The latest financial results of
the key processors signal mixed fortunes, highlighting that the domestic dairy
industry continues to face substantial operating challenges. These range from
increasing costs to negative media coverage on dairy and have been exerting
greater pressure on small and medium-sized processors especially, according to CCM’s August issue of Dairy
Products China News.
In terms of revenues, H1 figures
– all for January-June – show Yili ranked No. 1, USD444 million ahead of its
main competitor Mengniu, a significant gap compared to its lead of USD9 million
in 2011’ s full
year figures. Bright Dairy and Beijing Sanyuan remain far behind, so does the
smaller Royal Dairy (included as an example of a smaller regional dairy
processor). Mengniu suffered a decline of 1.17% vs H1 2011, but the other 4 companies
all achieved good sales growth: Yili +11.8% (in RMB), Bright Dairy +16.5%,
Beijing Sanyuan +14.3% and Royal Dairy +51.3%.
In terms of net profitability,
the situation is less positive. Bright Dairy’s net profit rose by 61.9%;
Beijing Sanyuan also performed soundly, with growth rate of 17.2%; however
Mengniu, Yili and Royal Dairy experienced decreases of 16.2%, 6.3% and 30%
respectively.
In general, sales growth was to
be expected. According to the Dairy Association of China (DAC), the total output
of dairy products was 11.5 million tonnes in H1, up 6.6% compared with the same
period in 2011. (Please see Dairy Products China News Vol.5 August Issue, p3
Dairy Industry Growth in H1).
The contrasting sales picture for
Mengniu reflects the impact of product scares, especially the incident
concerning its Aflatoxin M1 (AFM1) tainted UHT milk which occurred in late
December 2011 – just 2 months after the General Administration of Quality
Supervision, Inspection and Quarantine had issued an urgent telegram to all the
country’s Bureau of Quality and Technical Supervision offices on this very
subject. The company has indicated that this led to a 30% decline in sales:
this is believed to refer to December 2011 and January 2012 – especially the
latter – the Spring Festival in 2012 and a peak consumption season for dairy
products. (Please see Dairy Products China News Vol.5 January Issue, p10).
Such incidents have had a wider
impact, forcing the dairy processors to invest more funds and resources to deal
with them. They have also provided increased opportunities for international
suppliers, so intensifying the competition – once again, leading to a
requirement for more investment and pushing down some key processors’ profit
levels. It can be seen that all 5 companies’ net margins decreased in H1
compared with in 2011, and the increasing spend on marketing and expansion of
distribution networks is a key factor behind this.
The situation is worse for the
small and medium-sized companies with more limited resources. Royal Dairy is a
case in point: its production costs increased significantly in H1, including
operating costs +65.6%, sales expenses +64.9%, management costs +49.6%,
financial costs +950.6%, etc., all of which curbed the company’s net margin.
However, each company’s specific
situation is different of course. In fact Royal Dairy’s margins were still
higher than other 4 companies, especially the net profit margin. The key reason
is
likely to be its focus on premium
buffalo milk; government support also plays an important role, as this
accounted for 39.2% of Royal Dairy’s net profit in H1, compared with 29% in
2011.
Amongst the 5 companies, Bright
Dairy’s net margin is the lowest in H1, suggesting that the company has
invested significantly in promotions. The company believed that the net margin
for domestic dairy industry should be 5-6%, so there should still be ample room
for Bright Dairy to increase its profitability, mainly through launching more
premium products with higher gross margins (premium UHT milk, premium infant
formula etc).
The level of competition seems
sure to become fiercer in the future as processors diversify to seek higher
margins: besides Bright Dairy, Mengniu also plans to strengthen its expansion
of formula powder business, on the premise of continual expansion in its core
liquid milk business. The other
companies have indicated that
they are prepared for growing competitive threats to their businesses. The
dairy market in China 1990’ s
by the majors developing national scale which has over-powered the multiple
regional dairies. Now in the liquid milk segment, many regional companies are
beginning to launch UHT milk products, aiming to expand nationwide, whilst the
larger players are moving to expand their business in the regional markets.
Content of Dairy Products China
Prospects
for Whey Products
Key
Processors Face Challenges in H1
Infant
Formula Processors’ Results Signal Mixed Fortunes
Dairy
Processors Reduce Online AdSpend in July
Move to
Set up CQO System
Yili
& London Olympic Games
Beingmate
Sets Up New Farm
Xingxing
Dairy to Launch New Plant
Zhongxing
Livestock Launches New Farms
SanCor
Targets Market
Natrapure
to Launch New Infant Formula
Dairy
Products China News,
a monthly publication issued by CCM International on the 30th/31st of every
month, brings you the latest information on new market dynamics, company
dynamics, new dairy products and consumption trend, new legislations and
policies and raw milk supply dynamics that are shaping the market.
About CCM
CCM is dedicated to market research in China
Guangzhou CCM Information Science & Technology Co., Ltd.
17th Floor, Huihua Commercial & Trade Mansion, No.80 Xianlie Zhong Road, Guangzhou 510070, China
Tel: 86-20-37616606
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