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Opportunities and Challenges for Pasteurized Milk in China

  •   9 Apr 2019
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In late 1990s, Ultra Heat Treated (UHT) technology was introduced to China. Over the course of the last three decades UHT milk has become extremely popular in China, and its marker size surged from 19 billion RMB in 2003 to approximately 90 billion RMB in 2017 [1]. This growth can be primarily attributed to certain advantages offered by UHT milk such as its relatively long shelf-life and its convenience. Data shows that by May 2018 its penetration rate had hit 90% across China [2]. However, in recent years there has been rapid growth in China’s pasteurized milk market. The annual sales of fresh milk on JD platform increased 100% in 2018, and the number of consumers buying pasteurized milk during this time also rose by 100% [3]. The growth in this market parallels much larger growth trends towards health and wellness amongst Chinese consumers. Pasteurized milk is generally considered as healthier than UHT and when combined with improved sensory qualities it’s no wonder that pasteurized milk is gaining traction.

What is driving growth?

Consumption upgrade and health and wellness trends
Because of the comparatively low-temperature used to sterilize pasteurized milk, it contains more active components and boasts higher levels of protein, lactose and other nutrients. Given health and wellness trends, these characteristic are preferred by Chinese who place a high value on freshness and nutritional content. Combining this with the increasing purchasing power of Chinese we can see very obvious trends towards consumption of pasteurized milk particularly in China’s 1st and 2nd tier cities where cold chain logistics are more developed. Kantar data shows that pasteurized milk penetration rate in Shanghai reached 72% in 2018 (the national average level is 31%), and its market share accounts for 19% of all dairy products (the national average level is 5%).

Huge profits
Due to the fierce competition and limited market expansion, the profit margin for UHT milk has been shrinking in recent years and enterprises have to find other growth points for continued development. As a high-end product, pasteurized milk is targeted at youngsters and high-income group and it also boasts a much higher profit ratio. New Hope Dairy shared data showing that in 2017 the gross profit rate of its UHT milk was 23.59%, while fresh milk reached 48.74% [4]. Driven by the huge profits and growth potential, more dairy giants and regional dairy enterprises are investing in the pasteurized milk sector.

Global prevailing trend
The dominance of UHT milk in China is contrary to global trends where consumption of pasteurized milk accounts for the majority of milk consumption in more than 90% of countries around the world [5]. According to Nielsen data, the market share of fresh milk in Canada, UK, and America even hit 99%, 99.5% and 99.7% respectively. Although the fresh milk market share is currently small in China (14%), it will become much more widely accepted as global consumption patterns take root and cold chain logistics are developed at a national level.

Pasteurized milk’s competition structure in China

China’s regional dairy enterprises dominate in the fresh milk market and it includes Bright Dairy (Shanghai), Sanyuan (Beijing), Weigang (Nanjing) and New Hope (Chengdu). It is worth noting that Bright Dairy is the first domestic enterprise that has its fresh milk products sold across China, and its sales also ranked top in this sector, accounting for nearly 50% of the total. In 2018 Bright Dairy upgraded its “UBEST” fresh milk by lowering the pasteurization temperature from 85℃ to 75℃, with the goal of retaining more active ingredients especially immune globulin and lactoferrin.

Given the great potential of the pasteurized milk market, domestic dairy giants like Mengniu and Yili are also jumping on the bandwagon and are now vigorously promoting their pasteurized milk products nationwide. In 2017 Mengniu set up its Fresh Milk Division, then later in Jan. 2018 it launched 3 new brands with different market positioning:

  • Freshness best choice: exclusively for fresh milk community delivery
  • Fresh factory: mid-to-high end product, containing 3.5g protein and 115 mg Calcium per 100 ml
  • Daily freshness: high-end product, supplied by exclusive pasture, 2-hour processing, containing 3.6g protein and 120 mg Calcium per 100 ml

Leveraging New Retail
Some overseas dairy enterprises are also taking full advantage of “new retail”, a new commercial strategy and retail mode in China which leverages convenience technologies and combines in-store dining, cashless payments and online and offline shopping. In 2017 Fonterra and Freshhema (a new retail platform owned by Alibaba) jointly launched a pasteurized milk product named “daily fresh milk” to satisfy the consumer desire for ultimate-freshness. To ensure optimum freshness and premium experience the product is placed on shelves for just one day (despite a shelf life of 7 days). As expected, “daily fresh milk” is extremely popular among Chinese consumers and is usually sold out by 7 to 8 pm every day in the Shanghai area.

2 biggest challenges for China’s fresh milk market

The high cost
Retail of fresh pasteurized milk is realized by state of the art cold chain equipment, efficient logistics, premium supply chain management etc., which all increase the cost to enterprises and to consumers. For example, the retail price for “Van milk” (fresh milk product imported from Australia) is 79 RMB/L. Its logistics cost are around 23 RMB/L, but its retail price must also offset huge losses associated with a spoilage rate of almost 50%.

Consumer psychology: Far away hills aren’t always greener

Generally speaking preference for local manufacturers is the predominant influencer of consumer purchasing preferences amongst Chinese consumers. A market research shows that 90% of consumers prefer local brands when purchasing pasteurized milk as they believe short-distance delivery improves milk freshness [6]. This consumer psychology plays out by segmenting the market based on the geographical location of manufacturers and their proximity to their target demographics. It also means that disrupting established supply chains is difficult and poses a major challenged for international stakeholders looking to enter China’s markets

After a series of dairy scandal happened, Chinese consumers believe that imported dairy was superior to domestic. However, in recent years this believe is being gradually eroded through national education campaigns, an exemplary recent safety record amongst domestic dairy and significant technical improvements made by the domestic industry. According to 2018 GAC data, the import volume and value of liquid milk declined for the first time in 10 years. Looking at the market it is likely that an optimal entry strategy for international stakeholders will include a JV with established local enterprise to leverage existing supply chains and will take advantage of new retail trends like “new retail” and crossborder ecommerce.

Reference link

[1] Leading industry research data
[2] Jiemian news: pasteurized milk market in China
[3] China food media network article: rapid growth of fresh milk market in China
[4] New hope dairy: regional enterprises in dairy sector
[5] The next decade of China’s dairy industry
[6] Market Modernization (journal)--Survey on liquid milk purchase behavior
 

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ABOUT THE AUTHOR

Yilia Ye

ChemLinked editor, having the expertise in food regulations, Chinese import-export policies. 

LinkedIn profile: https://www.linkedin.com/in/yiliaye/