MENGNIU DAIRY's growth slows down, can it turn the tide with a strong rebound?

Lu Minfang, the helm of Mengniu, has officially ushered in the "exit" moment.

On October 10th, Mengniu announced that Lu Minfang resigned from positions such as executive director, vice chairman of the board, member of the Strategic and Development Committee, and Sustainable Development Committee. With this, Lu Minfang will no longer hold any position at Mengniu.

In March 2024, Lu Minfang had already stepped down as the CEO, and was succeeded by Gao Fei, the former senior vice president and head of the Room Temperature Business Unit. The sudden personnel change shocked the capital market, causing Mengniu's stock price to drop by 11.39% in just two days.

Lu Minfang took the helm in September 2016 as the fourth CEO of Mengniu when the company was experiencing a significant decline in net profit. He led a series of reforms at Mengniu, including focusing on product categories, establishing new business unit systems, promoting Mengniu's digital strategic transformation, accelerating merger and acquisition activities, and setting the goal of achieving a revenue and market value of one trillion by 2020.

Although Mengniu turned around from losses and revenue surpassed the hundred billion mark, the "double trillion" goal was never fully achieved during Lu Minfang's tenure. According to financial reports, from 2021 to 2023, Mengniu's revenues were 88.14 billion yuan, 92.59 billion yuan, and 98.62 billion yuan respectively, never breaking the trillion mark. Net profit attributable to shareholders was 5.23 billion yuan, 5.30 billion yuan, and 4.81 billion yuan respectively, with a significant 9.3% year-on-year decrease in 2023.

Taking over Mengniu is a daunting challenge for Gao Fei. In the first half of 2024, Mengniu's revenue and net profit were 44.67 billion yuan and 2.446 billion yuan respectively, down by 12.61% and 19.03% year-on-year. In addition, Mengniu in the era of Gao Fei not only faces the pressure of excess raw milk in the industry and weak demand, but also the challenge of finding new growth points in performance.

Lu Minfang, who once saved Mengniu from crisis, and now Gao Fei, who is also taking on the challenge, where will they lead Mengniu to next?

01.

Overall Performance Slump

In the era of Gao Fei, Mengniu is facing a tough start, with both revenue and net profit plunging.

In terms of business structure, Mengniu's main business can be divided into four segments: liquid milk business, ice cream business, milk powder business, and cheese business. However, all four major businesses faltered in the first half of 2024.

Among them, the revenue of the liquid milk business was 36.262 billion yuan, down by 12.9% year-on-year; the revenue of the ice cream business was 3.371 billion yuan, down by 21.75%; the revenue of the milk powder business was 1.635 billion yuan, down by 13.6%; and the revenue of the cheese business was 2.114 billion yuan, down by 6.28%.

Weak consumer demand is the main reason for Mengniu's performance pressure. Data from Marswin shows that in the first quarter of 2024, sales of dairy products in China dropped by 14.24%, with pure milk category down by 11.95% and yogurt category down by 16.78%. Nielsen data also shows that from 2021 to 2023, the year-on-year growth rates of total channel revenue for dairy products in China were 7.9%, -6.5%, -2.4% respectively, and in the first quarter of 2024, total channel sales of dairy products dropped by 3.1% year-on-year At the performance briefing in the first half of 2024, Gao Fei bluntly stated, "In the first half of the year, various product categories performed below expectations. Mainly, previously well-performing categories, such as ambient temperature white milk and domestic ice cream business, were affected by weak consumer demand, supply-demand imbalances, channel changes, etc. The company maintained reasonable shipments, resulting in a decrease in sales."

Not only Mengniu, but the entire dairy industry is generally mired in difficulties. In the first half of 2024, Sanyuan's revenue was 3.852 billion yuan, a year-on-year decrease of 9.05%; Bright Dairy's revenue was 0.254 billion yuan, a year-on-year decrease of 8.15%; Yili's revenue was 59.915 billion yuan, a year-on-year decrease of 9.53%.

However, the adverse external environment is just one aspect. Another aspect is that, as the liquid milk market approaches its ceiling, Mengniu has yet to find a second growth curve.

In comparison with Mengniu's old rival Yili, in the first half of 2024, Yili's revenue from liquid milk business was 36.887 billion yuan, a year-on-year decrease of 13.05%, accounting for 61.57% of revenue; revenue from milk powder and dairy products business was 14.509 billion yuan, a year-on-year growth of 7.31%, accounting for 24.22%; revenue from cold drinks business was 7.322 billion yuan, a year-on-year decrease of 20.04%, accounting for 12.22%. Mengniu's revenue from liquid milk business accounted for a high proportion of 81.2% of revenue, belonging to the absolute pillar business; ice cream business accounted for 7.5%; milk powder business accounted for 3.7%; cheese business accounted for 4.7%.

In contrast, in terms of business structure, Mengniu still mainly relies on the liquid milk business and has not been able to take on the responsibility of a second growth curve.

The appointment of Gao Fei to succeed Lu Minfang at Mengniu may be for this reason, as the company urgently needs to find a second growth curve to reverse the decline.

Since joining Mengniu in 1999, Gao Fei has held positions such as regional sales and marketing manager, sales general manager, marketing general manager, group vice president, and head of the ambient temperature business unit. He led the team to develop and expand the sales system of Mengniu, and the high-end milk brand "Telunsu" created under his leadership even once dominated a significant portion of Mengniu's liquid milk business.

Mengniu hopes that under Gao Fei's leadership, they can achieve a breakthrough, get out of the vortex of "increased revenue but not increased profit." However, against the backdrop of the gradual slowdown in the overall growth rate of the dairy product market, "creating another Mengniu" seems not easy.

02.

Cheese is a Difficult Lifeline

Mengniu has always regarded the cheese business as the second growth curve. At the 2022 performance briefing, Lu Minfang once stated that the scale of the cheese business had exceeded that of the milk powder business, becoming an important growth point for Mengniu's revenue.

In 2023, Mengniu's revenue from the cheese business was 4.357 billion yuan, a year-on-year growth of 229.82%, accounting for 4.4% of revenue. However, it is worth mentioning that its growth is mainly related to the performance of Mochi Blue.

In January 2020, Mengniu invested 0.287 billion yuan to acquire a 5% stake in Mochi Blue at a price of 14 yuan per share. Since then, Mengniu has increased its holdings in Mochi Blue through private placements, secondary market purchases, etc., with a total investment of 4 billion yuan Currently, Mengniu's shareholding ratio has reached 36.51%, making it the largest shareholder of Miao Kelando.

Although Miao Kelando's market share in the cheese market exceeds 35% and surpasses 40% in the cheese stick market, it has not brought much help to Mengniu.

In the first year of being merged into Mengniu's financial statements, Miao Kelando's revenue and net profit both declined. According to the 2023 financial report, Miao Kelando's revenue decreased by 16.16% year-on-year to 4.049 billion yuan, while the net profit attributable to the parent and the non-net profit attributable to the parent decreased by 53.9% and 89.63% respectively, dropping to 63.44 million yuan and 7.17 million yuan.

In the first half of 2024, Miao Kelando's revenue was 1.923 billion yuan, a decrease of 6.93% year-on-year; the net profit attributable to the parent was 76.7783 million yuan, an increase of 168.77% year-on-year; the non-net profit attributable to the parent reached 56.8846 million yuan, a staggering increase of 1963.11% year-on-year.

Although the net profit performance is very impressive, Miao Kelando's performance has not seen a turnaround. In its financial report, the company stated that the growth in performance was due to the decrease in raw material procurement costs leading to an increase in gross profit margin compared to the same period last year, while actively promoting various cost reduction and efficiency enhancement measures, resulting in a year-on-year decrease in sales expense ratio and management expense ratio. In other words, the significant increase in net profit is not earned, but saved.

Mengniu has always not given up trying to break through the possibility of leveraging its cheese business.

In June 2024, Miao Kelando announced that it would acquire 100% equity of Mengniu Cheese from Mengniu at a price of 448 million yuan, aiming to solve the inter-industry competition issues between Miao Kelando and Mengniu Cheese in the cheese business, and further enhance Miao Kelando's profitability and core competitiveness. This means that Mengniu has handed over all control of its cheese business to Miao Kelando.

However, Miao Kelando's cheese business has been under pressure for a long time, and whether it can successfully break through after the integration is still unknown.

The cheese business is Miao Kelando's main revenue-generating business, with revenue of 3.137 billion yuan in 2023, accounting for 77.69% of total revenue. However, compared to 2022, its cheese business revenue decreased by 18.91%, while the gross profit margin also decreased from 40.73% to 37.01%, a decrease of 3.72 percentage points. In the first half of 2024, the revenue of the cheese business was 1.63 billion yuan, basically flat year-on-year, with a gross profit margin of 39.39%, while in the first half of 2023, the gross profit margin was 40.57%, a decrease of 1.18 percentage points.

Furthermore, Miao Kelando's distribution channels have also encountered some problems, especially the continuous decline in the number of distributors. According to the financial report, in 2021, Miao Kelando had 5,363 distributors, which decreased to 5,218 in 2022, further decreased to 5,036 in 2023, and by the first half of 2024, only 4,790 remained.

All signs indicate that Miao Kelando's cheese is no longer selling well, partly due to the decrease in cheese consumption demand, and on the other hand, as a children's snack, cheese is not a rigid demand and has strong substitutability For Mengniu, not only does it need to deal with external uncertainties and competitive pressures, but it also needs to address internal challenges such as a single product structure and weakening profitability.

It can be seen that Mengniu is facing many difficulties. In this case, the cheese business also seems unlikely to become Mengniu's second growth curve.

03.

Battle of Low-Temperature Milk

Low-temperature milk usually refers to milk processed using the pasteurization method. Compared to room temperature milk, low-temperature milk retains relatively better natural active nutrients such as immunoglobulins and lactoferrin, which have a positive effect on human health.

According to Kantar data, the national penetration rate of low-temperature fresh milk increased from 18% in 2018 to 39% in 2023, with a 5.9% increase in the penetration rate of high-end milk compared to previous years. In addition, low-temperature milk has achieved steady growth across all channels. In the first quarter of 2024, the sales of low-temperature milk on Tmall, JD.com, and Douyin platforms increased by 24%, 6%, and 12% respectively year-on-year.

CICC International predicts that the compound annual growth rate of low-temperature fresh milk from 2022 to 2027 will reach 12%. Agricultural Development Fund investments also predict that the scale of the low-temperature dairy industry will reach 160 billion yuan by 2025.

In 2018, Mengniu began to enter the low-temperature milk field and established the Fresh Milk Business Unit. By 2019, Mengniu's low-temperature milk products had covered 24 provinces and 50 key cities. At the same time, it also established the Daily Fresh Language sub-brand to enter the high-end low-temperature milk market.

However, with the obvious slowdown in the liquid milk market growth trend, major dairy companies have accelerated their layout in the low-temperature milk business. For example, Yili's low-temperature milk business achieved growth against the trend, with a 54.6% year-on-year increase in retail sales of Jin Dian fresh milk in 2023; Bright Dairy's Youbei fresh milk has been the top-selling domestic fresh milk for five consecutive years; Nestle China promptly entered the low-temperature fresh milk market and launched products such as A2β-casein fresh milk; Junlebao also continues to strengthen its presence in the low-temperature yogurt and low-temperature modulated milk market.

With competitors flocking in, whether Mengniu can retain its leading position in the high-end low-temperature milk market remains uncertain. However, the appointment of Gao Fei may allow Mengniu to excel in the high-end low-temperature milk field. On the one hand, Gao Fei comes from the liquid milk business line and is familiar with business, market development, and sales systems. On the other hand, Gao Fei has experience and successful cases in the high-end milk market.

Overall, Mengniu's breakthrough is full of challenges, and the difficult tasks have been handed to Gao Fei. As for where Mengniu, this billion-dollar giant ship, will sail in the future, it depends on how the helmsman makes the next move