The company last week reported a 30 per cent rise in revenue to CNY5.7 billion (€558.5m) and net profits up by 11.5 per cent over the prior year's first half to CNY171 million. The performance is in sharp contrast to Shanghai-based Bright Dairy, the former number three player, which has been losing market share as a result of flagging sales and a quality incident that badly damaged its reputation last year. Bright's first-half dairy sales were down by 2.5 per cent to CNY2.5 billion, while net profit fell 40.2 per cent on the previous year's first six months to CNY90.5 million. The combination of slower sales and higher raw material costs, as well as increased spend on marketing of its yoghurts to improve its brand image, contributed to the large drop in profits.
Since last year's scandal in Zhengzhou, where local media reported that Bright's Zhengzhou subsidiary was reprocessing expired milk, Bright has been retreating rather than expanding its market, concentrating on its local Shanghai market. Bo Guanhui, an analyst at CITIC Security, told AP-Foodtechnology.com that it will be very difficult for the firm to regain a national position after this retreat to its local market. "It is extremely difficult for Bright to fight back to the national market. I don't think it is capable of competing with Yili and Mengniu, unless some dramatic changes happen in this industry, for example, if more customers start to drink yoghurt - Bright's most competitive product - than milk. However, I think the chance is tiny." Bright has ceded its number three position to up-and-coming SanLu, now part-owned by the giant New Zealand co-operative Fonterra.
But the national leaders, Yili and Mengniu, continue to increase their market share, buying up smaller dairies or squeezing them out of the marketplace. The two now dominate more than 40 per cent of the milk market, and analysts expect their shares to keep growing. "Yili's increasing investment in the yogurt market, which is less developed than that of milk, looks promising for the company. It currently has a 14 per cent share of this segment," said Guanhui. However he added that there will be growing pressure on margins. "Generally speaking, net profits are falling across the whole dairy industry, because of the great pressure from the increasing costs of materials and marketing. And as the industry develops more and more producers are participating, so it is natural that net profits will decrease," he explained.
Raw milk prices have risen by around 6 per cent during the first six months of the year based on a government procurement decision. "This is a big rise when you taken into account the low margins in this business," said Lillian Lou, analyst at Rabobank. Sugar prices are also eating into the margins on yoghurt and ice cream. "I don't expect the net profit of this industry to rise in the near future, at least not in the next two years," said Guanhui.
The leading dairies are however increasing their spend on marketing to grow consumption of milk products, which are not part of the traditional diet in China. "Because sales are growing, marketing spend has been relatively constant as a percentage of revenue over the years but in absolute terms it has really increased," said Lou. Guanhui says further efforts to educate consumers about the health benefits of milk will be required to ensure sustained growth in the sector. Another national brand, Mengniu, is expected to publish its half-year results on 6 September.
Additional reporting by Pan Yan.