The White Race

by+Hou+Jun

“The price is great： Only 6.9 yuan （about one dollar） per liter， even cheaper than domestic products， and its high quality with no additives，”commented a buyer at yhd.com， a leading e-commerce site in China， after purchasing Oldenburger， a German brand of ultra-high temperature （UHT） treated milk.

Foreign evaporated milk， storable at room temperature， has come back for another large-scale “invasion” through e-commerce platforms such as yhd.com and Tmall.com after a ten-year hiatus from the Chinese market. Some wonder whether the domestic UHT milk market will become dominated by foreign brands as happened recently with baby formula.

The First “Battle”

“This is the second wave of foreign producers of UHT milk，” explains Lei Yongjun， a Chinese dairy specialist. More than ten years ago， foreign brands led by Parmalat， Nestle and Kraft dove into the Chinese market but were defeated due to a lack of experience in the new market.

Parmalat， a famous Italian brand， arrived in China in 1995. In July 2001， it co-invested 70 million yuan with Nanjing Dairy Group Co.， Ltd. to create Parmalat（Nanjing） Dairy Co.， Ltd. The other pioneer was Philip Morris （now Altria）， one of the three world leaders， which joined hands with Beijing Crop Administration in 1993 to establish Kraft Foods （Beijing） Co.， Ltd.

Ultimately， both failed to hold the Chinese market. Parmalat （Nanjing） suffered heavy losses for a variety of reasons， including positioning and marketing， and was still 27 million yuan in the red in two years of operation. Kraft Foods （Beijing） didnt make a cent in seven years of operation and was eventually bought out in 2001 by Sanyuan Group， a leading Chinese dairy producer.

“Parmalats withdrawal from China in 2004 marked the last gasp of the first wave，” Lei continued， “Over the following five years， no other foreign brands attempted to enter Chinas UHT milk market.”

Wang Dingmian， a Chinese dairy expert， understands why the foreign attempts failed. One reason was that their price point was too high. At that time， a 250ml box was priced at more than four yuan – way too expensive for the average Chinese customer. As domestic Chinese dairy producers emerged early this century， many presented stiff competition by providing fresh milk in their respective local markets. Two months required for shipment and the high price led directly to the failure of foreign dairy products in China.

Another “Blowout”

Parmalat learned an expensive lesson， but the allure of the huge Chinese market remains attractive.

Compared to 10 years ago， the Chinese market has seen a considerable drop in the price of imported milk， and access to imports has been smoothed considerably. In May 2014， Beijing approved quick clearance of Australian fresh milk， which can be shipped to China in seven days – 20 days faster than before.

Recent incomplete statistics show that some 200 foreign brands are active in Chinas UHT milk market， including Globemilk， Oldenburger and Devondale， which are mostly found on online shops such as yhd.com， Tmall.com and WoMai.com.

On November 11 of last year （Singles Day）， Tmalls sales of imported UHT milk were inspiring. Anchor from New Zealand， for instance， set a record of 2.47 million in one hour by selling 15，737 units of its boxpacked UHT （250mL×24）.

Over the past four years， China has seen increasing import flow of unrefrigerated milk， which has become the topselling dairy product. Surveys conducted by the Dairy Association of China （DAC） show that in 2014， the country imported 296，000 tons of fresh milk， a year-on-year growth of 56 percent. “Imported milk accounts for less than 1 percent of the domestic market in terms of volume， but it still does impact certain regions and enterprises，” notes Gu Jicheng， secretary-general of the DAC.

“If trends continue， domestic unrefrigerated milk will eventually be muscled out by foreign brands，” remarks Lei Yongjun.“The figures we have today dont mean much. But these products will mercilessly flood the market once they gain a foothold.”

Insiders expect the growing output of raw milk from the EU to inevitably accelerate the “European invasion” of the Chinese milk market when its production quotas are formally abolished on April 1， 2015.

Local Dairy Dilemma

Chinas dairy producers are still calm despite the growing challenge of foreign brands. Three dairy giants – Inner Mongolia Yili Industrial Group Co.， Ltd.， China Mengniu Dairy Company Limited and Sanyuan Group – are working to deploy new distribution channels， particularly e-commerce， to hedge against the new “milk invasion.”

Over the last few years， Chinese dairy producers have accelerated their internationalization. Since 2013， dairy giants have started to hunt for milk resource overseas in collaboration with foreign counterparts. Guangming， for example， signed an agreement with a dairy producer in Australia to process UHT milk. Yili established a strategic partnership with Italys Sterilgarda Alimenti to introduce UHT milk to its production line. Mengniu joined hands with Alar Foods in Italy.

“Locally-produced UHT milk is mainly found in second- to fifth-tier cities in China， which have less access to imported products due to productivity， logistics， and price，” illustrates Song Liang， a senior dairy analyst from Zhongshang Circulation Productivity Promotion Center. “These cities wont be affected in the near future.”

Gu Jiasheng， deputy director of the Milk Product Industry Committee under the DAC， asserted that the new wave of foreign dairy “invaders” to the Chinese market started in 2008 when local producers were struck with credibility crisis after the Melamine Incident. Foreign dairy produc- ers first made a clean sweep of the infant formula market and now target the growing liquid milk market. For Chinese producers， the straightest path is differentiation.

Now， imported liquid milk is primarily ultra-high temperature treated， enabling it to last for six months， a massive advantage for long-range shipping. The disadvantage is primarily in taste and nutrition.

“Only pasteurized fresh milk is as nutritional as raw milk，” explains Gu Jiasheng. “Pasteurized is the best. We need to compete with foreign brands by developing pasteurized milk.”

As a matter of fact， greater public at- tention to health over the last few years has boosted the fresh pasteurized milk market. Statistics from the DAC show that since 2013， domestic sales volume of such products has increased by 30 percent annually， while that of UHT milk has increased by only a single digit.

“The impact of this round of imported UHT milk should be considered good news though，” explains analyst Song Liang.“Only fierce competition can stimulate domestic producers innovation， improvement and development. Maybe its show time for the pasteurized refrigerated milk market.”