Chinese milk boom to provide ongoing investment opportunities
expansion on the back of increased consumer awareness and improved
distribution networks, but can it provide adequate returns for
overseas investors? Tom Armitage reports.
According to industry analysts Euromonitor International, the milk sector in China has increased by an estimated 188 per cent over the last five years, with sales of UHT and long-life milk outstripping their fresh liquid milk alternatives by 680.1 per cent (the UHT and fresh milk categories each notched up respective growth rates of 753 and 72.9 per cent).
Currently the Chinese population has the lowest consumption of milk per capita in the world - an estimated two litres per year. And in 2004 China's spending on milk stood at a mere $1.8 per capita (€1.2) per year, against Western Europe's $54.6 (€41.9).
"Although perhaps not surprising, given there is strong demand in many other packaged food sectors, these large differences put in context China's relative under-development in the dairy sector, as well as giving an idea of its growth potential," commented Francisco Redruello, Euromonitor's IMIS industry analyst.
The Chinese milk sector, however, is highly competitive, dominated by large domestic firms, including Bright Dairy & Food Co, which accounts for 19.3 per cent of retail milk sales, closely followed by the Inner Mongolia Yili Industrial Group and the Inner Mongolia Mengnui Group, which command respective market shares of 18.2 and 14.1 per cent.
Reduello suggests, however, that the main obstacle for many overseas investors is stumping up the extensive investment capital that is needed to ensure a uniform distribution network - essential for maintaining product freshness, minimising transportation costs, and perhaps most importantly, bolstering profit margins.
Speaking to DairyReporter.com, he said that "many overseas players have lost some ground to big local players, with a stronger distribution network and a more aggressive approach in terms of promotions."
But some western producers - for instance Swiss food group Nestlé and beleaguered Italian dairy group Parmalat, which have respective shares of 2.4 and 0.9 in the Chinese milk market - have found early retail success in the form of branded, value-added milk products.
As part of Nestlé's long-term strategy to focus on producing products for the upper market segment, it launched a successful low-fat, high-calcium long-life UHT milk brand targeted towards the elderly in January last year.
This type of product success is largely the result of increased consumer awareness through advertising, although Chinese government health initiatives have also helped to up sales.
In 2001, for instance, it spearheaded a public awareness campaign to communicate the health benefits of dairy products, which were reiterated soon after the deadly SARS outbreak in 2003.
The proliferation of multiple retailers, including leading French retail giant Carrefour, has also helped both domestic and overseas dairy producers secure a strong retail presence for their products into regions that were previously served only by small, independent food retailers.
Euromonitor envisages further new product development (NPD), and this, along with the burgeoning appetite for health-orientated dairy products, will be key to sustaining further sales growth in the Chinese milk sector. The analysts predict value sales growth of approximately 73 per cent over the next five years.
"The Chinese milk sector is heading in a double direction. On the one hand, there will be an expansion in the demand of standard milk lines, but on the other, NPD is pointing towards an increase in the number and range of functional products. The latter is likely to run in parallel with a higher sophistication in packaging, especially within UHT lines, where the highest growth in constant value is expected between 2004-9," said Redruello.
