China's Dairy Market: Category Overview

On a global scale, the dairy sector is experiencing a period of turbulence. The removal of EU milk quotas, a slowing demand from China, and Russia's trade embargo have all resulted in a period of excess supply and low prices. However, the long-term outlook for the sector internationally remains positive, and China's dairy market shows significantly increased projections. 
By 2020 it is expected that the global demand for dairy will increase by 2.5% per annum. Rising incomes and increased urbanisation in emerging markets are the key contributors to this prediction. The Chinese market displays various opportunities for growth and innovation in dairy segments including yogurt, cheese, and ice cream, but the biggest growth will be seen in milk consumption which is expected to triple in the next 30 years
As Chinese consumers become more health-conscious, look for further transparency, and seek foods to fit a changing lifestyle, the dairy market is in a unique position to address these desires and concerns. 

Trends

More health-conscious consumer

Chinese consumers are becoming more health and fitness conscious at a rapid rate. Increased research linking diet to health, and the influence of western culture have made consumers more aware of their nutritional choices. The dairy sector is well positioned to work with this trend as the health benefits of dairy products can be clearly communicated. 

Due to its long list of health benefits, natural sources of protein are of considerable interest to consumers. As public consciousness and various trendy diets move away from carbohydrates and gluten, there has been a rise in proteins being a key source of calories. The global protein market is expected to grow at a compound annual growth rate (CAGR) of 6% in 2018, and consumers are increasingly viewing dairy proteins as the 'gold standard' due to their health benefits, easy digestion, and complete amino acid profile. To capitalise on this, many dairy producers are promoting dairy proteins and educating consumers on the benefits of protein from muscle building to weight loss.

There are various opportunities in the dairy market to reconsider marketing and branding to reflect health benefits of products. Ice cream is a product which has a greater market appeal to children with adults losing interest as they get older. However, as Chinese consumers become more health-conscious there is a growing trend toward healthier types of ice cream, with 85% of Chinese ice cream consumers willing to pay more for ice cream that claims to be 'better for you'. Yogurt-based ice cream is also quite popular due to positive associations with a healthy digestive system. Some products go further to claim specific health benefits when marketing to adults, such as Phinix Food Hangover Ice Cream, a South Korean product that claims to cure a hangover. 

Transparency

Dairy producers are already conscious of providing consumers with information, usually under a 'farm to fork' theme. There is an increasing consumer demand for further transparency, which  can create stronger trust with consumers and build up a respected reputation. 
Traditionally the key drivers which attribute value to a product are price, taste and convenience. These have been supplemented by 'evolving' drivers including health, wellness, safety, and social impact. The latter two drivers are all particularly associated with a growing want for transparency from food producers. 

An unclear supply chain can lead to health problems and a damaged public reputation. The Chinese infant formula market suffered a huge fallout following a devastating situation in 2008 when infant formula was contaminated with melamine, resulting in 300,000 infants falling ill from the formula with 54,000 being hospitalised. Government inspections found that the problem existed within products from 22 companies, including China's top four infant formula brands. The repercussions of this incident are still evident in the market with foreign brands trusted to a larger degree by Chinese consumers. 

Serious incidents such as the melamine contamination have a lasting effect on consumer relationships and trust with producers. Greater demand for transparency at all levels of the supply chain may prove difficult for large producers, but it is beneficial in the long-term for both parties. 

Out of home eating / snacking

The way in which Chinese consumers source and purchase food is changing as online and mobile shopping continue to shape the market. There is also an increase in eating out of the home which has contributed to a more western-style snacking culture. Although regular mealtimes of breakfast, lunch and dinner remain, timing and format of meals are becoming less rigid. As the daily lives of Chinese consumers becomes even more fast-paced and convenience-driven, snacking is a key trend which aligns with changing needs.

Reporting in November 2017, Mintel noted that cheese products created for on-the-go consumption are an undeveloped opportunity. Snacking or convenient cheese products only accounted for 5% of all cheese launches in 2017 in Australia and New Zealand, the most mature markets for cheese in the Asia Pacific region.

To take advantage of these changing consumer habits, some cheese producers are aligning their products as healthy snacking options. Although the Chinese market experiences relatively low consumption of cheese currently, it offers strong potential for growth if producers capitalise on the snacking and convenience trend among Chinese consumers. Various cheese producers have created products which work within the snacking format by using resealable packaging and providing smaller, or miniature portions. By positioning cheese as a healthy dairy source of protein in convenient packaging they are delivering on key trends including snacking culture and health-consciousness. 

Opportunities

Healthy options

As Chinese consumers become increasingly health and fitness conscious, dairy producers have an opportunity to emphasise the health benefits of their products. From protein to calcium, it is essential for brands to communicate the health benefits of their products and how they contribute to an overall healthy lifestyle.

It is important to understand and monitor the non-dairy market in order to cultivate opportunities in the dairy market. Increasingly consumers, particularly millenials, are drawn to non-dairy, plant-based alternative products such as almond, soya and oat milk. These products have been marketed as health-conscious products, and are growing in popularity. Within a six month period in 2017, 28% of Chinese consumers cite drinking plant-based drinks more regularly.

Non-dairy alternatives used to occupy a niche market, appealing to vegans and lactose intolerant consumers, but as people become more concerned with the health benefits of the food they consume, the market has expanded. However, the dairy market in China is still strong, remaining the world's largest retail market for milk, and in 2016 it was the leading market for dairy-drink innovation. 

A key way for dairy products to compete in this market is to emphasise ingredient provenance and the natural aspect of dairy. Organic milk will likely be more popular due to public perceptions of higher quality and safety, and dairy drinks will be a key aspect of the market open to further development. Between June 2016 and 2017 drinking yogurts accounted for 43% of total new product launches in the dairy drinks sector in Asia, while white milk launches decreased. This indicates that there are opportunities for flavour innovation and promotion of healthy ingredients in drinking yogurts. 

 

Transparency

As consumers have increasing access to information they are keen for further transparency. The Chinese dairy market in particular has experienced a lack of trust with its consumers due to previous health scares, so it is important for brands to get ahead of any potential problems and provide a transparent supply chain.


Technological advances are a key way to demonstrate transparency from farm to fork. Walimai, an emerging start-up based in China, is utilising blockchain technology to allow consumers to access clear information about a product's supply chain. Consumers can authenticate a product by scanning a secure radio-frequency identification (RFID) anti-counterfeiting label through a mobile app.

 

While this technology is of particular benefit to Chinese dairy producers who are working to regain trust with consumers, it is also an important consideration for international brands keen to access the market. 

 

Innovation

While technological innovation improves transparency, production, and marketing, it is important for dairy producers to put resources into gathering customer insights. Collaboration with consumers to adapt products to specific requirements has become a key way to ensure that brands are creating products that their audience want, particularly when it comes to flavour.

According to Mintel's reporting, the ice cream sector in China is the largest market by volume in the Asia Pacific region, but India remains the key market with an average value growth of 23% over the last five years. This is in large part due to Indian producers repositioning themselves to create flavours with local ingredients that appeal to consumers.

Chinese consumers crave unique flavours, so much like ice cream production in India, there are key opportunities to develop flavours which are composed to suit local tastes. By using local ingredients producers can also create a stronger image of authenticity.

Positioning different or interesting flavour combinations as 'premium' is also a tool that can be used by dairy producers in the Chinese market. Australia and New Zealand are leading the way in the Asia Pacific region for premium innovations, particularly with yogurt products. Although premium yogurts are usually not any healthier than regular yogurt products, they are marketed to be a more sophisticated option, and offer more exciting flavour combinations.

China is the Asia Pacific region's largest yogurt market by volume and has achieved the strongest value growth (CAGR) over the last five years. Within this growing market, innovation in terms of flavour, marketing and sourcing local ingredients are all underdeveloped opportunities.