Summary of Key Points
In the first half of 2026, China's dairy industry encountered a turning point: overall industry demand began to recover (with production increasing by 5.8%), but there was a clear differentiation among companies. Leading dairy firms shifted from a focus on scale competition to exploring deeper value and developing second growth curves, while regional dairy companies faced pressure from national giants. The entire industry bet on the "freshness" trend (low-temperature fresh milk, fresh milk powder, etc.), while each company explored different new growth areas (functional nutrition, cheese, raw material supply, channel innovation, etc.). This led to a landscape where the "first tier" (Yili, Mengniu, Feihe) took the lead, the "second tier" (Sanyuan, Xinruiye) followed, and the "third tier" (Guangming) lagged behind.
I. Industry Recovery with Divergent Profits: Some Thrive, Some Struggle
The dairy products industry finally began to recover in the first half of the year. Data from the National Bureau of Statistics showed that production increased by 5.8% year-on-year from January to June, driven by consumer demand. However, the profit performance of various companies varied significantly:
- Yili: Sold a large volume (revenue of 64.49 billion yuan, up 4.13%) but earned less on the surface (net profit decreased by 20%). However, after accounting for one-time factors such as the loss from purchasing Ausnutria and tax changes, core profits actually increased by 10%, indicating stability in its main businesses (liquid milk and cold drinks).
- Mengniu: Achieved balanced growth across all segments (revenue of 44.8 billion yuan, up 7.8%, profit of 2.37 billion yuan, up 15.9%). The growth rates for fresh milk, milk powder, and cheese all exceeded 30%.
- Feihe: Failed to maintain its momentum (revenue increased by only 2.3%), and profits decreased by 16.3% due to high sales expenses (36.6%) spent on channel incentives and advertising, effectively using all profits to compete for market share.
- Regional Dairy Companies: Xinruiye saw a significant profit increase of 17% through low-temperature fresh milk and cost control; Guangming and Sanyuan struggled in their main businesses. Guangming's revenue decreased by 4.8%, and its profits were supported by the sale of overseas assets; Sanyuan's revenue increased, but liquid milk sales declined, with profits mainly coming from dividends from its investment in McDonald's (only enough to buy a school district house in Beijing).
II. The Industry's Focus on "Freshness": Benefits and Risks
Dairy companies are now emphasizing "freshness" because consumers increasingly value low-temperature milk and fresh milk powder that retain nutrients. However, this competition brings new challenges:
- How to compete in freshness?
- Yili: Developed "Jindian Fresh" for ambient-temperature milk and "Seksan Fresh" for low-temperature milk (0.09 seconds of fresh-keeping technology); reduced delivery times for milk powder from 1-3 months to 28 days.
- Mengniu: Achieved over 30% growth in fresh milk, with digital and intelligent processes throughout the supply chain.
- Xinruiye: Implemented the "Fresh Cube Strategy" across all stages, from fresh milk production to delivery, resulting in double-digit growth in low-temperature product sales.
- Feihe: Launched fresh milk powder using domestically produced ingredients within 30 days and aimed for a shorter shelf life of 6 months.
- Potential Concerns?
- Homogenization: As companies all promote freshness, product differences are diminishing, potentially leading to price wars.
- High Cold Chain Costs: Low-temperature milk requires continuous refrigeration, limiting transportation distances and increasing costs for national companies.
- Pressure on Regional Companies: Low-temperature milk was once a competitive advantage for regional companies, but now national giants like Yili and Mengniu are entering the market, causing a decline in the sales of regional dairy companies' liquid milk products.
III. Developing Second Growth Curves: Different Approaches, Different Outcomes
With weak growth in their main businesses, companies are seeking new growth areas:
- First Tier (Yili, Mengniu, Feihe): Focusing on "high value":
- Yili: Expanding into functional nutrition (leading share in adult/infant nutrition products, doubling sales of health foods) and deepening dairy processing (building cheese bases, producing lactoferrin, etc.).
- Mengniu: Diversifying through milk powder, cheese (Mikolando sales up 32.6%), fresh milk, and international business, all with growth rates over 30%.
- Feihe: Moving from selling milk powder to selling raw materials (launching protein ingredient brands to reduce reliance on imports) and targeting a broader range of consumers (youth, adults, elderly).
- Second Tier (Sanyuan, Xinruiye): Focusing on "channels and business models":
- Sanyuan: Ice cream became a success, compensating for declining liquid milk sales with 17.3% growth; its premium products, such as Baxi, performed well.
- Xinruiye: Expanding internationally and innovating in channels (applied for H-share listing, selling products in Hong Kong and Southeast Asia, partnering with Ahuatian).
- Third Tier (Guangming): Little progress, aside from product iterations (e.g., Youbei fresh milk); no new initiatives in cheese or functional foods.
IV. A Turning Point in the Industry: Changing Competition Logic
The focus has shifted from scale to profitability and quality of growth. The direction of change is clear:
- From drinking to eating: Moving beyond milk to cheese, functional foods, and other dairy-related products (e.g., Yili's cheese products, Mengniu's Mikolando).
- From ambient to fresh: Slower growth in ambient-temperature milk, with low-temperature fresh products becoming the new driver of growth.
- From domestic to global: Expanding sales overseas or becoming global suppliers of raw materials (Xinruiye, Feihe).
In the next decade, the key question for dairy companies will not be whether they can grow, but how they grow—whether they will remain local dairy companies or transform into global nutrition technology companies. This will determine which companies can survive the market changes.
Conclusion
The 2026 mid-year reports reflect the differentiation in China's dairy industry: some are leading new trends, some are struggling, and some have not yet found their direction. The era of "scale is king" is over; "deep value exploration" and "second growth curves" are the keys to success. For consumers, this means access to fresher and more nutritious dairy products. For companies, it means relying on genuine capabilities to survive in the market.