The dairy market in the past two years has not been hot.
With the development and cycle of the dairy industry, China's dairy industry has shown a phased slowdown and surplus trend in the past two years. Looking at the sales of each sub-category, categories that have grown in previous years, including yogurt, infant formula, and even cheese and ice cream, have also suffered declines.
At the same time, under the influence of factors such as consumption grading and demographic changes, the industry has entered a new round of development, with equal emphasis on volume growth and structure. Consumers' demand for high-end and health is becoming increasingly significant, promoting the innovation and upgrading of industry segments. On the other hand, the traffic of traditional supermarket channels has bottomed out, and dairy sales channels are becoming more and more diversified.
Looking to the future, industry challenges and opportunities coexist, how should enterprises break through the situation in the new era and find new growth value points?
On June 25, 2024, Yan Wei, Partner and Head of the Food & Beverage Business Line of Roland Berger Greater China, delivered a speech entitled "Opportunities for Dairy Enterprises to Break the Situation under the Market Slowdown" at the FBIF2024 Dairy Innovation Sub-forum. How does Roland Berger see the current dairy market? What are the fundamentals of China's dairy industry? What are the hidden "game-breaking opportunities"?
Yan Wei, Partner and Head of Food & Beverage Business Line, Greater China, Roland Berger
[The following is based on the speech, and the content is abridged]
Hello everyone, I'm Yan Wei from Roland Berger. Over the past decade, I have been deeply involved in the food and beverage industry, covering multiple market segments such as dairy, soft drinks, and convenience foods. In the in-depth communication with customers, I noticed that compared with long-term strategic layout, customers are paying more and more attention to the refinement of operations, especially agile R&D, new mechanisms, channel strategies, procurement optimization and digital transformation. In recent years, we have observed an interesting phenomenon that dairy enterprises in China and even around the world are gradually shifting from the more extensive development model in the past to the stage of paying more attention to basic and internal skills.
As a world-renowned consulting firm with many years of experience in China, Roland Berger has a deep understanding of the local and international markets, as well as extensive experience in all aspects of the dairy industry chain.
In today's sharing, I will focus on the following 5 aspects:
Image source: Roland Berger sharing the material
(1) Development stage: I will share the development process of China's dairy industry and the next stage to enter;
(2) Driving factors: From the perspective of the industry and consumers, analyze the six core factors affecting China's dairy industry;
(3) Category trends: Analyze the fundamentals of China's dairy industry from two dimensions, one is the comparison between per capita milk protein consumption and developed countries, and the other is the evolution of category structure; Although in many cases the total market growth is slow, significant structural changes also mean potential opportunities;
(4) Channel trends: China is one of the countries with the most complex channel ecology in the world. Compared with foreign markets, whether it is developing countries or developed countries, we have channels that they have, and we also have channels that they don't have, which involves multiple levels such as price, product, and marketing. Many companies are faced with channel selection: if they do not do new channels, the volume will drop, but if they do new channels, it will have an impact on the entire business and price, and we will discuss the challenges in the future;
(5) Industry implications: Combined with the short- and long-term trends of the industry, we will explore how national and regional dairy enterprises, as well as suppliers in the upstream and midstream of the value chain, can participate in industry changes to ensure that they remain competitive in the new round of competition.
First, the development stage of China's dairy industry
First, let's briefly review the development stage of China's dairy industry.
Although China's dairy industry has gone through four stages of development, its high-speed development stage is mainly concentrated in the late 90s or after 00. There are several core drivers here, such as the convenience of ambient milk, which has led to a significant expansion of distribution channels. In addition, from the consumer side, from the end of the 90s to 2000, the per capita GDP of Chinese reached more than 3,000 US dollars, and a wider range of consumers began to really afford dairy products, and the importance of milk protein increased significantly.
Between 2000 and 2010, the dairy industry experienced a quality crisis, including melamine. However, with the introduction of national policies, the importance of food safety, the continuous development of the economy and the iteration of technology, the industry has developed rapidly. In addition to domestic milk sources, there are also large sources of imported milk.
In the two years after the epidemic, the industry has indeed shown a downward trend due to the macro environment and consumption expectations. But we believe this is a short-term phenomenon, and I will give you some guidance through the data later.
Overall, although there are short-term shocks, China's dairy industry has entered the real second half, and growth is no longer so easy, which needs to rely on the real underlying basic skills to compete. This is a period of relatively steady, slow growth, which remains attractive due to the large size of the Chinese market. In the latest stage, we can see that both supply and demand factors are driven: on the supply side, many dairy companies have made a lot of efforts in breeding, feeding technology and even feed raw materials to further improve milk quantity and milk quality; On the demand side, we can see opportunities for an increase in per capita consumption and category structure.
2. Drivers
On the whole, six influencing factors, such as consumption stratification, health awareness, and demographic changes, are reshaping the pattern of China's dairy industry and bringing development opportunities.
1. Consumption grading and stratification
China has a vast market, and consumers belong to different market segments, with different consumption concepts and price sensitivities. Therefore, when the economy was weak in the past two years, platforms such as discount stores and Pinduoduo that won by price developed rapidly. At the same time, consumers' requirements are also rising, and they are pursuing a "quality-price ratio". At present, the fast-growing member supermarkets such as Sam's and Costco also cater to the needs of the middle class and exquisite mothers. Overall, these consumers are looking for the same high-quality products and competitive prices, and the crowd is dividing.
2. Health awareness is improved
After the epidemic, the trend of increasing health awareness is very obvious. Notably, dairies are catering to this trend with a variety of functional value propositions, such as aiding digestion, improving vision, enhancing memory, and improving sleep, which presents a significant opportunity for dairies.
3. Demographic changes
First of all, the population trend is irreversible, and it is difficult for China's population to have a truly significant increase in the future. Second, China's birth rate has fallen off a cliff since 2018, from 18 million new births in 2016 to only 9.3 million in 2022, which has a great impact on the infant formula industry. So companies need to think about what macro demographic trends mean for the industry as a whole. At the same time, the aging of the population is also irreversibly occurring, and companies should take a consumer life cycle perspective to meet the dairy needs of adults and the elderly. We see that in mature countries such as Japan, this is a big market and can be very refined.
4. Technology update and iteration
Technology iteration promotes continuous progress in packaging, product composition, and upstream breeding, feeding, processing, and production, thereby improving the performance of products in terms of transportation, value, and nutrition.
5. Multiple channels emerge
China's channel ecosystem is complex. For many traders, the problem they have to face every day is that there are always new channels emerging every year or two, to do it or not to do it, and what to do. At this time, it is time to think about whether the enterprise itself has sufficient channel research capabilities, product iteration capabilities, and unified channel management and control capabilities.
6. Perfect infrastructure
Finally, infrastructure construction, at present, domestic dairy products are still dominated by room temperature milk, but with the improvement of consumers' health awareness, the demand for chilled, chilled, and short-term products is increasing. The continuous optimization of the cold chain is also an opportunity point and trend.
In summary, we see that these six trends will continue to occur and affect the entire industry, whether it is increment, structure, or play.
3. Category trends
We need to understand that the amount of protein consumed, especially animal protein, is strongly correlated with economic development. Animal protein includes meat protein and dairy products, and dairy products are highly related to the economy, lifestyle and philosophy, reflecting people's demand for protein nutrition.
At present, the per capita dairy consumption of Chinese is about 41 kg / year, while the annual consumption of dairy products in Europe and United States is more than 250 kg, one of the main reasons is that they have many formal consumption scenarios, such as breakfast, cheese, etc. There are great differences between China and European and United States countries in terms of food culture and economic level.
Yan Wei, Partner and Head of Food & Beverage Business Line, Greater China, Roland Berger
Case study: Category structure of Japan's dairy industry
We can refer to East Asian countries with relatively similar cultures and diets. In the past two years, China's per capita consumption of dairy products is about 41 kilograms, which is equivalent to Japan in the 70s. Today, Japan consumes 93 kilograms and Korea consumes 87 kilograms. Although there are industry pains in the short term, if everyone is confident in the fundamentals, they can look forward to the future more. Through cross-industry and cross-border research, we believe that China's dairy industry will develop by leaps and bounds. But it will take time and there will be a path to get there.
In terms of category structure, comparing Japan and China, it can be seen that the proportion of yogurt and cheese in China is much different from that of Japan, and there are a lot of opportunities for structural optimization and upgrading. This does not mean that white milk will be weak, and the high-end or fresh milk of white milk is very obvious.
Partial Japan dairy products
We can look at how Japan's dairy innovation is doing. Product innovation and cultivating consumer habits are both important. There are several important elements to cultivating consumption habits, first of all, it is necessary to clarify which segments of the population are targeted and what kind of value proposition is used to meet their needs; secondly, how to increase scenario-based consumption, whether to use existing scenarios or create new scenarios; In addition, it is necessary to increase the frequency of consumption to make the cake bigger.
Yogurt in Japan is already very refined and has many functional benefits, including the most common intestinal health, bone health (especially for middle-aged and elderly people), and products that include sleep, vision, and even muscle benefits.
Taking cheese as an example, cheese is also developing rapidly in China, creating consumption scenarios and increasing consumption frequency through snacking and desserts. This is well established in Japan and is rapidly developing in China.
Opportunities for upgrading the structure of the domestic dairy industry
We can see that UHT accounts for a large proportion of white milk, which is related to the importance of dairy head companies to this business and its proportion. At the same time, due to the large size of China, the value chain, transportation and other problems have also led to the dominance of ambient milk for a long time. At present, we have noticed that a large number of companies are actively promoting fresh milk or ESL milk. With the development of cold chain logistics in China and consumers' preference for fresh products, the market share of fresh milk will increase significantly, which is also common in Japan and Europe and United States.
With regard to milk powder, despite the decline in China's birth rate, the absolute number of newborns is still huge, so it is difficult for the milk powder industry to make significant changes. The structural changes are mainly reflected in the growth of adult milk powder, while the value of infant milk powder is also an opportunity for industry players to capture.
Image source: Roland Berger sharing the material
Fourth, the trend of channel structure
China's channels are very complex. We can look at it from two dimensions, one is the form of product consumption, including immediate consumption, short-term stockpiling, and long-term stockpiling; Another form of channel, including online, offline, or O2O.
From these two dimensions, China's channels are diverse, and new channels will appear every few years, and there is also a trade-off relationship between each channel. Some of them don't bring much increment, which may be encroachment on traditional channels, but it can't be done for traders.
1. Rapid growth of interest e-commerce
With the rise of hobby e-commerce, online content and live streaming channels are becoming more and more valuable. In the process, we need to refine operations and understand consumers deeply, and all of this needs the support of data. We know that the channel that can really provide a lot of data is an important means for many companies to understand consumer behavior, understand whether products are good or not, and achieve rapid iteration, so online has become a low-cost and easy-to-operate channel.
2. Rapid expansion of instant retail
Consumers love convenience, and O2O has become an irreversible trend. This kind of channel that provides convenience to consumers is developing rapidly, including platform O2O, fresh O2O, etc. However, there are problems such as price orders and goods channeling in community e-commerce, and there is a certain decline.
3. To B channel rebounded after the epidemic
With the end of the epidemic and the changes in consumption, the catering scene, baking, coffee, milk tea and other TO B channels have developed in large numbers, and many companies have gone public. We can find out how to manage key accounts and insights in the TO B channel, and realize product differentiation is very important. Fonterra has been very successful in this regard, and we are seeing more and more companies exploring opportunities in the F&B segment.
4. The near-field small business continues to grow
Near-field small businesses cater to consumers' needs for convenience, and many small businesses that are closer to consumers are especially suitable for products with short shelf life such as dairy products.
5. Diversified new business forms emerge
Some new discount stores have grown rapidly in the past, with a value proposition of being cheap, and driving white label sales by driving products. However, it is very painful for many big brands to do discount store channels, because the positioning of merchants is to rely on low prices to attract traffic, which will affect the price order. So some companies will refuse to compete. Indeed, everyone should think about which channels to control, which ones to develop, and what their own capabilities are.
The development of membership stores is also very fast, satisfying a part of the middle class who have high requirements for product quality and price. In countries such as the United States, the market potential of this model has been proven. This type of channel takes the form of membership payment, and if the product is not different from other channels, it is obvious that it will not meet their needs. Therefore, merchants and brands need to provide their own brands and differentiated products to meet consumer needs, and there are many brands that do well in this channel.
5. Revelation
1. Overall strategy: an opportunity for dairy enterprises to break the situation
In the next round of competition, both mature dairy enterprises and emerging dairy enterprises need to update their strategic planning from multiple dimensions such as strategic direction and ability grasping.
Image source: Roland Berger sharing the material
2. Strategic direction
Leading dairy companies need to pay attention to several core points: how to lay out categories under structural changes, how to occupy the minds of consumers, how to ensure brand vitality through matrix media delivery, how to build the ability and channels of channel iteration, and what links to focus on in the value chain.
Going overseas is a relatively large topic, which is more suitable for domestic enterprises that have done relatively successfully. First of all, the enterprise ranks at least first and second in its field, and at the same time, it must also understand whether the enterprise has the ability to export talents and where the core competitiveness is.
3. Capability and support system
In the face of a weak stock market, we need increments, so innovation is very important. How to do increment, core capabilities include agile R&D, new capabilities, etc. Traditional channels are not very suitable for making new products, if a product is not sold in the channel for a month or two, it will almost die, so how to use some new channels to do new product promotion is very important.
Digital construction requires the use of data to make more accurate decisions, such as how to make costs more controllable.
Case: Accurately identify hot business opportunities and create products with agility
First, let's look at a convenience food company that has been very successful in the past two years. After accurately identifying hot business opportunities, we made products agilely within a month, and successfully created explosive products through innovative methods such as water storage and test marketing iteration, and expanded to offline channels. On the day of the online launch of the product, 40,000 boxes were sold, and the Douyin account increased by 200,000+.
There are several important links in this way of playing, the first is to develop products, which involves agile R&D capabilities, once you encounter a better topic or element, it is very important to have reserves in the R&D library, otherwise it will not be fast; The second is the ability to track hot spots, how to explore topics that consumers are interested in or controversial through accurate consumer insights; Finally, how to make good use of the independent R&D team to make new products is also crucial. Many companies' R&D team resources are limited, and there are pressures such as performance growth, profit targets, and energy allocation when making new products, so whether they have the courage to allocate some resources alone is the key to new products - including R&D, supply chain, marketing investment, etc.
With the above conditions, build momentum and test marketing through online channels, and find problems and quickly iterate and adjust according to the test marketing data. After the online popularity has a certain foundation, offline promotion can be achieved by adjusting the packaging, specifications, and price, and selecting channels.
Many FMCG companies don't have that capability today, and this capability is crucial.
Case in point: Digital marketing
Let's take a look at a more innovative domestic beverage company, which has performed well in recent years and maintained rapid growth every year. This company has created a very good digital channel model, through the "five codes in one", the traditional channel of the terminal small B, distribution, distributors, and factories are all connected.
Although many FMCG companies have similar management tools, there are not many companies that have actually achieved BC linkage. Through the data center, brands can clearly grasp the purchase, sales and inventory of channels and terminal dynamic sales data, and then can finely, accurately and agilely carry out consumer promotion and new product launch, which can be accurate to a certain SKU, a certain type of terminal, and even a promotion period. At the same time, digital tools support efficient campaign approval, process management, performance tracking, and strategy adjustment.
Is there room for optimization in the FMCG industry, including dairy products, where the overall channel and consumer promotion costs account for a relatively large proportion? With this model, there is little to no cost waste. In recent years, the company's sales expenses and publicity and promotion expenses have decreased year by year, mainly due to the scale effect and marketing digitalization. This precision marketing capability is essential for cost control and needs to be backed up by data.
The above is the main content of today, I am very glad to have this opportunity to share with you today, thank you!
This article is the original of FBIF Food & Beverage Innovation, please contact for authorization for reprinting.