New White Battlefield: Where is the future of dairy products?

Once neglected, "nutrition" has become the key to victory.

Consumption upgrade can roughly be considered from two dimensions: concept and quality. In the dairy industry, consumption upgrades mainly mean awareness of the health value of dairy products. Objectively speaking, domestic companies are slow to go in this regard. In order to meet the demand for "letting all Chinese people drink milk", the initial operation and marketing of companies focused more on brand building rather than better products. Gradually deviate from the core value of "nutrition", a dairy product.
 
With the acceleration of consumption upgrades, consumers have gradually shifted from focusing on brands to focusing on products, and their requirements for nutrition have become higher and higher. The low-temperature pasteurized milk, yogurt, cheese sticks and other circuits have shown a trend of high growth.
 
In this context, Yuanqi Capital judges that the degree of product differentiation in the dairy industry will be further improved, and consumer portraits will be more precise and focused. In this regard, companies will further create new categories that better meet different consumer needs to meet the continuous growth. New demand. This requires higher R&D investment, stronger market insight, and better cross-category management capabilities for Chinese dairy companies that have focused on building brands. Compared with the international dairy and food giants, in addition to the above-mentioned capabilities, Chinese dairy companies also have a large gap in brand internationalization and going overseas.
 
From a macro perspective, the dairy industry is mainly divided into three categories: global integrated food processing companies, global dairy products and nutrition companies, and regional dairy products and nutrition companies. The leading domestic dairy companies Yili and Mengniu are currently in the third category, while Nestlé and Danone are in the first category. In the future, domestic dairy companies will inevitably transform into the first and second category dairy companies. This process means the globalization of brands.
 
If the perspective is further extended, the more successful examples of brand globalization by companies in other industries in China, such as Huawei, Geely, etc., all started with "re-engraving and innovation"-through learning from the world's leading benchmark companies, combined with independent Innovation has caught up, and it has also created its own brand and market. But how to learn from the expansion path of international giants? In the unique local market, where should the focus of the growth of Chinese dairy companies be placed? This article will focus on analysis.

01
Nestle Danone, one horizontal and one vertical
 
According to the list of the top ten global dairy companies in 2019 released by Rabobank, Nestlé ranked first with US$24.3 billion in dairy product sales, and its dairy products accounted for only 14.3% of Nestlé’s total revenue. This shows that this food "empire" The strength is strong.
 
The development history of Nestlé can be summarized as a microcosm of the history of food market development in developed countries.

 
Nestlé, established in 1866, initially produced condensed MILK and infant milk powder. In 1868, Nestlé set up sales points in Paris, Frankfurt, and London. At that time, it set a global sales strategy.
 
During the First World War, Nestlé first seized the opportunity brought by the surge in demand for milk powder to expand overseas markets. It bought factories in the United States and Australia far from the war, and took the first step in globalization.
 
Immediately afterwards, Nestlé invested heavily in research and development, and successfully developed instant coffee at the node of World War II, and became a rationing material for the US military during the war. By the end of World War II, Nestlé had become a global company spread across five continents. It can be said that Nestlé's success is inseparable from its control of the global current situation and its unremitting R&D investment.
 
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For example, in South America, Nestlé patiently helped local farmers grow coffee beans in order to solve the problem of raw material supply; in India, in order to make dairy products factories of excellent quality, Nestlé loaned local farmers to dig wells and grow grass, and provide veterinary drugs and veterinarians for free. Technology; In China, in order to solve the problem of MILK supply in Heilongjiang Shuangcheng, Nestlé not only sent an entire team of experts from Europe to help farmers take care of dairy cows and milk collection technology, but also provided farmers with loan interest. This localization strategy makes Nestlé more favored by governments in competitions around the world.
 
With the end of World War II, Nestlé began to advance its capitalization strategy and carry out global mergers and acquisitions. Through the acquisition of condiments, ice cream, frozen food, drinking water, and even mining, hotels and other assets, it rapidly expanded its business territory. This undifferentiated "savage expansion" seems to be a common operation for many companies when they become rich, and it is easy to have a negative impact on business operations due to over bloated assets. Fortunately, in the 1980s, Nestlé CEO Helmut Maucher realized this.
 
This period is actually the first turning point in the true sense of Nestlé—from "bulk" acquisitions to more precise acquisitions (the main acquisition targets are food companies), to form economies of scale and divest many non-related businesses , And even sold Alcon, which was the number one eye care market in the world, in 2010.
 
The second turning point occurred after Bao Bida took over Nestlé. For the first time, Bao Bida established Nestlé’s values of “Nutrition, Health and Happy Life” as the “Millennium Strategy”. Since then, Nestlé has begun to focus resources on nutrition and health products, and eventually developed into the seven major sectors we see now, accounting for A balanced food empire.

If Nestlé is a food empire that expands horizontally to the extreme, Danone is a dairy giant that penetrates the upstream and downstream of dairy products.
 
Founded in 1966, Danone initially produced yogurt and cheese. Due to its advantages in the complete industrial chain of cheese and low-temperature yogurt, Danone has been focusing on four major business sectors: fresh dairy products, drinking water and beverages, infant nutrition and clinical nutrition. , The market share of fresh milk ranked first in the world in 2019.
 
Danone is undoubtedly the most successful international giant in vertical and deep cultivation, holding high-quality upstream milk sources, carrying out supply chain construction and building a developed cold chain network.
 
Judging from the development of the dairy industry of the two companies in recent years, Danone resumed relatively rapid growth in 2016 after experiencing the pressure of European fresh milk price growth, while Nestlé's development focuses on drinking water, health food and other businesses. The dairy industry has not yet achieved positive growth.
 
Although both Nestlé and Danone started with dairy products, the two eventually showed completely different development directions. Nestlé has set itself as a comprehensive company from the very beginning, and has built itself more as a high-quality platform for operating products, committed to horizontal expansion; while Danone has made full use of its deep operating experience and dairy resources from its yogurt business, and chooses to deepen its cultivation. Dairy products.
 
Mergers and acquisitions have contributed greatly to the development of the two companies and are an important way to expand the scale. Nestlé prefers to cultivate after acquisition, and Danone prefers to conduct joint ventures with leading companies in specific fields. Danone’s entry into emerging markets mostly adopts the method of establishing subsidiaries in cooperation with local leading companies. Taking the Chinese market as an example, Danone has successively established joint ventures with Guangming, Wahaha, and Mengniu, and cooperated with local companies to provide them with technical and marketing support. Support, the benefits are often quicker; the model cultivated by Nestlé after the acquisition is more nuanced.
 
Under the background of different strategies and different paces of international expansion, Danone and Nestlé have gradually moved from highly homogenized business competition to differentiated competition. Even the competition in the same market has become weakened. The two companies have gone out of their own way. Road, business overlap has been continuously reduced.
 
From the point of view of the overlap of market regions, in the international layout of the two companies, Danone's main advantage area is Europe, while its share in the Americas and Asia is not high. Nestlé's relatively stable advantage region is in the Americas, while the business in Asia and Oceania is growing rapidly.

02
Three strategic dimensions to learn from
 
According to data from Rabobank in 2019, Yili and Mengniu ranked 8th and 10th in the world, respectively. Compared with international food and dairy giants, domestic dairy companies can learn from Nestlé’s acquisition path from three dimensions: improving the existing product system, developing new product systems, and seizing new markets.
 
First, improve the existing product system.
 
Mengniu previously expanded the low-temperature market through the acquisition of Junlebao and acquired the shortcomings of Yashili and Dumex tonic milk powder business. In the future, pasteurized milk will benefit from high-end consumption and the development of cold chain logistics, and there is a large room for development. Yuanqi Capital believes that domestic dairy companies such as Yili and Mengniu may gain a share in the new blue ocean of pasteurized milk by acquiring regional dairy companies and leveraging the brand's local penetration rate.
 
In 2016, Mengniu restructured its functional departments into independent business units such as room temperature, low temperature, ice products and milk powder, focusing on the in-depth development of categories. As one of the engines for Mengniu Dairy to achieve its 2020 double-hundred-billion goal, the Cryogenic Business Unit was placed high hopes and entrusted with important tasks. In the first half of 2018, Mengniu launched 7 new low-temperature products. With the two major sub-brands of "Danone" and "Junlebao" (Junlebao is currently being divested), Mengniu's low-temperature yogurt market share surpasses Yili, and the pasteurized milk brand "Daily Fresh" has been launched.
 
At the same time, Mengniu is deploying high-quality pastures upstream, and its subsidiaries Fuyuan Dairy, Modern Dairy and China Shengmu will further guarantee the supply of high-end milk sources and gradually highlight their contribution to low-temperature products.
 
In terms of acquisitions, Mengniu prefers the layout of the industrial chain, and at the same time, it has laid out its low temperature product distribution network. In 2016, Mengniu took over the troubled community 001, and this move is to prepare for the last mile of the community where low-temperature products are deployed. Mengniu is interested in the company's last-mile delivery capacity in first- and second-tier cities, and the operational space that can replicate this model to third- and fourth-tier cities in the future.
 
The transportation radius of low-temperature products is limited and the shelf life is short, especially for pasteurized milk. Therefore, it is not enough to build regional cold chain distribution. Yuanqi Capital believes that while building a low-temperature supply chain, it is also necessary to integrate the resources of regional dairy enterprises, ensure the supply of regional milk sources, and give play to the synergistic advantages of milk sources and low-temperature channels, in order to establish new barriers in the low-temperature market.
 
Second, develop a new product system.
 
An example is Yili's layout in the field of bottled water. Yili's 740 million yuan long-term investment to build the Changbai Mountain natural mineral water project is a small step in the differentiation strategy. Compared with building an independent factory, the acquisition of high-quality companies is obviously a more convenient and effective method, and it can also play a synergistic effect with the acquired company's own brand and channel network.
 
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The life cycle of beverages is very short. There are not many beverage brands over ten years. In recent years, the life cycle of beverage categories has become shorter and shorter, from the previous 3-4 years to about 2 years. Yili has a large product research and development team, which is superior to small-scale enterprises in terms of new capabilities. However, due to the certain differences between the beverage channels and the dairy product channels, beverage products have a certain sales ratio in tobacco hotels, wholesale markets and other channels, while dairy products are mainly concentrated in KA and traditional distribution channels. Therefore, the company is the company to expand new channels. Top priority.
 
In terms of bottled water, the market space is relatively large. In 2018, China’s per capita consumption of bottled water is 32L (calculated at 550ml/bottle, approximately 116.7 bottles, only 0.3 bottles per day), which is not only much lower than the United States (100L+), but also lower The neighboring South Korea (58.5L) is also lower than China's Hong Kong area (55.1L), and has not yet reached the global average. According to the estimated per capita consumption of 55L in the medium and long term, there is at least 70% room in the bottled water market.
 
Therefore, in the short term, in addition to focusing on several high-end single products at room temperature, Yili's beverage and bottled water business growth will also become one of the driving forces of performance in the future. This is a big step for Yili to step out of the dairy field and expand horizontally.
 
Third, seize new markets. Yili acquired the largest ice cream brand in Thailand and entered the Southeast Asian market. Just as Nestlé expanded its market share in China through the acquisition of Xu Fuji and Yinlu (currently, China’s revenue accounted for 7.5%, making it the largest market outside of the United States), the emerging AOA region’s revenue growth has also maintained a good momentum. . The neighboring Southeast Asia is rich in resources, large in population, and large room for economic development. On the other hand, local companies have a weaker foundation and fewer international giants such as Nestlé. This will also become an important strategic market for Yili and Mengniu's overseas mergers and acquisitions.
 
In terms of specific methods of mergers and acquisitions, from a short-term perspective, the lack of good targets and the financing structure based on indirect financing will limit the process of mergers and acquisitions. Yuanqi Capital judges that a joint venture model similar to Danone will be a "curve to save the country" path for Yili and Mengniu to expand in the short term. At present, Danone and Mengniu have combined their low-temperature yogurt business into one. Mengniu has further consolidated the advantages of low-temperature yogurt. In 2018, its low-temperature yogurt market share reached 35%, much higher than Yili. At the same time, Mengniu has also established a joint venture company in China with WhiteWave, a subsidiary of Danone in the United States, to launch plant-based drinks and plant-based mills to expand the layout of plant protein products.
 
In the process of expansion, a significant problem is the insufficient R&D investment of Chinese dairy enterprises. Once faced with global competition, the core competitive advantage is not significant.
 
Nestlé invests heavily in research and development, has the world's largest food and nutrition research and development network, has set up 40 research and development centers, and a team of more than 4,800 scientific researchers. In recent years, research and development expenses accounted for more than 1.7% of its operating income. Danone R&D Center manages Danone’s global R&D resources. It has two world-class large-scale R&D centers and other R&D centers around the world. It invests more than 200 million Euros each year to focus on research and development of health and nutrition projects.
 
Domestically, Yili and Mengniu's R&D investment accounted for only 0.55% and 0.30% of operating income in 2019, which are still at a relatively low level. With the further upgrading of Yili Mengniu's product structure and the further diversification of product categories, the strategic significance of R&D expenditure will be further highlighted. The proportion of R&D expenditure in the main business income must be increased, and the R&D center setting will gradually follow the international giants.
 
However, independent research and development of new products, in addition to R&D investment, is also a big challenge to cut with existing product channels. New products need to be cultivated, which means cash consumption-behind it represents the company's resource investment, and the sharing of existing brand resources and channel resources. According to grassroots research, the overall distribution rate of Anmuxi has reached 98%-99%, while the overall distribution rate of plant selection is only 40%-50%, which will directly affect its sales.
 
Yuanqi Capital believes that the product diversification strategy requires endogenous approaches to increase R&D investment. At the same time, the resource and channel sharing problems faced by new products are also tests. For example, Yili established a health beverage business unit to enter the beverage field. There is a certain difference in the channels of dairy products. Beverage products have a certain proportion of sales in tobacco hotels, wholesale markets and other channels, while dairy products are mainly concentrated in KA and traditional distribution channels. Channel construction is still a long-term proposition for Chinese dairy companies.

03
Shelf war, single product breakthrough strategy
 
Essentially, my country's dairy product processing industry is still in a rough and highly homogeneous industry. Therefore, the state of short-term fierce competition will continue before Yili and Mengniu's products have clearly differentiated.