Milk powder will enter the era of low profit

A large number of promotional discount advertisements have appeared on the official websites of major milk powder brands for some time. As a result, when many milk powder companies disclosed financial statements in recent days, they all spontaneously “slotted” the price war problem of Chinese milk powder. They had high growth and high gross profit. The golden era of milk powder industry is over.

Song Liang, a dairy expert, said in an interview with a reporter from China Business News that the infant milk powder market in China has entered the “Red Sea” stage in advance and will face market risks brought by excess production capacity and price decline in the future. The price war has already begun. . "The mainstream price range of milk powder in the future should be reduced to between 150 yuan and 180 yuan, and the manufacturer's gross profit margin should be about 20% more reasonable. The era of profiteering will end, and milk powder will enter a meager period."

The price war has not yet bottomed out

"China's infant formula milk powder market is fiercely competitive", "In addition to more brands have entered this market, existing participants vigorously carry out discounted promotions to maintain their market share", Synergy (01112.HK) August 18th Disclosure of first-half results, operating income of about 1.963 billion yuan, down 10.33% year-on-year; net profit fell 34.4% year-on-year to 205 million yuan. Biostime said that since the original infant formula formula series also launched a vigorous discount promotional activities, gross margin fell from 61.5% to 58.2%.

This is a small microcosm of the current price wars faced by infant milk powder manufacturers, because as the milk powder company’s financial reports come together, many companies have already mentioned the price war issue.

SYUT.NASDAQ's first-quarter results for FY16 showed that net sales for the period were approximately US$8.23 million, a decrease of 4.2% year-on-year. Clare Cai, the company’s chief financial officer, bluntly stated at the analysis meeting that in this quarter, the competition in the infant formula milk powder industry in the Chinese market continues to increase, which is the status quo of the entire infant formula milk industry. She compared sales of powdered milk on the existing e-commerce platform and said: “Compared to existing Chinese manufacturers, their ex-factory prices are lower. The e-commerce channel requires less capital than traditional channels, and their risk Investors are already ready to lose money and earn money."

Not only is the domestic milk powder brand affected, but the foreign milk powder is also experiencing changes. Mead Johnson CEO Jacquesson repeatedly mentioned the issue of China's powdered milk price war at two recent performance conferences. He believes that China's current pricing environment has "uncertainty" and at the same time admits that he began to participate in most of the "Price activity" (referring to price wars including promotions), "As a result, our sales have suffered a reasonable range of adverse effects."

"So far, domestic brands have cut their prices by a big margin, with the highest drop of more than 50%. Import brands have lowered their prices across the board. Wyeth, Abbott, Danone, and Mead Johnson have joined the ranks of promotional price cuts, and their flagship brands have reduced prices by 30%," Song Liang said.

But milk powder manufacturers have yet to see the end of the price war. Synbiotics expects that the fierce competition in the market for infant formula will not diminish. “It has become more important than ever to invest in brand building and marketing to maintain market position and improve brand recognition.”

Hundreds of tons of excess capacity

Lumin Fang, general manager of Dumex, gave an interview with a reporter from the First Financial Daily that he lamented that the Chinese milk powder industry is no longer as easy to do as in the past few years.

ClareCai said bluntly that the project launched by the milk powder industry will increase the estimated 460,000 tons of mixed and packaged capacity within two years. However, the consumption capacity of the Chinese market is only about 600,000 to 700,000 tons per year. Song Liang even predicts that the domestic milk powder production capacity plus Chinese investment in overseas production will total more than 1.5 million tons.

The market slowed, but the brands that entered the market continued to increase. When Jacquesson described the situation of China's milk powder market, he said that the slowing China economy, more brands entering the market, and lower dairy product prices created a competitive environment. He said that in the second quarter, Mead Johnson continued to witness that the Chinese market is shifting toward imported products, at the expense of domestically produced products, the former being sold on new channels such as new mother-and-baby stores and e-commerce.

Excessive capacity, but consumption is difficult to sustain. “2015 is a traditional year of the sheep. The birth rate has slowed down. The 'separate two-child' policy has been liberalized, but population growth has not yet reached expectations. According to data from the National Bureau of Statistics, the number of Chinese newborns in 2014 was 16.87 million, an increase of 470,000 over 2013. “Song Liang believes that, in terms of sales, as the price goes down, the growth rate of China’s infant milk powder sales will slow down significantly in the future, and it is expected that the growth rate in 2015 will fall to 9%.”

Intensive milk powder production capacity is further pushing the price war.

“The market price of milk powder in the domestic market has shown a general decline. The first is that offline channels are mainly based on promotional price cuts; online e-commerce channels are discounted and reduced; second, high-end products or high-priced products are under the channel, while lower-priced products are Start e-commerce channels.” Song Liang believes that the previous gross profit margin of milk powder business in the 30% to 60%, but with the opening of e-commerce channels, China's milk powder and international standards, the future gross profit margin at 20% will be more appropriate . At the same time, he believes that the price war will not end until the next year.