By Thibaud Andre, Daxue Consulting
The yogurt market in China has been expanding as its citizens are becoming more health-conscious. The dairy industry is getting substantial support from the government. A survey by Daxue Consulting shows that the Chinese are eating more yogurt than they did three years ago.
Put down the spoon and grab a straw: Chinese prefer drinkable yogurt
Eating habits differ by country. For example, in the United States, Americans like to eat yogurt for breakfast and they love to pair it with fruit. The French (roughly 83%) typically have yogurt as a dessert and they eat it plain. In China however, only 11% of consumers eat it with a spoon; drinking yogurt with a straw is more popular. Sales of drinkable yogurt surpassed those of powdered milk in 2005.
In China, the ambient drinking yogurt segment (including aseptically packaged products) is doing particularly well, compared to the refrigerated segment. In 2013, ambient drinking yogurt grew by 110%, and it was expected to grow even further in 2014, occupying 70% of the yogurt drinking market. Consumption habits have changed to “drink and go,” making ambient yogurt products more appealing to consumers.
3 reasons why demand for yogurt in China is expanding: population, urbanization, incomes
Drinkable yogurt consumption in China indeed is on a growth track – expected to grow by 7% this year due to population growth, urbanization and rising income, according to a report by the U.S. Department of Agriculture. In that case, dairy processors looking to export to China will need to ship high volumes of products.
Probiotics have a strong health awareness in China. The Chinese prefer probiotics in yogurt, due to its gastrointestinal benefits. It is somewhat surprising that almost 60% of Chinese men and women are lactose-intolerant. Therefore, dairy companies should cater milk production to suit Chinese taste buds. Lactose-free yogurt can be one option.
Some challenges to penetrating China’s yogurt industry
Nonetheless, there will be challenges for foreign companies seeking to enter the Chinese market. One challenge is logistics. As China’s fluid consumption is expected to grow by 7% in 2015 (even more than the previous years), the country will require a higher volume of imports, mainly drinkable yogurts. This could be a major challenge for companies because imported products are more expensive. Companies will need an efficient logistic system and efficient supply chain management system to manage their goods. It is highly recommended that companies aim for mass production (instead of niche production) mainly because of the growing demand, massive population in China and the low profit margin per unit.
Manufacturing in China can be quite tricky; products are easily imitated by local companies. There are local dairy giants that already exist in the market such as Guangming, Mengniu and Yili. They present a challenge. Therefore, for foreign companies to run business in China, it is always better to have a local expert who has a strong manufacturing base and someone who understands the Chinese market well.
Develop partnerships with Chinese dairies
One route to take is to develop partnerships with local dairy companies in China. This would not only save foreign companies in terms of production and logistic costs, cost of air freight to China and shelf life of products, but also increase brand visibility and marketing opportunities.
Since 2013, major Western dairy production companies have been building alliances with local companies to boost the dairy industry in China. For example, China’s Mengniu and Spain’s Danone have signed a contract in 2013 to establish a joint venture for production and supply of chilled yogurt products in China. Mengniu also has recently increased its stake in China Modern Dairy by 28%.
Yili Group formed an alliance with Sterilganda Alimenti, an Italian dairy firm, and a separate alliance with Dairy Farmers of America. DFA is building a $235 million state-of-the-art dairy ingredients plant in western Kansas in partnership with Yili and Kansas dairy producers. The plant will manufacture milk powder for the export market.
We believe that there is an opportunity to develop a premium segment in the single-serve yogurt category by focusing on consumers in the 50 largest cities in China.