Low-price milk powder: losing money to make a splash, and this tough period is here to stay

The low-price milk powder camp has been making frequent moves recently.

The New Hope Group, which has just stormed into the domestic milk powder market with a 99 yuan "cost price" product, has now struck an offline partnership with Walmart, launching a sales offensive across both online and offline channels.

Meanwhile, Junlebao, the "initiator" of low-price milk powder, plans to launch another low-price new product, Super Gold, on May 20, while also stepping up the layout of its offline experience stores.

But judging from the current turnover of New Hope and Junlebao, neither company has yet turned a profit. Some public opinion holds that low-price milk powder brands, whether offline or online, "are currently at the stage of losing money to make a splash."

Dairy industry expert Song Liang told the Beijing News that although in the long run milk powder prices are bound to enter a downward channel, it will take time. Prices that are too low can easily kill off the channels, and "price is no longer the decisive factor influencing consumers; the key is whether you can improve professional services for consumers."

Low-price milk powder shifts from online to offline

On April 27, infant milk powder "price butcher" New Hope Nutritional Products Co., Ltd. announced an "exclusive strategic partnership" with Walmart, signaling that its newly launched 99 yuan low-price milk powder "Airuihui" is starting to shift to offline channels. Starting May 1, "Airuihui" went on sale both online and offline simultaneously, all at the price of 99 yuan.

In response, Wang Zhi, general manager of New Hope Nutritional Products Co., Ltd., said the partnership with Walmart "is Airuihui's efficient integration of platforms and resources in improving channel construction and marketing promotion efficiency," with the aim of letting more consumers experience "Airuihui" offline.

Industry insiders have pointed out that the price formation mechanism of Chinese milk powder has not yet been completely eliminated. So, in shifting to offline channels, how does New Hope avoid this pricing mechanism? Wang Peng, brand manager of Sichuan New Hope Dairy Co., Ltd., responded that the cooperation model between New Hope and Walmart is rather special, but the specifics are not convenient to disclose, and the cooperation cost cannot be understood as "zero"; he would only say that the channel costs of cooperating with JD.com and Walmart are relatively close.

Liu Xiao'en, senior vice president of Walmart China's procurement department, previously told the media that the cooperation with New Hope is an entirely new attempt, with no performance projections and no guarantee of gross margin, saying only that "both sides have made many efficiency improvements, saving costs to pass on to consumers."

Before New Hope, Junlebao, which also entered the market relying on e-commerce, had already laid out offline channels as early as last year. Liu Senmiao, manager of Junlebao's milk powder division, told the Beijing News, "Junlebao currently has 5,000 stores, and when it reaches 20,000 it will connect online and offline. There are not yet enough offline stores, and we are expanding rapidly."

According to information previously disclosed by Liu Senmiao, Junlebao already has 4,000 O2O offline experience stores, cooperating with mother-and-baby stores across the country, saving on online sales costs such as shipping and online platform fees, and returning these to offline, thereby requiring offline and online to be priced the same.

Big low-price fanfare but still losing money

In fact, when New Hope first partnered with Walmart, there were voices saying New Hope was "losing money to make a splash."

Senior dairy industry analyst Song Liang believes their cooperation "does not fit the profit model of current mainstream retail formats"; large stores have their difficulties, and personnel and rent costs are also very high, hard to bring down.

He told the media that for large hypermarkets like chain supermarkets, the entry fee is at least 4 million yuan a year, plus tens of thousands to nearly a million yuan in display fees, and tens of thousands of yuan in event support fees; when these costs are spread out, a can of milk powder must sell for at least 150 yuan to make money.

Even in online channels, New Hope and Junlebao currently have not turned a profit and are still in the "burning money" stage.

Liu Yonghao, chairman of the New Hope Group, has stated that the 99 yuan milk powder will definitely lose money in the early stage, and will only become profitable once product sales reach a certain scale. When asked about the specific break-even line, New Hope's Wang Peng said there is currently no relevant plan or target, and they are striving to increase the consumer base to 500,000 to 1 million this year.

Junlebao's Liu Senmiao said that in the more than half a year after its launch last year, Junlebao's 130 yuan milk powder achieved sales of 210 million yuan, and in the first 3 months of this year alone it exceeded 100 million yuan, with cumulative membership reaching 500,000.

Has such sales volume made Junlebao profitable? Liu Senmiao believes profitability consists of several factors: first, scale; second, capacity utilization; third, gross margin. "If you sell a can for 300 yuan, then selling 5,000 cans a year can be profitable; selling at over 100 yuan a can, we estimate we need to reach 500 million to 1 billion yuan in turnover this year to be profitable."

Liu Senmiao also emphasized that Junlebao milk powder is still in the market development stage, and both consumer trials and product promotion require investment. "We haven't set a profit target for this milk powder yet; let's first build the market well and then talk. If we wanted to be profitable, we'd just slightly reduce the investment and there it is."

Lei Yongjun, chairman of Putian Shengdao Milk Powder Marketing, estimates based on experience that under traditional channel operations, the break-even line for a milk powder company is annual sales of 500 million yuan; if this point is not reached and investment is increased, then the company "is definitely losing money."

As for low-price milk powder, Lei Yongjun believes that if brand operation and personnel control are done relatively precisely, annual sales of 300-400 million yuan would be the break-even line for low-price milk powder.

The "price war" has already begun

More and more brands are joining the low-price milk powder camp, and competition has already begun.

Junlebao milk powder division manager Liu Senmiao disclosed that as of the end of last year, 10 companies were preparing to make milk powder priced at around 100 yuan, and now 2 or 3 more companies have joined in.

Yashili recently also publicly admitted that "Niu Xiaohui," who was featured in media during Mother's Day as a comeback against the original wife, is in fact Yashili's "Nenghui" gold infant formula milk powder.

Unlike Junlebao and New Hope, Yashili's "Nenghui" is not a new brand dropped into internet channels out of nowhere, but a comeback based on 8 years of traditional market experience. Yashili's official WeChat said that 8 years after "Nenghui" came out, its price dropped from around 160 yuan to within 100 yuan, "using 99 yuan to open a new era of high quality and low price for big-brand milk powder," and its promotion channel, like New Hope's, chose JD.com.

But dairy expert Wang Dingmian, in an interview with the media, believes that at present its market share is not as good as several other brands, and wanting to achieve promotional effect through low prices, it has not made preparations as well as New Hope has.

Junlebao, the "initiator" of low-price milk powder, is also not to be outdone. On May 5, Junlebao's official WeChat announced that it would soon launch a new product, Super Gold, with indicators superior to "three-high" milk powder (high price, high cost, high profit) but at a lower price.

Liu Senmiao told the Beijing News that this Super Gold milk powder will be officially launched on May 20, priced at over 100 yuan. "Compared with foreign milk powder, this milk powder's main ingredients such as nucleotides and prebiotics are superior to theirs; if placed on the market it would usually sell for around 380 yuan."

The path of low-price milk powder is somewhat confusing

In Lei Yongjun's view, consumers in first- and second-tier cities are more brand-sensitive and not sensitive to price; the real market for low-price milk powder is in less developed areas, but e-commerce has some difficulty reaching these areas. "The e-commerce model focuses too much on low prices and not enough on brand building, making it hard to take root in consumers' minds, and consumers' milk powder purchases will not grow explosively; this is also the fundamental reason low-price milk powder is shifting to offline channels."

Lei Yongjun said that for low-price milk powder brands like Junlebao and New Hope to move from online to offline, they still need to innovate in their business model. "I think they are still rather confused." When milk powder is distributed to terminal stores, part of the profit must inevitably be given up to the terminals in order to match the same low price as online, which will also deal a kind of blow to the online sales of milk powder.

Regarding the quietly emerging "price war" in low-price milk powder, Song Liang said that in the long run milk powder prices are bound to enter a downward channel, but adjustment takes time; prices that are too low can easily kill off the channels and easily disrupt the entire industry. "Price is no longer the decisive factor influencing consumers; the key is whether you can improve your professional services for consumers. In terms of service, Chinese dairy companies still have a long way to go."