Europe well placed to benefit from soaring Chinese dairy demand
Chinese cuisine is famed for its lively palate, vibrant colors and extensive list of ingredients – but dairy products have not traditionally featured among them. Demand for things like milk, cheese and yoghurt has historically been tamped down by personal tastes, widespread lactose intolerance and the high price of imports, but the times certainly appear to be changing in the Asian superpower.
According to data recently released by the European Commission, European cheese exports to Beijing for January through November of this year was 24% higher than the entirety of 2018, while China’s hunger for European butter has grown by 36% over the past year. Indeed, demand for dairy in China has tripled over the last 20 years, making it now the second largest dairy market in the world behind the US. However, the shadow of a 2008 scandal still looms large over the domestic dairy industry, fueling distrust among consumers and making overseas interests more attractive. Meanwhile, Brussels’ ongoing trade spat with Washington means that it may well soon have a surplus of supplies – and China could prove to be the perfect destination for European dairy products.
The dawn of dairy
With an estimated 85% of the Chinese population suffering from lactose intolerance, it’s little surprise that dairy has not historically been popular in China. However, growing awareness over the nutritional benefits of dairy products prompted the Chinese government to introduce a free milk in schools program in 2000 and make the industry a key component of its 13th five-year plan in 2016. The sharp uptick in dairy consumption in recent years suggests that these efforts have paid off.
Plant-based milks such as oat milk and soy milk have circumvented the difficulties created by a lactose intolerant populace, with the market for plant-based milks growing 17% between 2015 and 2017. Meanwhile, yoghurt sales have gone through the roof in recent years, leaping up an incredible 108.6% between 2013 and 2017 and leapfrogging milk for the first time that year. A recent report found that 40% of Chinese residents consume yoghurt on a daily basis, up from 15% in 2013.
Cheese, on the other hand, often has its lactose content broken down by the bacteria residing within it, especially in harder cheeses like parmesan and Swiss. This means that cheese is easier for many lactose-intolerant people to digest than milk or yogurt. This, coupled with the rising popularity of pizza in the country and the upper- and middle-class’s growing penchant for Western tastes, is behind the dramatic rise in European cheese exports to China.
Europe in advantageous position
The boom in Chinese imports could not have come at a better time for European manufacturers and exporters. In October of this year, Donald Trump introduced new tariffs which will affect at least €1.6 billion of European goods, with the dairy industry set to be among those hardest hit. A 25% levy on food and drink exports has led to speculation that US imports could fall by as much as 90%, creating a surplus of stock in Europe. This could send prices plummeting and endanger as many as 20,000 jobs.
Fortunately, China could be on hand to step into the breach and pick up that shortfall in American imports. Given the fragile regard with which domestic producers are currently held, European companies are often seen as a higher quality and more reliable alternative, meaning consumers are willing to pay extra to obtain their goods. This distrust of homegrown firms’ dairy products stems from a 2008 scandal involving infant milk formula.
In an effort to artificially boost the levels of protein detectable in milk via laboratory tests, some Chinese producers added melamine to their formulas. The substance is high in nitrogen and toxic to humans, especially those with underdeveloped stomachs. Six babies were killed as a result, while over 50,000 were hospitalized and around 300,000 more were taken ill. The good standing of the domestic dairy industry has yet to recover, which is why foreign imports perform so well against their native competitors.
Following the examples of others
Several firms have already taken advantage of this. Australian beverage company Kirin had enjoyed considerable success in the Chinese market until their dairy interests were purchased by Chinese company Mengniu late last year. Meanwhile, A2 Milk Co. from New Zealand was recently revealed as the best-performing stock of the 2010s after it posted a 16,150% return over the last decade. With 31% of its $7.4 billion market valuation, China is largely responsible for A2’s wild success.
Closer to home, European companies would be wise to take a page out of the book of Latvian company Food Union. Having first entered the Chinese market in 2015 and poured $55 million into creating two state-of-the-art dairy production facilities in the country two years later, Food Union’s competitors initially ridiculed it for targeting a market that many thought did not exist.
However, the performance of their children’s dairy line Lakto, bolstered by its partnership with the hugely popular animation program BabyRiki, has given ample proof that Food Union was ahead of the curve. Lakto products are sold all over China, both in traditional supermarkets as well as online and in mum and baby stores, and a BabyRiki-themed restaurant has popped up in the Chinese city of Wuhan.
As Askar Alshinbayev, founding principal of one of Food Union’s investors, Hong Kong-based investment vehicle Meridian Capital Limited, put it: “Working in partnership with leading Russian animation house Riki Group has enabled us to seize the marketing initiative in China—one of the largest, fastest-growing and fiercely competitive consumer markets in the world. Our innovative animation characters have ensured that Food Union’s healthy dairy brands for children have become an integral part of families’ daily lives and help drive the company’s impressive growth”.
Food Union may have had an early inkling that the Chinese dairy market was going to open up for overseas firms, but other European dairy companies should be well aware going forward that China is one of the most exciting markets in their industry. The tariff situation with the US means that the Asian country is the next big thing for the European dairy industry and the sector’s major players should move quickly to capitalize on this burgeoning market.