Coronavirus Epidemic Significantly Impacting Dairy Supply Chain

The coronavirus outbreak has placed considerable supply and demand-side pressures on China's domestic dairy sector. SMEs are poorly equipped to buffer the impact of the outbreak. Major issues relate to disruption to logistics, reduction in the supply of primary outputs, and staffing issues. These disruptions will likely translate to an increase in the price of raw materials. However, brands are warned to avoid passing these prices on to consumers during the epidemic. Bricks and mortar businesses are expected to be worst hit by the epidemic.

ChemLinked Prediction

In the webinar “2019 China Food Industry Recap” ^[1], Chemlinked predicted considerable merger and acquisition activity in China’s dairy sector in 2020. The impact of the coronavirus on China’s supply chain is likely to accelerate the rate of SMEs exiting the market. These smaller companies will suffer in many ways and at multiple links in the supply chain. The impact on logistics will be a significant issue that will likely drive the price of raw materials up. Additionally, SMEs will also be poorly equipped to buffer the temporary hiatus placed on production, staffing issues, and general lack of liquidity.

1. Upstream links in the supply chain hit with a double whammy.

China has put several major urban hubs on lockdown and placed major restrictions on transport. For farms and other upstream links in the dairy supply chain, these restrictions will significantly impact output and production capacity^[2]. Raw milk output is expected to suffer a significant decline. Other links in the supply chain associated with processing, production, blending, canning, etc. will also be significantly affected as the government has placed restrictions on the number of employees that can work and the dates when employees are permitted to return to work.

2. Consumer demand falls

Demand has also been significantly affected^[2]. In many cities, the movements of residents are restricted considerably. For example, in some major cities in Zhejiang province, there are rules in place that restrict the movements of families. Under these restrictions, families are only allowed to send one person out every two days to purchase essential goods. These restrictions have predictably led to a precipitous drop off in sales and demand of dairy.

3. Are any stakeholders benefitting?

Offline maternal and child stores have been worst affected. Online retailers and e-commerce platforms are best equipped to buffer the impact of the outbreak. Larger dairy enterprises with more extensive stocks will also be able to sell excess stock during this period.

What to do?

1. Food safety and quality

At this moment, consumers are particularly sensitive to food safety issues^[3]. If a severe food safety incident occurs, consumers' confidence towards a brand or a single category will decrease rapidly in the short term, and it will take a very long time to rebuild. Furthermore, Chinese authorities have pledged to strengthen food safety supervision during the outbreak^[4].

2. Do not increase prices.

In 2019 and 2020, some dairy enterprises raised the prices of individual products^[5]. During the epidemic, it would be unwise to continue to raise prices as this risks invoking the wrath of Chinese consumers who will see this price increase as an attempt at a cash grab during a time of crisis. At a policy level, the government has also imposed rules to severely crack down on unethical price increases during the epidemic^[6].

3. Exploring e-commerce

During the outbreak, the surge in online sales is a noticeable trend, and this outbreak is a strategic opportunity for enterprises to expand online channels.

4. Corporate social responsibility warmly received by Chinese consumers.

Zhu Danpeng, a food industry analyst in China, points out, "dairy companies have to rely on word of mouth and brand image to save themselves during and after the epidemic." Large enterprises, such as Yili, Firmus, Junlebao, Nestle, etc.^[2], have garnered positive media exposure by donating money and goods. This social credit will likely translate to greater traction and increased sales after the epidemic is resolved. Beingmate, which is estimated to have lost in the range of 65 million to 95 million yuan in 2019^[7], donated more than 2,000 boxes of adult formula milk powder to frontline medical staff, valued at more than 1 million RMB.