Analysis Entrepreneurship
Mengniu hit by Chinese dairy stagnation
The Chinese dairy giant Mengniu (revenue €12.7 billion) seems to be one of the first major Chinese dairy companies to feel the impact of the problems in the domestic dairy market. A report from investment bank JP Morgan caused a significant drop in stock price and uncertainty about the future of the company, which in a way symbolizes the current state of the Chinese dairy sector.
The analyst report initially led to a 15% decline in stock price over 6 days. In general, the report highlighted several structural weaknesses of Mengniu.
Decreasing Returns
These include a lack of innovation and an outdated product portfolio, a significant involvement in low-yielding, even loss-making Chinese milk production, holding excessive milk powder stocks, and lagging profit and dividend development.
Despite this, Mengniu, owned by the giant state company Cofco, is still in the black. The company is also not plagued by scandals, but the American investment bank has opened the eyes of many to the difficult position of Mengniu in a stagnant Chinese dairy market.
Back to a Quarter of Value
It has been visible for some time that Mengniu is not doing very well. At the peak of its success a few years ago, Mengniu was worth almost €24 billion on the stock market, now it is less than €6 billion.
This puts the company's performance in weak comparison to the other Chinese dairy giant, Yili, which seems to be faring much better through all the troubles.
Surplus Going Abroad
However, like Mengniu, most large and medium-sized Chinese dairy companies are struggling. Chinese dairy farming has been producing significantly more milk in recent years. This is in line with the latest five-year plan, but not aligned with consumption trends in the country. The excess milk is therefore powdered, as there is nowhere else for the product to go. However, powdering is a loss-making and costly activity. Last spring, a quarter of all milk was powdered, according to Chinese sources. This product was stored, but there was no demand for it.
This has changed recently. China has suddenly become an exporter of milk powder. It is disposing of the excess stocks in various markets in Asia, including countries with low purchasing power, such as Myanmar and Bangladesh.
Still an Importer
This is not a structural solution for the dairy industry. There needs to be less milk and therefore less cattle in China. And perhaps a different product range is also needed, because despite all the export, China still imports a lot of whey and derived products, as well as infant formula. The latter may be difficult to change, as a certain group of consumers still do not fully trust domestically produced infant formula. The former is related to the fact that Chinese people still hardly consume cheese and they also hardly produce cheese. So they also do not produce whey.
