Feihe Dairy finds the right formula for growth

Firm credits market reforms and quality-first approach for popularity

Feihe Dairy, a domestic leader in infant and toddler formula production, has attributed its recent strong growth to consumers' deeper pockets, a commitment to quality and reforms in the dairy industry.

Based in Qiqihar, a city in Northeast China's Heilongjiang province, Feihe was among the earliest dairy brands in China, and represents a story of turnaround success.

Established in 1962, the firm was originally a sub-brand of Heilongjiang Farms & Land Reclamation Administration, owner of a number of State-owned enterprises and farms across Heilongjiang province.

In 2001, Leng Youbin, chairman of Feihe Dairy, led the firm out of the administration, agreeing to accept the factory's debt of 14 million yuan ($2.01 million). He and the team have since taken advantage of China's growing wealth, and helped rejuvenate the Feihe brand with a market-focused mindset.

"Without the opening-up policy and market power, Feihe would not have been able to become what it is today," said Leng.

Today, Feihe has a close partnership with six exclusive farms, and more than 60,000 cattle producing more than 300,000 metric tons of milk annually. It also has seven processing factories.

However, a decade ago, Feihe suffered a sizeable blow, when a baby milk scandal rocked the industry. Infant formula produced by Sanlu Group, then a leading dairy company, was found to contain melamine. Six babies died, and thousands more were left seriously ill.

While Feihe remains one of very few domestic dairy enterprises to have survived the melamine incident - no contamination was found in its products - the period proved devastating for it and other Chinese baby formula makers, as parents flocked to international brands. To compete, domestic firms soon became trapped in a series of price wars.

In response, Feihe reconsidered its whole business model, and began to gear itself toward middle- and high-end baby and infant formula products, emphasizing itself as a trusted quality name.

Feihe upgraded its comprehensive industry chain comprising farming, manufacturing and sales, to better control its quality. It established a two-hour manufacturing and delivery cycle, to ensure fresh milk is processed in two hours. The company set up a system to dry fresh milk, and deliver it to consumers within nine to 28 days.

A tracking platform was also created so that consumers can source their products with safety and convenience.

For Chinese dairy manufacturers, "quality and fresh dairy products are their core competence in their rivalry with international dairy makers," said Leng.

The result is that Feihe Dairy is now the top domestic milk formula brand in the Chinese market, and is gaining on foreign brands.

Of the top 10 milk formula brands in China, Danone's Nutricia had a 10.6 percent market share in 2017, followed by Nestle's Illuma at 9.1 percent and Royal Friesland-Campina's Friso at 7.4 percent. Feihe International's Firmus ranked fourth, with a market share of 6.7 percent according to Euromonitor International.

Feihe Dairy's revenues grew 60 percent year-on-year in 2017, while sales of its high-end products jumped 200 percent. This year, the company is expected to top 10 billion yuan in sales.

Feihe's growth, as well as other Chinese dairy firms, has helped the domestic industry to turn a corner. The once dominant international baby formula makers have seen their market share fall from 70 percent to 50 percent in China in just a year.

Chinese dairy brands have also expanded their presences overseas. Last year, Feihe established infant and baby milk formula factories to export its manufacturing know-how.

To further help, this September, Feihe and the China Standard Institute set up a fresh formula standards system, to shorten the gaps between domestic dairy producers and international leading players.

Wang Lirong, deputy secretary-general of the China Dairy Industry Association, said the standards system showed Feihe's commitment to quality.

In 2017, infant and baby formula milk had its best ever year in China for product quality, with 99.5 percent passing random tests.