A new dairy policy has arrived. Is the industry's spring far behind?
Although the milk powder “new policy” has only been in effect for one month, what is called the most brutal reshuffle in history has already swept in across the board, with many milk powder companies shedding tears as they dump stock in a final frenzy. Recently, reporters learned from several industry insiders that many milk powders on the market are being “dumped” at ultra-low prices through various promotional methods, at prices lower than ever before. Among them, a Yaolan milk powder distributor in one location was shipping at 20-25 yuan/can, while on Fen Zhong Zhuan Xiang, Beingmate's “Green Love+” imported in original cans from Ireland was promoted at a price of just 19.9 yuan/can. In Shaanxi Province, which leads in goat milk powder development, most dairy companies have begun restricting goat milk purchases.
Industry insiders say that a large amount of inventory milk powder on the market is being dumped, including not only domestic milk powder but also imported milk powder, which is being dumped quite frenziedly as well. Part of the reason is that the products are nearing their shelf life, but a larger part is due to the implementation of the strict new policy, forcing some brands to exit the market in hopes of clearing all stock before the policy deadline arrives.
Most Dairy Brands Face Elimination
According to the new milk powder policy, formulas for products in the same age range registered by the same company must have obvious differences and be confirmed by scientific evidence, and each company may not apply to register more than 5 series and 15 product formulas.
A person familiar with the matter told reporters that in order to adapt to marketing in multiple regions, most small and medium-sized milk powder companies have dozens or even hundreds of brands. Under the new policy, they can only keep 5, and which ones will survive is still unknown.
Regarding the current quantity of inventory products, several industry analysts said that a conservative estimate puts it at nearly 10 billion yuan, and at the lowest no less than several billion yuan. There are currently more than 1,500 custom milk powder brands on the market. Calculating on the basis of a minimum order of 30,000 cans, that is at least 45 million cans. At an original price of 200 yuan per can, that is about 9 billion yuan in inventory.
Dairy expert Xie Guansheng said that the circumstances of products being discounted and dumped vary. Some milk powder brands indeed have relatively large inventories and recently began substantial promotions to speed up destocking, while another category involves custom brand products being offloaded. Many milk powder brands worry that some custom brands will be consolidated out under the new policy, so they dump the custom products of those brands, which originally sold for more than 200 yuan and now sell for only over 100 yuan.
Wang Weimin, secretary-general of the Shaanxi Province Dairy Safety Production Association, said that after this adjustment, a sharp reduction in brands is already an indisputable fact, but the most critical thing is that a large number of small and medium-sized dairy companies will shut down. Wang Weimin said that taking Shaanxi Province as an example, there are sixteen goat milk powder companies, most of which do contract processing and OEM production. The new policy is a fatal blow to these companies, and it is estimated that only three to five companies will remain in the end.
Industry insiders believe that the brands currently most affected are Yaolan, Mingyi, Guanshan, Shengyuan, Feihe and others, as well as Shaanxi goat milk powder brands such as Yubao, while those slightly less affected are Beingmate and Yashili. These two companies started relatively late in custom products, though they also have quite a few custom brands. Those almost unaffected are Biostime and Yili, which have no custom products. This new policy also has a relatively large impact on domestic goat milk powder brands. Due to the serious phenomenon of OEM production, many brands will be eliminated.
Rising Concentration Trends Toward Competition Among Major Brands
In addition to domestic brands facing a major reshuffle, foreign milk powder brands are likewise encountering the strictest policy adjustment in history. Because many brands use overseas factories for contract manufacturing, the new policy will leave many brands facing a situation where no production plant can manufacture for them.
Wang Weimin said that after the new policy, imported milk powder brands and major domestic brands may occupy more market share. According to him, domestic companies have as many as dozens of OEM brands, while for those well-known milk powder companies, their own brands are few and they rely on brand recognition to compete. The restrictive provisions of the new policy on the number of brands have far less impact on foreign milk powder than on domestic companies.
The massive dumping will continue until the end of next year, and by the second half of next year the dumping phenomenon will stabilize. Reducing inventory is currently the biggest problem facing the industry. As the intensity of dumping increases, many brands will exit the market, industry concentration will rise, some miscellaneous small brands will be cleared out, and the industry will see a situation of competition among several major giants.
In fact, the “Work Plan for Promoting Mergers and Reorganizations of Infant Formula Milk Powder Enterprises” issued last year clearly proposed that by the end of 2015, it would strive to form about 10 large infant formula milk powder enterprise groups with annual sales revenue exceeding 2 billion yuan, with the top 10 domestic brand enterprises reaching an industry concentration of 65%. “The current policy direction is concentration, and more concentration,” Wang Weimin said.
It is worth noting that as industry concentration rises, the bargaining power of distributors and store channels will decrease. Some channel links that earn high profits by selling knockoff products will face operational difficulties, and some distributors and baby and child stores will also see a wave of closures or transformations.
Upstream Breeding Industry Adjusts Accordingly
With the introduction of the new milk powder policy, the upstream and downstream of the milk powder industry will face enormous adjustments, which has become an industry consensus.
Take Shaanxi Province's goat milk powder industry as an example. When reporters interviewed three months ago, the purchase price of goat milk raw materials was about 8 to 10 yuan/kg, but as of November 3, the purchase price of goat milk raw materials had fallen to 3 to 4 yuan/kg, and the income goat farmers actually received was less than 2.5 yuan/kg. “In just one or two months, the situation has changed drastically. When milk is delivered to the major dairy companies, they simply do not want it, saying they cannot produce that much.” goat farmers told reporters.
Is that really the case? In the workshop of a dairy processing enterprise in Shaanxi Province, newly replaced production equipment sat silently in the corner. “We originally had dozens of brands, and now the new policy requires cutting down to only 5. Who dares to produce? If it cannot be sold, it will cause huge losses. Not daring to produce in large quantities, we can only limit the amount of milk collected, and lowering the milk purchase price is only natural. But when this signal is fed back to the dairy farmers, they become panicked, afraid that what happened in the dairy cattle industry will happen again, and they are also hesitating about whether they can still raise these goats next year.” the head of the enterprise said.
The impact of the new milk powder policy has already been reflected in the dairy goat trading market. Just three months ago, the purchase price of a fine dairy goat was no less than 2,000 yuan, but after the new milk powder policy was released, out of worry about the future market, the purchase price of a dairy goat has fallen to 1,000 yuan.
“Shaanxi's goat milk industry had just entered the fast lane of development, and after the new policy, 2/3 of enterprises' production capacity will be in a state of surplus and they will have to stop production.” Wang Weimin told reporters that if it is limited to only 5 brands and 15 individual products, the market sales of the 5 brands with the largest sales volume among Shaanxi goat milk enterprises can only account for 30—40% of the company's total performance, and small and medium-sized dairy enterprises will suffer a direct fatal blow and have no choice but to withdraw from the market in the future.
For those small-scale farmers who supply milk to small and medium-sized dairy companies, if the milk purchase price continues to fall, they will have to slaughter goats to reduce the losses caused by breeding. “In the future, it will definitely be targeted cooperation between large-scale breeding cooperatives and large dairy companies, which can both ensure the quality of milk sources and reduce breeding costs.” several dairy experts told reporters.
Industry insiders believe that a reduction in milk powder brands will make regulatory management more detailed, and the probability of problematic milk powder will be greatly reduced. In the long run, the introduction of the new milk powder policy is beneficial to industry development. If adjustment is carried out through market means, the process will take longer. But adjustment through industrial policy can turn originally slow progress into sudden development, though the shock to the industry is too great, and too little buffer time is left for farmers, especially breeders.