China’s burgeoning dairy market has been one that has attracted a large number of European firms over the years with prospects of strong sales to a market traditionally resistant to dairy products though now starting to accept them as an integral part of the national diet. The growing range of dairy products available in China – from ice cream to drinkable yoghurt and from fresh milk to infant formula – has pushed this growing adoption along with government campaigns to encourage milk drinking, rising consumer incomes, improved distribution and wider retail channels.
Go deeper with GlobalData
Over 60 major foreign investors have entered the Chinese dairy industry including the key players in the European market such as Nestlé, Yoplait, Unilever (Wall’s), Italy’s Parmalat, Danone, Denmark’s International Nutrition Corporation and Friesland Coberco of the Netherlands. However, their fortunes have been extremely mixed.
The entry strategies of the foreign dairy companies have largely depended on how deep their pockets are. For those with extremely deep pockets, such as Nestlé, they have been able to enter the market with greenfield operations and start manufacturing and selling dairy products of a generally high quality to local consumers directly from their China production bases. These companies have been able to establish strong and broad distribution channels and fund large-scale advertising and marketing campaigns to compete with the strong, and invariably less expensive, local brands. This is a long-term view of the sector backed by the financial muscle to maintain their commitment to China and, in the case of diversified food groups like Unilever, is supported across numerous product categories and brands. For slightly smaller operations importing through Hong Kong has been an option with a gradual move onto the Mainland through sourcing raw materials in China and importing ingredients.
Those without the deep pockets of a Unilever or a Nestlé have had to adopt a different approach to China’s dairy market. Competing with entrenched local brands at the low end of the market takes a lot of cash and commitment. Even deep pockets don’t guarantee success – two of the world’s biggest dairy concerns, Danone and Kraft, eventually sold their greenfield production sites to their local joint-venture partners with profits looking distant.
Where European dairy companies have been more successful is in producing added-value and long life products. Some notable successes have been scored in the infant formula market and in the yoghurts category. Yoghurt is one category where foreign brands have pushed innovation in both pack sizes and flavours – they have been copied by local brands such as Wahaha and others, but have retained a strong market share. Infant formula has brought in other players, such as the pharmaceutical companies, to this niche in the dairy market. Spending on all things baby-related in China is high and infant formula milk powders have been successful positioning themselves as a health product with a premium price for most consumers.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataYoghurt and formula milk have been strong niches though other promising sectors have not fared so well. Despite rising sales across the board the ice cream brands have found China a tough market. Bruising price wars have meant ever lower margins for companies like Wall’s and Nestlé despite heavy marketing expenditure and a lot of brand introductions. It has proved hard to charge premium prices and Wall’s has had to accept lower prices in return for wide distribution. Other foreign ice cream brands, such as Haagen-Dazs, have been relegated to serving only the premium end of the market in cities such as Shanghai. They have built a presence through freezer cabinets and their cafes but still remain a minor brand overall.
However, the climate will remain tough in China for the foreign dairies as progress is coming slowly and new products are rapidly imitated. What has started to be a good market is the drive to export dairy technology to China as the PRC seeks to upgrade its domestic industry.
