Price reductions, inventory clearance, insufficient demand... What is happening to domestic dairy companies?

According to data from the National Bureau of Statistics, China's milk production has been on an upward trend since 2017, reaching 41.9665 million tons in 2023, a year-on-year increase of 6.74%. Corresponding to the high production capacity is the continuous decline in raw milk prices. The latest data from the Ministry of Agriculture and Rural Affairs show that as of May this year, the domestic raw milk purchase price has fallen for 27 consecutive months compared to the same period last year, marking the longest period since 2010. At the 2024 China Dairy Industry Development Strategy Seminar held on July 3, Li Shengli, the chief scientist of the National Dairy Cattle Industry Technology System, stated that due to the continuous decline in the purchase price of raw milk, the milk price and cost have experienced the first recorded inversion in the national dairy cattle system.

In addition to the pressure to clear inventory on the supply side, the demand side is also under pressure. Data from the National Bureau of Statistics show that the per capita consumption of dairy products in China has remained flat over the past decade. With the fading of the demographic dividend, this means that the growth momentum of the overall domestic market's demand for dairy products is hard to be considered sufficient. The 2024 Q1 China Shopper Report published by Bain & Company and Kantar shows that, across the entire market, both yogurt and cheese are categories that have seen a decline in sales for three consecutive years.

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Data source: Bain & Company × Kantar Consumer Index "2024 China Shopper Report, Series One," June 2024.

With high raw milk inventory and weak demand for dairy products, seeking structural growth is an inevitable path in such a competitive market environment. However, where exactly is the direction of diversification for China's dairy industry structure?

CBNData found that the low-temperature yogurt category maintains a high growth rate online, with a compound annual growth rate of online sales reaching as high as 78.4% from January to May in the past three years, and a batch of new players have emerged relying on this category. Against this backdrop, we will explore the reasons behind this from the aspects of channel evolution, brand landscape, and product diversification. Who are the core players? What kind of products have a better chance of helping brands to establish a foothold in this track and achieve structural growth?

Offline decline, online takeoff, what expansion opportunities do channel evolution bring?

For a long time, low-temperature dairy products have been constrained by objective conditions such as cold chain logistics, and are often consumed mainly offline, with large supermarkets and hypermarkets becoming the main sales channels for low-temperature dairy products. However, with the continuous increase in e-commerce penetration rate in recent years and the acceleration of cold chain logistics facilities, the objective limiting factors that originally affected the online sales of low-temperature dairy products are gradually disappearing.

Dairy companies such as Mengniu, Yili, and New Hope also mentioned in their 2023 annual reports that on the sales channel level, the retail sales of dairy products in large supermarkets and physical stores have shown a downward trend compared to the previous year, while the retail sales of dairy products in convenience stores and online community group buying and other proximity channels have shown an upward trend compared to the previous year, and online channels continue to develop rapidly.

The decline of traditional offline channels is hard to conceal, and the focus of emerging retail channels is on differentiated layout.Specifically, when it comes to traditional offline channels, the overall growth of dairy products is sluggish. Data from Mayangwin shows that the overall sales of yogurt in offline channels in the first quarter of 2024 decreased by 11.46% year-on-year, and the sales volume decreased by 12.69% year-on-year. In contrast, the sales and volume of ambient yogurt both experienced a year-on-year decline of over 20%, while low-temperature yogurt has already been at a lower level of deceleration among the segmented categories of overall dairy products.

Regarding the brand landscape of the low-temperature yogurt category, Mengniu and Yili still firmly hold the top market share in offline channels. Junlebao's Jianchun series products achieved a year-on-year sales growth of over 20% in the first quarter of 2024. Overall, there has been no change in the top 10 brands in offline channels in recent three years, and the fluctuation in brand ranking is also relatively small.

Apart from traditional offline channels, the rise of new retail and other emerging business formats also affects the competitive situation and layout strategies of brands. Dingdong Maicai stated to CBNData that the sales volume of low-temperature yogurt on the Dingdong Maicai platform in the second quarter of 2024 increased by nearly 20% compared to the same period last year. Affected by high temperatures, the platform expects that the sales volume of low-temperature yogurt in the second half of this year will increase by about 30% compared to last year.

Comparing the brand composition and top 10 best-selling products of low-temperature yogurt in Hema (self-operated) and Dingdong Maicai in the Shanghai area, it can be seen that these two major channels basically cover the mainstream brands of low-temperature yogurt in terms of brand selection range. However, there are obvious differences in specific product pricing strategies.

Hema's own brand products basically cover all major items of the current low-temperature yogurt category (curdled yogurt, sugar-free yogurt, Greek yogurt, drinkable yogurt, etc.), focusing on becoming the most cost-effective choice in major items, while other settled-in brands complement the mid-to-high price bands with differentiated positioning spaces. In comparison, Dingdong Maicai is more cautious in the layout of its own products, with only a few cost-effective customized items as the main focus, and more characteristic items are created in the form of brand co-branding. In terms of brand settlement, it tends to be more mass-oriented, covering products from popular brands such as Mengniu, Yili, and New Hope, with a broader price range.

It is not difficult to find that as various channel players start to operate their own businesses, the opportunities for brands in these retail channels lie more in the creation of differentiated products. In other words, while fully embracing the emerging diverse channels, how to balance the rising costs brought by rapid product iteration and refined operation is a key issue that brands need to address when entering these channels.

Online low-temperature yogurt takes off against the trend, and the competition among three types of players begins to emerge.

Compared with the downturn in offline channels, online channels show a different scene. Data from Magic Mirror Insight shows that the compound annual growth rate of the overall dairy product sales on Taobao's e-commerce platform in the past three years from January to May is 6.29%, while the compound annual growth rate of low-temperature yogurt is 78.4%, which is the highest growth rate among all segmented categories. The compound annual growth rate of the low-temperature dairy product category, which includes low-temperature yogurt, low-temperature milk, and low-temperature modified dairy products (39.8%), is also significantly higher than that of the ambient track (3.32%).

In May 2024, the sales proportion of low-temperature yogurt reached 8.4%, an increase of more than 8 percentage points compared to January 2022, and has become an indispensable segmented track in the entire dairy industry.

It's not just Taobao's e-commerce platform; the sales data from Douyin's e-commerce also show the same accelerating growth trend for low-temperature yogurt.It is worth noting that although the overall sales of the low-temperature yogurt category have maintained rapid growth, a further breakdown reveals that the current increase in online sales of the low-temperature yogurt market is mainly driven by volume rather than price factors. The industry's average product price has dropped from around 80 yuan in 2022 to between 20-40 yuan in 2024. The low-temperature yogurt, which was jokingly referred to as an "assassin" in the previous two years, seems to have stepped down from the high-priced "pedestal" just like ice cream.

The increase in sales volume on one hand confirms that consumer demand for low-temperature yogurt has not decreased, and on the other hand, it indicates that cost-effectiveness remains important for consumer decisions regarding low-temperature yogurt. Under these two premises, the competitive landscape among brand players has changed. Looking at the changes in brand concentration on the Taobao platform, the concentration of the top 5 low-temperature yogurt brands has remained relatively stable at around 60% after a rapid contraction in the first half of 2022, and the window for new brands to break through has narrowed.

For the players in this market, what kind of online competitive landscape do they face?

The current mainstream players online are mainly domestic brands. From January to May 2024, among the top 20 brands on Taobao e-commerce, only Yoplait is a foreign brand, while the others are all domestic brands. These include national dairy companies represented by Mengniu and Yili, regional dairy companies represented by Tianrun, Herun, Langeer, and Xiyu Spring, and new consumer brands represented by Jian'ai, Wudao, and Lechun. For the latter two categories of brands, low-temperature yogurt is often the key track for them to achieve differentiation and breakthrough in online channels.

It is worth noting that in the past two years, traditional dairy companies have continued to strengthen their online channels, and the mass market for online low-temperature yogurt has been quickly locked in. From January to May 2024, the sales growth rate of Mengniu and Junlebao in the low-temperature yogurt category was as high as 900%+ and 400%+ respectively, and their market share increased by about 8 and 5 percentage points respectively. During the same period, the top 5 brands in terms of sales growth rate were also these traditional dairy companies targeting the mass market.

However, this does not mean that latecomers cannot take the lead. Looking at the overall online sales performance of the brands, new generation brands such as Jian'ai, Wudao, and Lechun have still maintained their market position on Taobao and Douyin e-commerce. In addition, some brands choose to compete in a staggered manner in terms of channels, such as Langeer and Xuebao, whose performance on the Douyin platform is particularly prominent. Overall, Jian'ai, Wudao, Kasi, Tianrun, and Yili are the brands that have consistently ranked in the top 10 of low-temperature yogurt on Taobao and Douyin e-commerce for three consecutive years.

Different price points have different characteristics, and brands have started a positioning battle around products.

In a constantly expanding track, what are the commonalities among these brands that can quickly seize and hold market share?

Aggressive low-price strategy vs. long-term diversified layout

Looking vertically, from January to May 2024, Mengniu, Chunxiang, Xiyu Spring, and Zhenling have significantly risen in online rankings, and their commonality lies in the ultimate low-price strategy. By summarizing the unit price per hundred grams of the best-selling single products of the top brands on Taobao from January to May 2024, these brands are all concentrated between 1~3.9 yuan/100g, and are absolute cost-effectiveness kings.Overall, traditional dairy companies and regional dairy enterprises represented by brands such as Mengniu (Mengniu main brand/Guanyi Milk/Anmule/Daguoli Yogurt/Chew Yogurt), Junlebao (Jianchun, Chunxiang), Yili (Yili main brand/Changqing/Old Yogurt), New Hope, and Xiyu Spring mainly focus their best-selling products in the price range of 1~3.9 yuan/100 grams; the intermediate price range of 4~7.9 yuan/100 grams presents a mixed competition among various players, including foreign brands like Meiji and Yoplait, as well as various domestic brands, such as Mengniu's Chew Ban Time and Daily Fresh Cheese, New Hope's Da Vinci, Classy, Jianai, Beihai Ranch, and Langgege. The price range above 8 yuan is mainly dominated by Greek-style yogurt from Wudao, Lechun, and Yoplait, and children's yogurt items from Jianai and Classy.

Therefore, even though online sales of Mengniu and Junlebao have soared, it has not significantly affected the market share of Jianai, Wudao, and Lechun, which are positioned in the mid-to-high price range, because there is a significant difference in the price range they target. It is worth mentioning that Classy and Jianai are the only two brands that have a presence in all price ranges, which is closely related to their diversified product matrix. From bulk yogurt and family-sized yogurt at 1-3.9 yuan/100 grams, to sugar-free yogurt and probiotic yogurt at 4~7.9 yuan/100 grams, and then to baby yogurt for children at 8-11.9 yuan/100 grams, both brands have relevant best-selling items.

To a certain extent, this also indicates that in the current competitive landscape of the low-temperature yogurt market, the way for brands to attack is to significantly surpass competitors in a single dimension (such as Jianai's minimalist formula in the past, Xiyu Spring's current ultra-low price), while the defense lies in the diversified product portfolio and consumer mind positioning formed over time.

What are the differentiated opportunities around three major types of low-temperature yogurt?

Since diversified products are an inevitable path for brand development, what kind of products have a better chance of winning over increasingly rational consumers?

For low-temperature yogurt, the products currently on the market can be mainly divided into three types according to different processes: stirred yogurt, set yogurt, and filtered yogurt. In addition, further differentiated product design can be achieved based on factors such as whether sugar is added, whether special fermentation processes are used, whether patented strains are added, and whether organic milk sources are used.

From the perspective of product competition, to capture consumers within the same price range, it is necessary to significantly surpass competitors in a certain differentiated dimension. The current differentiated competition mainly focuses on protein content, probiotic effects, and more non-standard taste and texture aspects.

CBNData has sorted out the sales performance of low-temperature yogurt product keywords on Taobao and Douyin e-commerce from January to May 2024. Overall, health is still the main trend. In detail, dimensions such as taste, texture, packaging specifications, functional effects, and consumption scenarios all show different specific trends.

In terms of product taste, nuts are one of the fastest-growing taste keywords since 2024, while fruit flavors show a downward trend in overall e-commerce platforms. From the perspective of product functionality, probiotics, high protein, and high calcium are all positive growth keywords on Taobao and Douyin e-commerce, with significant growth in probiotics and high calcium on the Taobao platform. In terms of product packaging specifications, bucket packaging, bag packaging, and combination packaging perform well on the Douyin e-commerce platform, while sharing packaging and bucket packaging also show the same trend on the Taobao platform. From the perspective of consumption scenarios, breakfast remains the core scenario, while sub-scenarios such as fitness, side dishes, and meal replacement also have high growth rates.

These trend keywords do not exist independently of each other, but are often carried by a specific product item.For instance, products such as grain and yogurt mixing bowls have combined the needs of meal replacement and fitness scenarios. In recent years, major brands have launched related new products. In response to the high-protein demands of this consumer group, brands like Lepur, Yoplait, and Wudao have introduced Greek yogurt grain bowls with a price per 100 grams higher than 10 yuan, becoming premium products within the premium category.

The health of the gut microbiome has also gained more consumer attention in recent years. Brands like Classy-kiss, Jian'ai, and Meiji have introduced various fermented milk products with added probiotics. Since these products are often linked with digestive benefits, post-meal scenarios provide a good opportunity for integration. This also determines that the texture of these products should not be too heavy.

For product development personnel, constrained by food processing technology and cost control objectives, taste, health, and affordability form an impossible triangle in the entire food and beverage industry. Product development has become a process of balancing and making trade-offs based on the preferences and needs of the target audience.

Taking protein content as an example, generally speaking, the higher the protein content per 100 grams, the higher the pricing. Filtration processes are one way to achieve high protein content, but this means an investment of two to three times the amount of milk raw materials. Therefore, under the premise of maintaining the price, some products may choose to add whey protein powder, which is less expensive. However, this also means that compared to naturally filtered yogurt, the taste of yogurt with added protein powder may be compromised. At this point, food industry experts may use other ingredients such as gelatin, pectin, and light cream to balance the taste. But when it comes back to consumer needs, would a consumer who reads the product ingredient list and cares about the protein content of yogurt accept such a long list of ingredients? The answers to these questions will ultimately be reflected in the product pricing and market performance.

Pulitzer Prize winner and investigative journalist Michael Moss, in his book "Salt Sugar Fat: How the Food Giants Hooked Us," emphasizes the deep dependence of processed food companies on the three major ingredients of salt, sugar, and fat, and how they achieve the "sleight of hand" in the world of processed foods through the balance of these three ingredients. However, the business model that captures the market by satisfying the "bliss point" of taste buds is facing challenges in the current era, as more and more consumers become aware of the dangers of excessive intake of sodium, sugar, and fat. This is also why Jian'ai, with its extremely short ingredient list of "raw milk, lactic acid bacteria, sugar, and nothing else," could quickly make a name for itself in the low-temperature yogurt category and still maintain its position as a leading brand in the niche category.

Against the backdrop of the overall expansion of the track scale, price band expansion, and diversification of products, the low-temperature yogurt track has also welcomed more powerful "top players" such as Mengniu, Yili, and Xinruye. Returning to the question at the beginning, can low-temperature yogurt bring structural growth opportunities for dairy companies that are stuck in the industry bottleneck?

The answer is affirmative. Under the trend of health needs, low-temperature yogurt with active probiotics naturally has a category advantage that regular yogurt does not have. Compared to milk, it also has functional attributes that are friendly to lactose-intolerant people, more digestible, and low GI, which can meet the needs of a wider range of people and special scenarios, laying the functional foundation for the development of this category.

Looking at the mature yogurt markets overseas, China's low-temperature yogurt market is still in a stage that needs to be developed, and consumers' functional cognition and consumption habits of low-temperature yogurt still need time to establish. Phenomena such as Greek yogurt and probiotic products, which lead brands with categories, have to some extent verified the market's recognition of the functional attributes of fermented dairy products. Sub-category products with certain thresholds but greater functional value, such as Icelandic yogurt, kefir yogurt, and various yogurts with patented strains, are also worth continuous exploration by dairy companies in the future.