In China, the bourgeoning market of liquid milk and dairy products has transformed into a fierce battlefield packed with domestic and international milk producers fighting aggressively for the market share. This situation seriously challenges the status quo of a long-standing milk duopoly in China, and more importantly, unveils great market potential of the under-saturated and under-estimated liquid milk demand for foreign brands.

 

Money, Milk, and Media

It was not a long time before Chinese consumers were bombarded with flooding milk commercials and dazzling dairy product placement in variety shows and movies. In November, Yili, the largest dairy firm in China, pledged $470 million U.S. dollars in its TV advertising campaign for the year of 2016. With $171 million dollars on exclusive naming rights for two of the most-watched Chinese reality shows, Yili also bought exclusive primetime advertising slots for CCTV’s 2016 Rio Summer Olympics Scoreboard and other leading entertainment shows.

Not to be eclipsed its most ambitious competitor Yili, Mengniu also marched on with its advertising campaign. The firm generously invested hundreds of millions of dollars in naming TV programs that are major rivalry with those sponsored by Yili. During the media sponsorship auction season this year in China, in TV advertising alone, Mengniu sponsored $120 million dollars with competition show Run for Time and Summertime Sweetheart Season 1, a reality show that is even still in its brainstorming stage.

There has been a long history of Yili and Mengniu’s competition in the Chinese milk industry. Unlike baby formula market where foreign brands completely outplay Chinese domestic sellers and claim 54% of the market, liquid milk consumption is a different story.

Yili and Mengniu, counterparts of Apple and Android in the cell phone industry, dominate significant market shares of liquid milk in China. Both milk giants account for 21.7% and 18.8% of Chinese liquid milk sales respectively, followed by WaHaHa of 9.6% and Bright Dairy of 6.9% in 2013. Yili earned a profit of $652 million dollars in 2014 while Mengniu claimed its profit at $360 million dollars.

The overwhelming advertising strategy employed by dairy companies guarantees that if a television show consumer turns on his TV during prime time, this target consumer would be very likely exposed to milk advertisements, either kids drinking milk with smiling faces or young professionals trying a solve her digestion problem with premium-priced yogurt.

The aggressive marketing approach, along with the considerable amount of advertising money that is more than 80 percent of the annual profit, exactly reflects how desperate Chinese milk companies are in order to capture the ever growing market of liquid milk. But the duopolistic situation is about to change, when foreign competitors come into play and try to get a share of the huge cake.

 

(Yili and Mengniu’s TV ad campaigns with reality shows Where Are We Going Dad? Season 3 and Run For Time Season 1.)

The Next Growth Point

If there is anything that deserves attention in the Chinese milk industry, it’s the exuberant and growing demand that dictate the liquid milk market. As the Chinese government abandoned its controversial one-child policy, China will implement its two-child policy starting from next year. For dairy firms around the globe, the good news is that in the next decade, millions more children will be accompanied with cow milk during their childhood and adolescence. In the future, those who grow up with milk consumption behavior can be core customers that help support sustainable growth of dairy companies in the long run.

Even if the new two-child policy may bring more babies, the sales increase in the baby formula market has remained comparatively weak. A Nielsen report shows that in the first half of 2014, dollar sales of baby milk powder in China jumped by 7 percent, however unit sales slumped by 4 percent. As the competition in milk powder market intensifies and the market gets saturated, price wars can become a normal state in the industry, making it harder for firms to grasp the market share. While the sales of baby milk are likely to face its bottleneck in the near future, liquid milk, in contrast, has a brighter prospect.

Thanks to the continuing urbanization and shifting consumer behavior in the Chinese rural area and third- and fourth-tier cities, more people are switching from drinking soy milk to cow milk for their breakfast. In 2012, a Chinese consumes only 32 pounds of milk a year on average, whereas an American drinks 168 pounds per year and the figures for neighboring Japan and South Korea are 75 pounds. A ten percent annual increase of discretionary income over the past decade enables Chinese consumers to spare more money on their groceries, thus creating huge potential for liquid milk consumption.

However, the 2008 melamine scandal left long-lasting aftershock on Chinese domestic milk brands. Eighteen local dairies were found adding melamine into raw milk in order to fake high quality cow milk. Consumer confidence has never recovered from deep suspicion against local milk companies since then. In an effort to appeal to those who have lost their faith in domestic milk, foreign companies seized the chance and launched its marketing campaign. The result proved to be a huge success.

In the past decade, the amount of imported liquid milk in China have grown exponentially, from less than 4,000 tons in 2005 to 200,000 tons in 2014, according to the U.S. Department of Agriculture. As of 2015, firms from 27 countries, including the U.S., Germany, and Australia, have been exporting liquid milk to Chinese market with more than 100 brands. The confidence in safety and quality is the major driver behind the growth.

Since the baby formula market has already been dominated by international brands, Chinese firms are now fighting hard to prevent its liquid milk business from being taken away by foreign competitors. Unfortunately, it seems that both Chinese and international companies are primarily targeting the same group of consumers.

 

Target the High-End Market

Milk has always been a luxury in China for thousands of years until 1980s, when the economy went back on track after the end of the disastrous Cultural Revolution. A large part of Chinese population is intolerant to lactose, making it hard for them to digest milk, cheese, or other dairy products. Chinese never in their history used milk, so when milk companies attempted to create demand in the 80s and 90s, they marketed milk as a necessary source for strength, nutrition, and energy, as well as a symbol for better living standard. “A pound of milk a day, keeps Chinese strong,” slogans similar to “an apple a day keeps the doctor away” could be heard on TV and radio on a daily basis.

As milk consumption steadily rose since 2000, Chinese firms shrewdly sensed the huge potential purchasing power of Chinese middle class families. That’s why Yili spent hundreds of millions of adverting budget on reality TV shows like Where Are We Going Dad? to broadcast visuals of celebrities’ children drinking its QQStar, a flavored milk product that is designed for kids under 12 and priced at a premium. QQStar comes with a small 4-ounce carton, meaning lower packaging costs compared to regular milk packaging. By targeting millions of middle- and upper-class parents of spoiled only-child, Yili managed to generate more profit margin from selling milk in smaller size.

In the liquid milk market, international firms price their products at even higher premium to attract high-end customers in Chinese market. Australian milk firms like Pauls, Harvey Fresh, and Lemnos mostly sell their merchandise through online stores. By branding themselves as the gateway to high-quality lifestyle, they successfully drew attention from urban wealthy families that don’t care much about money but instead put more weight on the product quality they receive. German brand Oldenburger, for instance, even put German flags and huge “product of Germany” banners on goods shelves in some stores to signal its German origin.

(Imported milk products in Chinese stores.)

Historically, because of the perception that imported goods are usually superior in quality, Chinese consumers are willing to pay more than do global customers. Merchandise that is not native to the Chinese market – coffee, cherries, pistachios – are generally well accepted at higher prices in anticipation of higher value. Imported milk is no exception. An imported product typically doesn’t require massive advertising campaign to push sales, because its country of origin is a good selling point in itself.

It’s difficult to predict whether international companies will occupy larger shares than do Chinese brands in liquid milk market. However, it can be foreseen that in the near future, Chinese firms are likely to undergo more intense competition from each other, because international companies have overall greater and more trustworthy brand images. For Chinese milk giants Yili and Mengniu, they might lose their leader status if they failed to grapple opportunities to cater to customer needs and to rebuild their brand images.

They are working hard on it. Perhaps it may seem awkward sometimes, especially when you see a 15-second close-up shot of Yili milk carton held in American actor Stanley Tucci’s hand, in the 2014 Transformers: Age of Extinction movie.

 

https://youtu.be/tmyBOyChsoI

Sources:

China Milk and Dairy Market Report 2015, KPMG China, May 2015

 

People call it the French version of 9/11. Paris, just like terror-shrouded Sinai and Beirut, occupied the latest global headlines when the capital of romance turned into a living hell last Friday. Shootings and bombings swept the city in theater, stadium, restaurant, and street corners, leaving hundreds of civilians dead and wounded. If the Charlie Hebdo shooting was infuriating and revolting, there is something more agonizing and heartbreaking about the Paris Black Friday. It brutally mirrors the perplex and twisted nature of political, economic, and religious conflicts, both local and global, in our modern world.

 

Other than spreading extremist fundamentalism and terrorism around the globe, the ISIS is nothing like al-Qaeda, the mastermind that left a permanent scar on the soil of America. Apparently, ISIS has a much more ambitious and clear plan – it shows strong desire for land and it desperately wants it now. With its ultimate goal of establishing a powerful caliphate, the militant group even envisioned a tempting plan to reshuffle the order of world financial and monetary system. It sounds just like other absurd conspiracy theories on the market at the first sight, but how the ISIS theoretically articulated and defended its own vision of the new financial order explicitly reveals its devouring ambition of conquest.

 

In a lengthy propaganda video released in early September, the ISIS fiercely condemns the global dominant position of United States dollar, accusing the U.S. Federal Reserve of enslaving the world economy and the greenbacks of being “evil and unchecked.” Instead, the ISIS proposes a bold alternative: replacing paper money with its own legal tender money called gold dinar. Full of iPhone-commercial-style shots boasting of its modern and state-of-the-art mintage, the video purports to show the superiority of gold standard and challenges the status quo of U.S. dollar as the reserve currency used by many countries. The ISIS also claims that it’s now collecting its oil revenue only in gold, even though most of oil money is still paid in the U.S. dollar.

(A screenshot of the ISIS propaganda video. Source: The Economist/YouTube)

Whether the gold currency remains legal is left to question, not to mention its practicality as commodity money. People has abandoned precious metals as money long time ago and implemented financial systems around paper money for centuries. In fact, the world hasn’t abandoned gold standard until the U.S. brought the convertibility of the U.S. dollar to gold to an end in 1971. In theory, pegging the dollar to gold can guarantee price stability and prevent inflation in the long run, however, the history has proven that’s not quite accurate.

 

While most economists nowadays agree that gold standard is a bad idea, recent political debates around the revival of gold standard merely reflects the dissatisfaction towards the Federal Reserve’s power of setting the interest rates and printing money. The gold standard can explicitly limit the size of the economy and the flexibility of government monetary policies. When the central bank needs an easy monetary policy, it will be restricted to do so because the money is linked to how much gold it has – any over issue of paper money can risk bank runs or even the collapse of the economy.

 

Looking back through the history, precious metal was replaced by paper money, and today paper money is gradually being replaced by checking accounts and credit cards. In his Night Journey, the Prophet Muhammad was awoken by an archangel, received revelations from the God, and envisaged a caliphate ruled by the Koran, but he has probably never imagined the evolution of monetary systems. Whether it’s the 7^th century or the 21^st century, there is no point of going back to the time when we link our economies to precious metal. If there’s any benefits in maintaining such system, it has simply become obsolete and impractical to fit in our modern world.

 

Born and raised in Boyle Heights, Robert Campos, 69, has seen the unpaved dirt street in front of his house transformed into solid concrete and then asphalt. But the neighborhood where he knows every corner and turn has never been so costly and unfamiliar to him.

Gentrification has undoubtedly become a heated controversy looming over Boyle Heights in the past few years. As home value recovered from 2008 financial crisis, an increasing number of home owners, mostly those who have lived in the area for more than 15 years, are leaving the neighborhood and selling their properties.

“If it gets above $350,000, I’m going to insist we sell the property,” said Campos, who inherited his four-bedroom house from his mother and is now retired. He vividly described a Korean investor canvassing the neighborhood, eager to buy houses with $400,000 cash in hand, just before the housing collapse in 2008.

When Sergio Ramos, a real estate broker, opened his business in 1992 on the E. First St., he would have never imagined a monthly sales of 60 to 70 residential houses. Before the housing bubble busted, some houses were even sold at $500,000, the highest in Boyle Heights’ history. “After that everything just died down,” said Ramos, “but prices have gone up recently in 2015. Compared to last year, they increased about 10 to 15 percent. That’s a lot.”

Due to its Latino culture and vicinity to the downtown area, Boyle Heights has attracted a lot of young Mexican-Americans who work in downtown area and Arts District. Most of them are first-time home buyers and working-class population, according to Luis Negrete, the manager of a real estate agency located close to the Metro Indiana station.

On one hand, there is a constant demand for housing pushing up the prices; on the other hand, however, the ongoing gentrification process has made living cost higher than ever before.

(Robert Campos sits beside the door, reading newspaper. By Zihao Yang)

“It’s getting more expensive [to live here]. The taxes have gone up a lot. And utilities have gone up a lot,” said Campos, considering moving to Costa Rica or Mexico where his parents originally came from, “I might have to go into a small one-bedroom apartment because I can’t even afford to live here in this neighborhood.”

Moving out of the country doesn’t seem to be a realistic plan, but Campos and his sister have been seriously considering the option of putting his house up for sale, taking the cash, and renting a single-bedroom apartment for himself.

A former technician of a telecommunication company, Campos fell off the pole during his routine shift in 1990, injuring both of his legs. In the past 15 years, he has been relying solely on pensions and past savings for a living.

However, if someone puts all his money in a savings account and makes no other investments, the balance would have probably looked the same since the Federal Reserve set the Federal funds rate at near-zero level in 2008.

“Somebody is paying the price for low interest rates. It’s you and me who have money-market accounts which are earning 0.27 per cent,” said Raghuram Rajan, a former IMF chief economist, in an interview of the documentary Money for Nothing, “[The super-low rate] punishes the elderly and people on a fixed salary. They worked to save that money but get nothing for it.”

Strange enough, when food expense, property tax and utility bills stack up, getting rid of your own house and renting one instead suddenly become a realistic option for older generations with no children to bestow their properties on.

The demand for housing in Boyle Heights has remained fairly strong after the Metro Gold line was put in use in 2003, even if home prices have fluctuated tremendously during the past decade. The influx of new immigrants inevitably stimulated the cost of living to increase. New theme restaurants, bars, and fancy coffee shops were opened recently and scattered in the neighborhood, according to a New York Times article.

A newly-opened Starbucks in 2013 was big news for many community residents. Some old residents saw it as a sign of ongoing gentrification or even an intrusion of the well-preserved historic community while others hailed the coffee shop because it helped boost the value of their properties.

It has been seven years since the bust of housing bubble, and home prices almost climbed back to its pre-2008 level. Whether there is any bubble in this round of housing boom is still open to debate, potential home buyers and investors are keeping a close eye on the market trend.

“It’s still affordable and location is one thing that’s undeniable,” said Ramos, as he compared the median home selling and leasing prices of Boyle Heights to those of downtown Los Angeles. Downtown area has gone through a considerable increase in property value and rent prices after major revitalization plans were put into effect.

“As years has gone by, there has been more old owners moving out. It’s little by little, but increasing,” said Ofelia Zamora, a small business owner who emigrated from Mexico to Los Angeles and has settled in Boyle Heights since 1987.

Zamora owns a shop that features birthday and party supplies on the E. Third. St. Filled with balloons, ribbons, and handmade Mexican piñata fiesta drums, her tiny business has seen a noticeable shift of consumers in the past few years.

According to Zamora, some owners sold their houses and moved to Texas in pursuit of comparatively better living standard and lower cost of living. Others with immigrant background moved back to either Guatemala or Colombia as their children settled well in the U.S.

 

As the interest rates remain around 0.25 per cent, getting a mortgage and borrowing from banks come with fairly low costs, making it easier for home buyers to obtain loans.

(Boyle Heights has become a new destination for people working in downtown Los Angeles. By Zihao Yang)

But for Manuel Honorato, owner of a car repair company, whose parents currently own a house in Boyle Heights and are thinking of moving to Mexico after retirement, increasing cost of living doesn’t seem to be the only reason why his parents might consider selling the property. Gentrification has not only brought higher prices, but also many newcomers to the neighborhood.

“That forces people to move out because new immigrants don’t have that sense of community norm,” said Honorato, “The neighborhood is becoming broken down because of the prices. All of a sudden you don’t have friends because all your friends are moving out.”

The economic gap, along with the generation gap, has made Boyle Heights more divided than ever before. “On this block alone, there are probably only ten property owners,” said Campos, “my mother was the oldest person of the original owners on the block. The rest of people have just bought property in the last 20 years. I’m probably the last person who has been here for as long as I’ve lived.”

How does it feel like to live in China?

If someone asks different generations the same question, he would probably get completely different answers. Trade, a concept that only seems relevant to multinational corporations and business owners, has shaped almost every aspect of people’s life. The trade between the U.S. and China has grown exponentially in the past two decades, partly due to China’s economic integration into the global market and increasing needs and wants of Chinese consumers. In this blog post, I’m going to share a two family stories and shed some light on how trade has profoundly influence some Chinese families.

Military Factory, Xi’an, China 1954-2004

Prior to the Chinese economic reform in 1978, living standards has virtually remained at the same level for most of urban Chinese citizens.

When my grandparents moved to the city of Xi’an in 1958, they landed their first jobs as assembly worker and technician in a factory producing ordnance for Chinese military. Xi’an North Qinchuan Group, a state-owned military defense factory founded in 1954, was one of many military manufactures in the city at the time. Just like other state-owned industries such as oil, construction, telecommunication, and railways back in the 50s, getting a job in military industry is equivalent to getting a job for life. Responsible for testing parts that were ready to deliver and assemble for aircrafts, my grandparents worked at the same place for more than 30 years. In the late 70s, the factory was said to have more than 10,000 employees.

(Historical data of Chinese exports since 1986. Source: Tradingeconomics.com)

As China steered from planned economy to market economy, and opened its border to global trade, many state-owned enterprises suddenly found themselves obsolete and totally unable to compete with foreign companies. In the past twenty years, China has witnessed many traditional state-owned industries went to bankruptcy or protracted restructuring, and Qinchuan Group was no exception. In the late 1990s, the company attempted to switch its production from military defense to car parts. Unfortunately, as a state-owned company for almost half a century, its economy car model Flyer was in no way as competitive as cars manufactured in Taiwan, South Korea and Japan. It filed for bankruptcy in 2004 eventually, and was incapable of paying pensions from time to time.

According to the National Bureau of Statistics of China, the total trade volume of goods in China, including both imports and exports, skyrocketed to 2.97 trillion U.S. dollars in 2010 from 20.6 billion dollars in 1978. Opening up the border line to international trade came with a cost. Internally, outdated industries would face fierce competition from the global market and lose its domestic market share. At the same time, domestic goods and services industries would have to upgrade and renovate itself in order to export their products to foreign countries.

Baby Formula, Shenzhen, China 1993

When the 2008 Chinese milk scandal made global headlines, foreign-made baby formulas were almost sold out overnight in China. Some even started panic buying in Hong Kong and subsequently caused intense friction between Hong Kong residents and mainlanders. But my father told me it was nothing new to him. When Wyeth, Mead Johnson and Abbott, all American infant formula manufacturers, entered mainland China in 1986, 1993, and 1996 respectively, they probably had never imagined how popular and desirable their S-26 and Enfamil baby formulas became among Chinese parents.

Because the product was so highly priced and it came in shortage occasionally in the 90s, some parents (my father was one of them) would even buy contraband foreign baby formula from smugglers at the border of Hong Kong and Shenzhen, a city bordering Hong Kong. It seems ridiculous in retrospect, but at the time when American brands first made its way to the Chinese market, they meant quality and safety to many consumers. Even today, a 900-gram standard packet of infant formula that sells for 25 U.S. dollars outside China is priced at 50-70 dollars in China, simply because the demand far exceeds the supply. High quality baby milk has become a scarcity in mainland China. Distributors can basically set a price that is three times higher than its customs declaration price, and there are still parents lining up to buy the product.

(Smugglers of baby formula waited outside Shenzhen/Hong Kong checkpoint, 2013. Source: News.163.com)

There is no doubt that market penetration of foreign companies in China stroke a huge blow against domestic milk producers. They basically have driven local infant formula companies out of business. It was since when no one was confident enough to trust domestic milk that series of laws and regulations came into effect to regulate the industry. The success of foreign baby formula brands in China implicitly reflects the fact that trade can have a huge effect on the market composition of importing countries.

 

This week’s field trip to the Port of Los Angeles definitely impressed me with the visualization of data. By visualization I mean seeing how trades take place in person instead of just reading numbers from economic reports. In fact, foreign trade is never something that is far away from our daily life. It’s what you eat on your lunch tables, what you see on the shelves of supermarkets, or even what you feel when you lose your jobs.