention, that the Chinese brand are diversifying their promotion. Besides offering discounts up to 66%, new strategies involve bonus points for spending on gifts and buy one get one free offers. More promotion strategies will be crucial for producers, as 55% of e-commerce users prefer brands offering discounting and 24% stay loyal to brands with gifts or bonus points.
The China Food and Drug Administration has revealed stricter regulations for base powder and misleading marketing strategies. These new strategies are being implemented, to counteract to scandals regarding Chinese infant product manufacturers, happened in the past.
The purchasing company of base powder has to check and ensure the quality and safety of the base powder before using it in the production. Furthermore, the local food and drug administrations have to do controls in the producing plants, whenever they apply for a new product license or a license renewal.
The other regulation regards to misleading marketing activities. It contains especially targeting the labelling of infant products and the claims that are involved with the labels. Both, Manufacturers or rather retailers as well as the local administrations are ordered to check any products and make sure, that the labelling is whether false nor infringing. The regulations for labelling are supposed to make sure, that product name, declaration of ingredients, and the function description are true and not exaggerated or misleading.
According to CCM, the growing pressure on manufacturers regarding label management will lead customers to preferring big and established companies with a trustful brand and service. Small and middle-sized enterprises are likely not to stand their ground and be wiped out from the market.
According to the 2016 National Consumer Satisfaction Research on Liquid Milk, Chinese customers are changing their demand for milk products. The study reveals, that the characteristics like consumer satisfaction, brand image, and perceptual quality did all decrease in 2016. This trend might be a signal to manufacturers to be aware of changing demands. Consumers are attaching more value to quality and reputation of the milk. The research also states, that consumers respond little to Sales promotion in general and be negatively affected by price hikes, which lowers their satisfaction levels again.
2016 National Consumer Research on Liquid milk
Source: CCM, China Association for Quality
One of the result of the report is the high popularity of fresh milk and UHT milk among the Chinese consumers. The benefit of UHT milk lays in the insurance, that the high temperature sterilization provides a long shelf life and kills dangerous bacteria. This guarantees a well fit into the modern life style of a growing number of Chinese customers. Therefor, 31.2% of those questioned prefer the UHT milk, according to the report. The second highest preference belongs to fresh milk. The main benefit hereby results of the higher nutritional value in fresh milk. Also notable is the rising taste of formulated milk such as flavored milk, namely chocolate milk and vanilla milk.
This trend can also be seen in the imports of milk products to China. According to Tranalysis’ research, China imported milk products without any addition of almost 640 million USD value. The three biggest exporting countries are hereby New Zealand, Germany and France. Other countries only play a lesser role in the exports to China. It is notable, that Germany exported almost 100 million kg more than New Zealand, but facing a lesser value. This is due to the very low unit price of Germany’s exports.
The imports of flavored and sweetened milk and cream to China, on the other hand, show a much higher value in 2016, than unflavored milk. The outstanding leader in exports is hereby again New Zealand, China’s biggest partner in milk products. It is notable, that the total import volume of flavored milk and cream is still 10 million kg lower than the unflavored one, but the price is several grades higher.
Furthermore, the report states the high preference of liquid milk over milk power. This is explained with the rich nutritional properties in liquid milk. The main nutritional is calcium.
Another result deals with the distribution preference. According to the survey, almost 90% of the participants like to buy their milk in the good old supermarket. The next choices are convenience stores and also delivery by the manufacturers directly. Although the market of online purchases is growing in general, for milk this is only a weak distribution share. Less than 2% of the milk is purchased via E-commerce, according to the report. The supermarket still represents the most convenient place to get the daily doses of calcium for the Chinese consumers.
Suppliers of milk should have these changes in mind, when promoting and selling their milk brands in the Chinese market. It is true the consumption of liquid milk has a slower growth in general the last years, but the changing preferences are for sure an opportunity for milk suppliers to approach the Chinese changing needs and ensure the share of their milk brands in the Chinese market.
2016 was very crucial for the recovery of China’s domestic milk business. After a long struggle of China’s farmers from end of 2013 to the middle of 2016. falls in the price of imported milk powder occurred from October 2013 and in 2014 which meant stronger competition for local milk. In addition, domestic demand faltered, leading to continued declines in the milk price, so culling and milk dumping proliferated and many farming companies suffered losses or went bankrupt. A reported 55% of dairy farms have made a loss in 2016.
Purchase price of raw milk, Jan2014-Feb2017
Source: Ministry of Agriculture
For February 2017, the milk price remained stable, compared to January. But CCM expects the price to rise soon, due to lower milk output in general. Actually, the price of raw milk in China was 3.55RMB/kg in February. That is a 0.3% decline year on year. Since H2 2016, the milk price has been recovering: up by 4.7% from RMB3.39/kg in August 2016 to RMB3.55/kg in February. This can be mainly attributed to the decreased international milk production and the subsequently increased commodity prices. In addition, the decline in domestic milk output was also a factor for price rises. According to the National Bureau of Statistics, the milk output was 36.0 million tonnes in 2016, down by 4.1% YoY. Some areas have been hit worse than others.
A Dairy analyst from CCM predicted a period of growth for domestic milk prices in 2017, with the price staying at around RMB3.8/kg. This was confirmed by another dairy expert Wang Dingmian, who says: “It is likely that the figure will rise to RMB3.7/kg and even to RMB3.9-4.0/kg for large farms.”
China exported about 22.8 million kg of milk in 2016, of which 22.5 million kg went to Hong Kong alone. The value of this exports surpassed 20 million USD. Looking at the exports of enriched milk and cream, the total quantity not even reached 6 million kg, while the value is stated by 21.2 million USD. The share of the importing countries is similar to the basic milk, with more countries and Myanmar as the second rank of importing countries. The import share of Hong Kong here is about 77%.
Booming cheese market
China’s cheese manufacturers are advancing fast to get their share in the high-speed spreading cheese market in China. However, the main sales channels are still in the food service sector, leaving a high potential for manufacturers to penetrate into China’s retail market.
According to CCM’s research, the cheese industry in China witnessed increasing demand for cheese during 2015-2016. The main sales channels hereby are food services like hotels, caterings, and the baking business. To be more precise, the entrance rate of cheese in China reached 79%. Even the retail sector only accounts for 24% of sales in the whole cheese market in China, the future looks very encouraging. According to the Cheese China 2016 Report by Mintel, retail sales are expected to rise at a CAGR of almost 13% until the year 2021. Hence, the amount of distributed cheese would end up at 38,830 tonnes. Moreover, looking at countries around China, like Japan and Vietnam, the potential for cheese sales in retail stores is shifting more obvious. Those two Asian countries already have a retail portion of cheese at about 41% and 73% respectively.
After a strong infiltration of cheese into China’s 1st and 2nd tier cities in previous years, the most attractive and fast growing opportunities for manufacturers and traders can be found nowadays in the 3rd and 4th tier cities in China. Especially bakeries and western style restaurants are witnessing a surging demand for cheese from their customers.
China’s dairy manufacturers have discovered the expanding interest and started to getting into the cheese business as well. However, according to CCM, about 90% of cheese in China is still imported, which is an amount of about 90,000 tonnes yearly.
For Chinese manufacturers, the jump into the cheese business could be an effective way out of the sluggish market trend of many dairy products in China. While the purchase price of milk is constantly going down in the last years, the cheese business is a promising upmarket diversification. Currently, only a few Chinese manufacturers have got a share in the cheese business by delivering to brands like McDonald's, Milkana, and Savencia. The supplying Chinese companies, according to CCM, are Bright Dairy & Food and Beijing Sanyuan Food.
Other companies in China are putting a lot of effort into the development of cheese products to get their share in this rising market. One example is Yili, which is developing a cheese product for the Chinese taste currently, with an unknown launch date yet. China Mengniu Dairy is working on launching its own cheese products as well, which demonstrates a diversification from its current product portfolio, consisting only of cheese sticks for infants in this market. Also, Ground Food wants to open a cheese processing factory in spring of 2018, which will be capable of producing about 40,000 tonnes of cheese products yearly.
The main exporting country for China’s cheese demand remains New Zealand with a quantity of cheese export to China by more than 51 million kg and a value of over USD216 million. The second rank is Australia with almost 20 million kg and on the third rank can be found the USA with almost 9 million kg. The total import volume of Cheese to China has been 634.1 million kg in 2016 with a value of 639.7 million USD. The top exporting countries of cheese and curd in China 2016 from China Customs show, that China’ s cheese import is highly concentrated in the Oceania region, while European countries, which are traditionally famous for cheese products, are lacking behind.
Nevertheless, China is also exporting cheese to several countries, even if the main destination is Hong Kong. Surprisingly, Italy is the second ranked destination of cheese from China, according to the data from China Customs. The total export value in 2016 was 862,000 USD.
It is not a secret, that the implementation of China’s National Alfalfa Industry Development Plan from 2016-2020 will have a significant impact on the dairy industry in China. About 60-70% of the production cost of milk in China is caused by cost of feed. Costly imported feed, like alfalfa, therefor is responsible for high farming costs. China’s demand for alfalfa is rising, leading to a year on year growth of 19.7% in January to November 2016.
Consumption of domestic and imported alfalfa by largescale farming companies, 2015
In 2015, China’s domestic supply shortage of alfalfa was 1.3 million tonnes. The gap of domestic supply and demand is even rising. It is expected, that in 2020 the demand of alfalfa will surpass 6.3 million tonnes, facing a supply of barely 1.2 million tonnes.
The main problems of supply are an unstable product quality and fragmented production.
This is where the plan should cause improvement. The focus is set on the traditional planting areas of northern and western China, with goals of promoting feed crop rotation, improve processing and commercialisation, and increase the construction of production bases.
The key goals of the plan are: a new planting area of 0.2 million ha, a unit output of 9t/ha, a total output of 1.8 million tonnes, and self-sufficiency of about 80%. These measurements are supposed to lower the independence of alfalfa imports and therefor reduce the production costs of feed and as a result of milk.
For more information on China’s dairy market, have a look at our market intelligence form CCM and trade analysis firm Tranalysis.