Market Overview
Retail Performance
As China's economy continues to recover, the consumer market shows a moderate rebound. According to the National Bureau of Statistics, China's GDP grew by 5.3% year-on-year (YoY) in Q1 2024, and per capita disposable income increased by 6.2% YoY, both indices showing a 0.1 percentage point improvement over the same period in 2023. Additionally, the total retail sales of consumer goods in China grew by 4.7% YoY in Q1 2024. However, despite the recovery in most consumer goods sectors, the dairy industry’s rebound fell short of expectations. Nielsen IQ data reveals that dairy sales across all channels decreased by 2.4% YoY in 2023 and 3.1% YoY in Q1 2024. UHT white milk remains the most significant category, with its share in dairy consumption increasing yearly.
On the corporate side, revenues remain under pressure. For instance, leading Chinese dairy enterprise Yili reported a total revenue of 32.58 billion yuan in Q1 2024, a YoY decrease of 2.58%. This marked the second consecutive quarter of negative revenue growth for Yili, following a 1.82% decline in Q4 2023. For the full year of 2023, Yili's revenue was 126.2 billion yuan, with a YoY growth of only 2.44%, compared to 11.37% in 2022, 14.15% in 2021, 7.38% in 2020, and 13.41% in 2019. Yili’s revenue structure comprises liquid milk, milk powder, cold drinks, and other products, with liquid milk being the primary revenue source, accounting for over 65% of total revenue. However, liquid milk revenue has stagnated around 85 billion yuan from 2021 to 2023. In Q1 2024, Yili's liquid milk revenue was 20.26 billion yuan, down 6.8% YoY; milk powder revenue was 7.43 billion yuan, down 0.2% YoY.
Distribution Channel
The significance of traditional large distribution channels in dairy sales has weakened, while interest-based e-commerce and convenience stores have shown better performance. NIQ data shows that in 2023, dairy sales in hypermarkets and supermarkets decreased by 13.6% and 3.6% YoY, respectively. In contrast, interest-based e-commerce and convenience store channels, although smaller in proportion, saw sales growth of 34.7% and 4.8% YoY, respectively.
Lower-tier markets exhibit significant potential. Thanks to the development of chain supermarkets and cold chain logistics, dairy products have opportunities to further penetrate lower-tier cities and rural areas. From 2019 to 2023, the compound annual growth rates (CAGRs) of shelf-stable liquid milk, refrigerated liquid milk, and adult milk powder in lower-tier markets were 0.3%, -3.2%, and 0.8%, respectively, outperforming the -2.8%, -8.1%, and -1.6% in higher-tier markets.
Leading dairy enterprises dominate nearly 70% of sales across all channels, particularly in offline and comprehensive e-commerce channels. New players are entering the market through interest-based e-commerce, such as livestreaming commerce, using visually appealing content and live interactions to trigger impulse purchases.
Consumer Preference
From macro perspective, consumers have become more cautious amid economic concerns and cost pressures, tending to compare prices and seek alternatives when shopping. At the same time, there is an increasing focus on health and wellness. Consumer survey indicates that 72% of Chinese consumers prefer products beneficial to their health, a figure higher than the Asia-Pacific average. Additionally, 68% of consumers are now more concerned about the healthiness of ingredients than before.
Specifically, in dairy consumption, price-sensitive consumers tend to seek higher cost-performance products by comparing prices across multiple channels. Specifically, they often prefer larger packaging for better cost-efficiency. For instance, the sales proportion of large-pack pasteurized fresh milk (1L+) increased from 14.9% in 2022 to 15.9% in 2023. Meanwhile, as consumers' health awareness deepens, there is a growing preference for dairy products that emphasize nutrient enrichment, sugar-free, low-fat options, comprehensive health benefits, and original nutrition. For example, sales of Mengniu’s Vitamin D Strawberry Yogurt grew by 240% YoY in 2023, amidst a decline of 15% YoY in the shelf-stable yogurt.
Notable Trends to Watch
Equal Importance of Price-performance and Price-quality
In the context of differentiated consumption, consumers can be divided into price-oriented and value-oriented groups, showing significant differences in product preferences, consumption channels, and purchasing strategies. Price-oriented consumers prioritize cost-effectiveness and affordability, while value-oriented consumers consider not only cost but also user experience, social attributes, and fitness for purpose.
To follow this evolving trend, the dairy industry needs to cater to both ends of the spectrum—meeting the demands for both price-performance and price-quality ratios. For price-oriented consumers, dairy enterprises should clearly define their product positioning, ensure they fulfill products’ essential functions, target consumers across different distribution channels, and offer cost-effective options with larger packaging sizes. On the other hand, for value-oriented consumers, dairy enterprises should emphasize product appeal through exclusivity, tailored health benefits, improved quality, and enhanced user experiences.
Focus on the Silver Generation
Aging population is a fundamental reality in China for now and a long time to come. According to the National Bureau of Statistics, by the end of 2023, there were 297 million people aged 60 and above in China, accounting for 21.1% of the population. Facing declining physical functions such as chewing abilities, swallowing abilities, and digestive capacity, elderly people often experience imbalanced diets and insufficient nutrition intake. Nutritional intervention is crucial to improving their health. Additionally, the retired group typically have stable pensions, translating to strong purchasing power and high expectations for life quality, creating opportunities for functional dairy products in the silver demographic.
Leading dairy companies have targeted the elderly milk powder market, aiming to explore new growth opportunities. For example, Yili has launched China's first sleep-enhancing adult milk powder. Mengniu has released a white paper on the health and nutritional solutions for middle-aged and elderly people in China. Other dairy companies like Bright Dairy, Feihe, and Junlebao have also introduced sub-brands and corresponding products. The segment of elderly milk powders is rapidly expanding, covering functions for calcium supplementation, sleep quality improvement, immunity enhancement, digestive health, and cardiovascular support.
In the future, with the market benefits brought by the aging trend, reaching more silver consumers has become a new focus for the dairy industry. For brands, innovating healthy aging dairy products can be approached from three key aspects. First, providing balanced nutrition to meet the daily dietary needs of the elderly. Second, offering preventive precision nutrition to help prevent diseases and reduce the burden of illness and related risk factors. Finally, promoting healthy eating habits and encouraging a positive lifestyle through effective communication of healthful dietary practices. Brands need to align with the nutritional needs, dietary habits, and consumption scenarios of the elderly to innovate more precisely targeted nutritional dairy products and capture larger share of the silver generation market.
Continued Emphasis on Pasteurized Fresh Milk
Due to health benefits, pasteurized fresh milk is becoming increasingly important in the liquid milk sector. Consumers are showing growing preference for products with fresh nutritional elements. Kantar reports that the penetration rate of pasteurized fresh milk in China rose from 18% in 2018 to 39% in 2023.
Pasteurized fresh milk, typically priced higher than UHT white milk, appeals to consumers who prioritize freshness, nutrition, and taste, and are willing to pay a premium for these qualities. Retaining these high-value heavy users is crucial for dairy enterprises. Due to the short shelf life and demanding storage requirements of pasteurized fresh milk, the market was once dominated by proximal regional dairy enterprises. With national dairy giants like Yili and Mengniu strategically expanding their presence in this segment and leveraging their supply chain and distribution advantages, competition has intensified.
