Global dairy prices near 5-year low, price war accelerates shakeout of domestic dairy companies
On July 15, the auction price of whole milk powder on Fonterra's GlobalDairyTrade platform suffered a ninth consecutive decline. Coincidentally, recently, well-known American infant formula company Mead Johnson also significantly lowered its 2015 sales growth rate, earnings per share and other indicators; the company expects that at constant exchange rates, its sales growth range for this year will be lowered from the original 7% to 0%~2%.
Industry insiders worry that amid falling international milk prices and overcapacity, the domestic dairy industry will still endure the price war for some time. On July 23, dairy expert Song Liang said in an interview with a National Business Daily reporter that more companies will lower their performance targets in the second half of the year, and as milk powder prices enter a long-term downward channel, China's infant formula milk powder has entered an era of thin profits.
Mead Johnson lowers profit expectations
The auction price of whole milk powder on Fonterra's GlobalDairyTrade platform has been falling continuously. Data show that 4,750 tons for September delivery failed to sell; whole milk powder for December delivery, arriving at port in January 2016, fell from 2,054 USD/ton to 1,895 USD/ton, down 10.7% from the transaction price on the 1st of this month.
The decline in upstream raw material prices in the dairy industry has already affected the downstream industry, and Mead Johnson has become the first company to publicly lower its performance expectations for this year; in its recently updated 2015 financial forecast, it said that after preliminary estimates, Mead Johnson's sales in the second quarter of this year at constant exchange rates fell 3% year-on-year, and if the foreign exchange impact is included, this figure will fall 7% year-on-year.
Mead Johnson also said that dairy product prices are currently close to a 5-year low, and the impact of falling milk prices has appeared in several markets, including Latin America and Asia, with the Chinese market being the most obvious.
In response, on the afternoon of July 23, Mead Johnson (China) said in an interview with a National Business Daily reporter that because the company has not yet completed the second-quarter closing process, this result is currently only a preliminary forecast. This year the company's performance in the North American and European markets has remained strong, and the transformation strategy implemented in China has also shown satisfactory preliminary results, with newly launched fully imported products performing strongly.
Mead Johnson said that through a series of new initiatives and continuously strengthened e-commerce channels, the Chinese market can record sustained sales growth by the end of this year.
More than 2,000 dairy product brands
The price war that began in June last year has made China's milk powder industry go through its most difficult period in history; previously, this rigid-demand consumer product, like real estate, had maintained firm prices for ten years.
Song Liang told reporters that the keyword for the dairy product industry in the first half of this year was the price war, with offline channels focusing on promotions and price cuts, while online channels offered discounts or pushed low-priced products. “Imported brands cut prices across the board, and domestic brands saw cuts of up to 50%.” Even so, consumers did not seem to buy it. Calculated by sales value, as prices move downward, the growth rate of China's infant formula milk powder sales will slow markedly in the future, with the increase expected to drop to 9% in 2015.
A marketing manager at a domestic dairy company admitted frankly to a National Business Daily reporter that although the company has not yet adjusted its sales target for this year, the first half of the year was indeed difficult. A brand department head at a listed company revealed that amid the sluggish market, the company is also compressing promotion costs in order to maintain the profit margin of its original products.
Song Liang pointed out that China's dairy product market has more than 2,000 brands and severe overcapacity. On the one hand, the price war drives a large number of small brands out of the market, and on the other hand it compresses channel profits, forcing channels to upgrade toward specialization.
Song Liang also said that the price war has moved the overall price system of domestic milk powder downward, accelerated industry mergers and reorganizations, and can also curb excessive capital investment and the entry of new overseas milk powder operators. Competition in China's infant formula milk powder has entered the red ocean stage ahead of schedule.