Dairy firms recover from milk scandals

By Ding Qingfen (China Daily)
Updated: 2009-06-15 09:55

China's dairy sector is struggling to claw its way back from the debilitating effects of last year's tainted milk scandal that saw one producer go bankrupt, losses at several others and an industry reputation in tatters.

The melamine-tainted milk scam claimed the lives of six infants and hospitalized nearly 300,000 others in 2008. The incident forced dairy firms to take their products off the shelves and go into damage control mode, chiefly by way of crisis marketing and quality control.

The industry, which had witnessed a 20 percent growth rate over the past decade, also reported deep losses.

Industry leader Mengniu, for the first time in several years, posted a loss of 948.6 million yuan in 2008, despite strong sales during the first three quarters of the year.

Yili incurred losses of 1.69 billion yuan; Bright Dairy lost 286 million yuan.

Only Sanyuan Food, one of the few producers to escape the crisis, made a profit of 40.76 million yuan in 2008.

Dairy firms recover from milk scandals
Fresh milk is poured into a vat at a farm in Hebei province. Close to 4,000 milk collection stations in China have been shut down due to substandard conditions since November last year, according to the China Dairy Industry Association. [Asianewsphoto]

Investors too shunned the industry. Yili and Mengniu shares nose-dived. Yili dropped to 6 yuan from 17 yuan, while Mengniu fell to HK$6.4 from HK$24 last August. Bright Dairy shares went down to 3.2 yuan last December from 7.6 yuan in September 2008.

And, in February this year, Sanlu, which was at the heart of the scandal, declared bankruptcy, leaving a dairy market worth 10 billion yuan for other players to grab.

Shake up

Now, the industry is going through a shake-up of sorts.

Sanyuan Food, a regional brand name in Beijing and Hebei, is gearing up to be a national player after it purchased Sanlu's key assets. Many other regional players are also looking at expansion, although analysts contend that the top two producers, Mengniu and Yili, cannot be replaced that easily.

The industry is also focusing on bettering the source quality of dairy products.

Yili is developing a new cow community model, and plans to organize 20 such communities by the end of 2009. Each community houses 1,000 cows collected from local farmers. Yili is entrusting a professional company with the task of raising the cows to make sure the milk is safe.

"2009 will be the year of quality. Quality means life," Zhang Jianqiu, Executive President, Yili told China Business Weekly.

Rebuilding reputation is not a milk run

"Quality control will be given top priority," said Yang Wenjun, president of Mengniu, Yili's chief rival and China's top dairy producer. "We must win back consumer confidence rapidly. We cannot let them down any more."

Mengniu plans to increase the number of its mega-sized pastures, each of which can house up to 10,000 cows, to 20 in the next three years from nine currently, he said.

For Yang, the past eight months have been the busiest in his life. "For months, I worked for at least 12 hours a day. Everyday, I was traveling around, meeting, negotiating and doing a lot of chores that I wouldn't have touched before," he said.

The last quarter of 2008 was the most difficult, according to Yang. "Sales were sluggish and there were piles of inventory in the warehouse," he said.

Yili's Zhang said many of his company employees, including the top brass, volunteered to go down to supermarkets during weekends to promote sales and to communicate with consumers.

"There were thousands of complaints, but it was understandable," he said.

These efforts seem to be paying off, finally.

By the end of April, Mengniu had recovered about 90 percent of its earlier sales volume, Yang said, although "this year will continue to be hard; Mengniu may not be able to shrug off the effects of the scandal until the end of next June".

In late April, Yili too reported first quarter profits had soared by 104 percent from a year earlier, to 113 million yuan. Mengniu executives said the company was likely to make a profit of 700 to 800 million yuan this year.

Share prices of Yili, Mengniu and Bright Dairy have also gone up since ealry this year. Last Friday, Yili and Bright Dairy closed at 15.5 yuan and 7.04 yuan at the Shanghai Stock Exchange, and Mengniu closed at HK$19.26 at the Hong Kong Stock Exchange.

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