Re-fight channel sinking, foreign milk powder in the low-line market and domestic milk powder "fight bayonet"

Recently, a number of foreign milk powder brands announced the latest performance, although the domestic milk powder market as a whole shrinks, but the growth of foreign milk powder brands is slowing down or declining Trend is gradually changing. The first financial reporter understands that major foreign milk powder brands, including Royal Friesland, Danone, Wyeth, A2 and so on, are promoting a new round of channel sinking, ready to "grab the ground" in the 3-5 line market and domestic milk powder brands.

The performance of foreign milk powder recovered

2021 is not an easy year for major milk powder brands at home and abroad, but the recently announced performance of foreign dairy companies such as Friesland, Nestlé and A2 is better than market expectations.

According to the announcement, Friesland's revenue in 2021 was 11.5 billion euros, an increase of 3.2% year-on-year, and its operating profit was 360 million euros, an increase of 32.5% year-on-year, and the growth rate of the Chinese market was higher than the global level.

Friesland China President Chen Ge told the first financial reporter that Friesland China's annual net turnover and net sales maintained double-digit growth, of which the sales of professional dairy products in the Chinese market increased by more than 30% in 2021, the professional nutrition business (including milk powder business) maintained single-digit growth, and the core large single product Royal Meisu Jiaer increased by more than 50%.

A2 Milk's results for the six months ending December 2021 in the same period show that sales of A2 Chinese label milk powder began to pick up in the second quarter after a decline caused by destocking in the first quarter of the fiscal year. In the first half of 2022, sales of A2 infant formula for Chinese labels were NZ$190 million, down 11.4 per cent year-on-year, but double-digit growth was achieved in the second quarter, and milk powder market share also reached a record high of 3.2 per cent in December 2021.

Recently, Nestlé also announced its full-year results for 2021, with sales revenue in the Chinese market of CHF 5.56 billion, or about 39.2 billion yuan, of which market share such as cooking, coffee and pet food is growing, but the market share of baby nutrition is still declining. But at the analyst meeting, Nestlé CEO Schneider said that Nestlé will not sell the milk powder business and has adopted a new strategy, which is expected to show results in 2022.

The reporter noted that the trend of the above-mentioned financial report reaction of dairy enterprises is different from that in the first half of 2021.

Nielsen's offline (mother and baby + supermarket) milk baby powder data released by Nielsen from January to May 2021 shows that the market share of several major foreign brands has declined to varying degrees, with Friesland's Meisu Jiaer and Danone market share falling by a small margin of 0.3% and 0.4%, while the market share of Wyeth, Mead Johnson and Abbott fell by 2.1, 1.9 and 1.1 percentage points respectively. In the first five months of this year, the market share of offline domestic milk powder rose from 31.4% to 39.6%, while the market share of foreign milk powder fell by 6 percentage points to 32.9%.

The battle for the low-line market

The previous decline in the performance of foreign milk powder brands, on the one hand, is caused by the shrinking of the domestic milk powder market, with 10.62 million births in 2021, compared with 18.83 million people in 2016, about 40%; on the other hand, it comes from the fierce competition brought about by the rise of domestic milk powder brands Such as Yili, Junlebao, Feihe, etc., which harvest small and medium-sized brands in the third to fifth tier markets and seize market share, while foreign brands have not been able to start in the low-tier market.

Kantar Worldpanel survey data show that in the first half of fiscal 2022 (that is, June-December 2021), China's overall baby powder market size fell by 5%, the survey found that the decline in the first-tier market dominated by foreign milk powder brands was more obvious, down 6.6%, but the 2, 3 and 4 tier markets were flat.

The performance change of foreign milk powder brands may be related to strategic adjustments, including a new round of channel sinking.

Foreign milk powder brands tried to promote a channel sinking around 2018, and finally failed to succeed due to water and soil dissatisfaction, but from the second half of 2021, foreign milk powder brands changed their strategies, hoping to seize the opportunities of the low-line market, and also saw some changes from the financial report.

Friesland's financial report shows that China's lower-tier cities have huge growth potential, the market share of infant formula milk powder accounts for up to 55%, Friesland through its own development of the Philippines Frequent Purchase App directly links offline mother and baby stores, service providers, and has expanded to 162 lower-tier cities, in the fourth quarter of 2021, the proportion of Philippines regular purchase sales has exceeded 10% of friesland's China baby formula business sales.

According to Chen Ge, the channel sinking is still being explored, the new model and the previous model with the help of dealer channel sinking model is different, the business has been split, on the one hand, the use of foreign milk powder brands in the digital and brand advantages, docking stores and consumers; on the other hand, through professional service providers logistics and other service support. At present, this model is welcomed by the market, so this year will further promote the implementation of this strategy.

During the market visit, the reporter learned that Danone's new round of channel sinking is also flattened through Internet technology to avoid multi-level distribution. In the industry's view, this model reduces the distribution link, thereby enhancing the competitiveness of foreign milk powder products in the channel with domestic brands.

It's not just Friesland and Danone that include increased nestlé's new plans to increase the impact of its products in lower-tier cities; in addition, A2 has also increased its investment in lower-tier cities to seek higher penetration rates, and as of the end of December 2021, the number of a2 distribution stores in China has increased from 228,000 at the end of June 2021 to 246,000.

Independent dairy analyst Song Liang told the first financial reporter that under the stock competition, foreign milk powder brands can not give up the low-line market, the current new strategies of each have achieved some results, but in the long run, the downline market is the main battlefield of domestic milk powder brands, the next step of competition will be very fierce.

It is worth noting that the results of the third- to fifth-line market competition or will determine the future of the domestic milk powder market, the reporter learned that at the beginning of this year, there are domestic large brands have begun to require dealers to double the payment, and promote new customers to buy one get one free and other large-scale promotional activities, further squeeze and seize the market share of small and medium-sized brands, accelerate the market reshuffle, and there are small brands in 2021 sales less than the previous 30% to 40%.

In Chen Ge's view, in the next 5-10 years, the reshuffle and centralization of the milk powder industry will not stop, Nielsen data, the current market share of the top ten in the industry is about 75%, and in the next 5 years, 75% of the market share may only come from 5 or 6 brands. The next step of market competition has entered a stage of all-round competition, examining the comprehensive strength of enterprises in branding, digitalization, channel management, formula registration, quality and so on.

"Now the third- to fifth-tier market is already a state of contention." Song Liang said that with the rollout of foreign brands' off-line market business, as well as the promotion of e-commerce, especially the official cross-border purchase business, consumers' focus may be the same as those of the first and second lines, gradually shifting to multi-dimensional considerations such as formula, product function and consumer education, and the long-term pattern of the market remains to be seen.