Impact of Supermarket Development on Dairy Industry and Smallscale Farmers in China

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Impact of Supermarket Development on Dairy
Industry and Small-scale Farmers in China

• Dr. Dinghuan Hu
• Institute of Agricultural Economics and
  Development, CAAS
• Dr. Kevin Chen
• Beijing Program Office, Agriculture and Agri-food
  Canada (AAFC)
• Opinions expressed are those of individuals and
  do not reflect any position by CAAS and AAFC

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Start with News

• The newspaper of Economic Daily reported on
  April 13th that the marketing income of Mengniu
  Group reached 10.8 billion RMB yuan in 2005, an
  increase of 50.1 over that in 2004, and an
  increase of 43 in net profit.
• Data issued by the State Statistical Bureau
  showed that in 2005, the marketing income of the
  three major magnates of Mengniu, Yili and Bright
  has accounted for over 50 of the national
  market.

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Development history of the three enterprises

• a.YiliIt was a small-scale dairy processing
  enterprise with a fixed assets of only US5000
  before the 1990s.
• b.Mengniu was established in July 1999 with only
  US750,000 when started.
• c.Bright is a large-scale dairy processing
  enterprise in Shanghai with fairly long history.

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Where Are They?
Mengniu
Yili
Bright
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Raise of the problems

• Why are the largest two dairy processing
  enterprises in China (are) located (concentrated)
  in Inner Mongolia?
• Why have the small-scale dairy processing
  enterprises in North China become the first and
  second largest enterprises in China?
• Why has Mengniu only taken (used) less than 7
  years to become the largest dairy processing
  enterprise in the dairy sector in China?

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Western Stage
City Stage
National Stage
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Three development phase of dairy industry in China

• Dairy industry in China has experienced 3
  development phases
• 1?Urban dairy industry (phase)
• 2?Western dairy industry (phase)
• 3?National dairy industry (phase).

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Urban dairy industry phase

• Before the 1990s, the milk production and
  processing in China was mainly concentrated in
  urban suburbs, especially the suburbs of large
  cities.

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Reason for the existence of urban dairy industry

• China has the problem of milk fresh-keeping for a
  long period of time, due to the lack of cold
  chain system, therefore, milk can only be
  produced in the urban suburbs so as to meet the
  milk consumption demand by urban residents.

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Limitation of Urban Dairy Industry

• 1?Shortage of land resources, especially urban
  expansion has made space for dairy cattle
  husbandry becoming less and less
• 2?Shortage of feed resources, especially herbage
  shortage
• 3?Increase of labor cost
• 4?Existing serious environment pollution problems.

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Rise of Western Dairy Industry

• In the end of the 1980s, especially in the
  1990s, dairy industry in west zone had a rapid
  development in China. The west zone mainly
  includes Inner Mongolia, Hebei, Heilongjiang,
  Xinjiang and other regions in the west and north
  China regions.

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Reasons for the Development of West Dairy Industry

• (1)The local governments have adopted active
  policies to promote dairy industry development
  (During the period from 1980 to 1985, Inner
  Mongolia had invested a total amount of 81.62
  million RMB yuan to promote dairy industry
  development)
• (2)Rise of excellent dairy processing enterprises
  such as Yili and Sanlu
• (3)Supported by capital market
• (4)Supported by foreign fund and technology.

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West Milk Transported to East Region

• Dairy products in west zone are marketed to the
  developed economic east zone where the demand for
  dairy product is increasing. In such way, it has
  met the increasing demand by urban residents and
  on the other hand, it has created conditions for
  a dairy industry development in the west zone.

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Conditions for West Milk Transported to East
Region

• 1?Import of UHT milk processing technology
• 2?The development of supermarkets have improved
  the distribution channel.

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The important Factors to Promote the Development
of Dairy Industry
UHT Milk
Development of Dairy Industry
Supermarket
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Import of UHT Milk Processing Technology

• In mid-1990s, the dairy processing
  enterprises in West zone has imported milk high
  temperature sterilization technology (UHT Milk)
  and the UHT technology processed liquid milk can
  be preserved a duration of 36 months in ambient
  temperature. This has made it possible to
  transport liquid milk from west to the markets in
  the east zone. Yili and Mengniu were the earliest
  to import UHT milk processing technology in the
  west zone in China.

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Obstacles of West Milk Transported to East Region

• For a long time, urban dairy industry had
  monopolized the liquid milk retail channel in the
  urban areas through household distribution and
  other retail methods. It is very difficult for
  the newly-emerging west dairy processing
  enterprises to enter the urban market.

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Supermarket Development

• The development of supermarket has created
  conditions for dairy products produced in west
  zone to enter the urban markets of the east zone.
  Supermarket is not restricted by urban dairy
  industry. The dairy products produced in west
  zone can directly enter the urban markets of the
  east zone through supermarkets.

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Share of retail sector by supermarkets in 12
large s\cities in China
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Impact of supermarket development on dairy
industry

• 1?Broken the monopoly by urban dairy industry in
  the local markets
• 2?found markets for the milk source in the west
  zone and promoted the development of dairy
  industry in west zone
• 3?Provided ample supply of dairy products for
  consumers in east zone
• 4?Provided large quantities of dairy product
  varieties for the consumers
• 5?Created conditions for large-scale dairy
  processing enterprises in expansion and merge of
  medium- and small-size enterprises.

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Dairy Product Varieties in Supermarkets
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Surveyed milk and yogurt
purchases by retail outlet in Beijing, Shanghai
and Guangzhou
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Production concentrated to large-scale
enterprises (2002)
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National Dairy Industry phase

• Since the 21st Century, while the dairy
  processing enterprises in the West zone are
  expanding to the East and Central zones,
  enterprises in the East zone such as Bright and
  Sanyuan have started to enter the West and
  Central zone, so as to obtain the raw milk
  resources and market in these regions.

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Plant distribution of the 6 major enterprises
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FDI enters the dairy industry market in China

• The French DANONE has become the third largest
  shareholder of the Bright
• Rich Keen Limited has purchase 40 share of
  Wondershan
• Mengniu and Denmark Arla Foods Co. have spent 540
  million RMB yuan in exploration of baby milk
  powder market
• The New Zealand Fonterra Co-operative Group Ltd
  has purchased 43 share of the Sanlu Group.
• The output value of foreign invested dairy
  enterprises has accounted for 1/3 of total dairy
  output value in China, with a total profit and
  tax amount of over 40.

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Impact of dairy industry development on
small-scale rural households

• 1?Along with the increase of raw milk demand,
  more rural households start to raise dairy
  cattle
• 2?Company helps small-scale rural household in
  developing dairy cattle husbandry
• 3?Two kinds of dairy cattle husbandry models
• 4?Problems faced by small-scale dairy cow
  husbandry rural households.

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Company helps small-scale rural households in
developing dairy cattle husbandry

• In order to obtain ample milk source, companies
  encourage rural households in dairy cattle
  husbandry. Mengniu provides loans for purchasing
  dairy cattle by rural households. In the
  beginning, they loan an amount of US 625 for the
  rural household in purchase 1 dairy cow, then
  this figure had reduced to US 400. They also
  provide technical instructions for the rural
  households.

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Establish milking stations

• In order to guarantee the quality of raw milk and
  convenient for the dairy farmers, Yili and
  Mengniu have established milking stations in
  areas where dairy cattle husbandry is
  concentrated.

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Create new husbandry models

• In order to encourage dairy husbandry to
  develop toward orientation of super large scale,
  Mengniu and Yili have established dairy cattle
  husbandry small areas, so as to let dairy farmers
  of certain scale to enter the dairy cattle
  husbandry small areas.

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Problems faced by small-scale rural households

• Along with the increase of rural households of
  dairy cattle husbandry, milk has appeared
  seasonal surplus phenomenon, causing the
  phenomenon of individual rural household
  discarding milk.

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Policy recommendations

• 1?Local governments no longer need to blindly
  develop local dairy industry
• 2?Strengthen supervision over Contracts between
  company and rural household, so as to protect the
  interest of small-scale rural households
• 3?Encourage the development of dairy farmer
  association, so as to increase the negotiation
  force of dairy farmers with the milk stations and
  processing companies.

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Enormous dairy product potential market

• If the 1.3 billion Chinese people drink one
  glass of milk per day, the demand for milk and
  feed will be as follows_______!

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Thank You Very Much!