UHT Milk Market Entry Strategy for China: UK Dairy Analysis

Executive Summary

A number of important trends have converged in recent years that carry significant implications for companies competing in the dairy industry and seeking to expand their commercial operations into China. As the world's most populous country, China has an enormous population of infants, which translates into major demand for milk products (Cui, 2016). Moreover, the relaxation of the formerly restrictive one-child policy has created a new surge in childbirths, and many experts believe that the population of young people in China will continue to increase well into the foreseeable future.

Besides wanting more children, the Chinese people are increasingly able to afford them, and the growing middle class in China has also generated new demand for the best products available for young children. Because the United Kingdom (UK) enjoys a global reputation for exporting high-quality products, it is not surprising that demand for milk from the UK dairy industry has increased in China. The purpose of this report, therefore, is to provide a systematic overview and analysis of the current Chinese market for ultra high-temperature (UHT) milk and its byproducts, including an industry analysis and recommendations for the future.

Introduction: The UK Dairy Industry

At present, approximately 1.8 million dairy cows comprise the UK's dairy industry, supported by about 14,550 dairy farms. The UK dairy industry is also characterized by a significant animal husbandry enterprise, meaning that UK dairy cows give birth to about 2 million calves each year (The dairy industry in Britain, 2019). Although herd sizes vary dramatically across the country, the average size of dairy herds in the UK is about 125 animals. It is noteworthy that this average herd size has increased dramatically — even on small farms — from roughly 30 cows per herd as recently as the 1970s (The dairy industry in Britain, 2019). These figures indicate that even smaller family farms in the UK have become more efficient in their animal handling procedures, translating into greater revenues and a global reputation for high quality (The dairy industry in Britain, 2019).

The breeds of dairy cows also vary widely across the UK, but the overwhelming majority (about 90%) are Holstein-Friesian animals (black and white), with other breeds including Guernsey, Ayrshire, and Jersey cows. Regardless of breed, the efficiency of the UK dairy industry has been further demonstrated by the fact that a single dairy cow's annual milk production increased from just around 990 gallons in the 1970s to nearly 1,967 gallons in 2012 (The dairy industry in Britain, 2019). In fact, yield per dairy cow in the UK has more than doubled since the 1970s due to improved herd management methods and selective breeding practices (The dairy industry in Britain, 2019). While milk production per cow varies widely from farm to farm, the amount of milk produced by UK dairy cows is about ten times as much as cows would typically produce to feed calves alone (The dairy industry in Britain, 2019).

This increased production has also translated into significantly greater demands on the animals. One industry analyst reports that "the unnatural physical demands placed on modern dairy cows result in a large number of the national dairy herd being killed every year due to lameness, mastitis (udder infection) and infertility" (The dairy industry in Britain, 2019, p. 3). While cows can generally live to the age of 20 to 30 years, dairy cows in high-production settings are typically slaughtered before their fourth lactation period (at about 5 years old) (The dairy industry in Britain, 2019).

It is also noteworthy that dairy farming is the largest single agricultural sector in the UK, representing about $5 billion annually — a figure that accounts for roughly 17% of the UK's total annual agricultural production (The dairy industry in Britain, 2019). Notwithstanding these impressive production figures, the UK still imports more milk products than it exports and experienced a $2 million trade deficit as recently as 2012 (The dairy industry in Britain, 2019). Nevertheless, the UK remains essentially self-supporting with respect to milk from its dairy industry, and the sector is well positioned to take advantage of new export opportunities.

At present, the largest dairy company in the UK is Dairy Crest, with annual revenues of about $13 billion in 2012. Another major company is Muller-Wiseman, with approximately $52 million in revenues during fiscal year 2011–2012, followed by Arla, a European conglomerate that accounted for more than $11 million in revenues in 2012 (The dairy industry in Britain, 2019). Taken together, it is clear that milk is big business in the UK, and it makes good business sense to explore new opportunities for expansion — including the enormous Chinese market — through the internationalization of operations. As Elkins (2018) advises, "In general, companies go international because they want to grow or expand operations. More specific motives include generating more revenue, competing for new sales, investment opportunities, diversifying, reducing costs and recruiting new talent" (para. 3).

Business Drivers: PESTLE Analysis

Although the Chinese economic juggernaut has slowed somewhat in recent years, the country continues to enjoy sustained growth due in large part to its transition from a closed, centrally managed political framework to a free-market economy that has fueled increased participation in the global marketplace since the late 1970s (China politics, 2019). While China remains the target of criticisms concerning its human rights policies and strict oversight of free speech, most analysts agree that it has transformed into a relatively more liberal nation compared to its political policies just a few decades ago.

The Chinese political leadership has succeeded in making substantive reforms to the country's economy, resulting in an increase in gross domestic product (GDP) of more than 1,000 percent since 1978. These reforms included the dissolution of collective farming practices and the relaxation of price-fixing regimens that had artificially kept domestic prices below prevailing market levels (China politics, 2019). During the period from 2013 to 2017, China had the fastest-growing economy in the world, achieving approximately 7% real economic growth per year (China politics, 2019). As a result, the Chinese economy became the largest in the world in 2017, outpacing the United States for the first time in history (China politics, 2019). These impressive gains have produced an increasingly large middle class that wants and expects more than basic necessities.

In early 2015, the Chinese government released its 13th Five-Year Plan, which underscored the need to embrace innovation and increase domestic consumption of goods and services to reduce the country's historic heavy reliance on government investment (China economy, 2019). The most recent Five-Year Plan also placed a high priority on increasing exports and heavy industrial investment (China economy, 2019). China continues to experience year-on-year economic growth, as reflected in GDP projections extending to 2023 (Statista, 2019).

Despite the increased emphasis on reducing government subsidies in the private sector, the Chinese government remains a major force in the economy through state-owned enterprises, though current trends suggest that this level of participation will continue to shrink as the economy improves and export diversification proceeds (China economy, 2019). Although it remains unclear whether China will succeed in its ambitious goal of doubling GDP by 2020, the country appears well poised to increase both imports and exports in the foreseeable future (China economy, 2019).

As noted in the introduction, the relaxation of the so-called "one-child only" policy in 2013 had previously contributed to a stagnation of China's birth rate. Nevertheless, the Chinese population remains enormous, and nearly a quarter-billion people in China are currently aged between 0 and 14 years (128,270,371 males and 110,120,535 females) (China politics, 2019). A quarter-billion young people consume a great deal of milk, and Chinese parents are increasingly able and willing to pay for the best products available for their children.

Milk production in the UK has increased several times over in just the past 40 years, and output per cow continues to rise as innovations in technology and improved herd management practices are implemented across the country (Palliser, 2011). Milk production per cow has also increased due to culling practices that eliminate lower-producing cattle in favor of proven high-production dairy animals (Palliser, 2011).

While improved herd management and technological innovation have contributed to significant increases in milk production in the UK, certain environmental factors cannot be overlooked — particularly with respect to UHT milk products. For example, the organic dairies that produce UHT milk are unable to use the same nitrogen-based fertilizers on grazing pastures as their conventional competitors, and must instead rely on white and red clover to achieve higher-quality milk output (Morrow, 2002). According to Harmon (2011), "Interestingly, the milk that these cows produce has a healthier fatty acid profile. Organic milk has significantly better quality year-round (less seasonal and annual variability) than conventional milk."

All dairy cows in the UK that produce organic milk are permitted to graze on grass more frequently than their conventional counterparts, but other factors also contribute to the improved quality of their milk. Morrow (2002) reports that "dairy cows are strongly affected by their social environment: a positive human-animal bond is critical to cows' welfare, and animal density and mixing of cattle is disruptive to the social order" (p. 3). Consequently, producing high-quality UHT milk requires more than simply maximizing animal density, and farm owners must consider animal welfare above all else.

The primary legal requirement for UHT milk producers is that all organic milk products must be heated to 280 degrees Fahrenheit for 2 to 4 seconds in order to destroy any bacteria present in the milk (Palliser, 2011). By contrast, conventional milk is pasteurized by heating it to at least 145°F for 30 minutes, or to 160°F for at least 15 seconds (Palliser, 2011). As a result, organic UHT milk also has a significantly longer shelf life than conventionally pasteurized milk (Palliser, 2011).