Shaking 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.

However, "it will take months for the sector to get back on its feet; it may only happen by the first half of 2010," Wang Dingmian, executive council member of the Dairy Association of China, told China Business Weekly. "Our biggest concern is how to regain consumer confidence as soon as possible."

The biggest plus point for dairy producers is China's huge untapped dairy market.

Every Chinese citizen on average consumes 30 kilograms of dairy products annually, much less than the world average of 120 kg and 300 kg for developed nations. The 1.3-billion Chinese population is estimated to require dairy products of between 117 and 351 billion kg every year. These numbers, despite the scandal, spell good news for dairy producers.

"China's huge consumption potential requires that local dairy producers grow significantly. That will come as a major boon for the industry," Long Yongtu, Bo'ao Forum's secretary-general for Asia, said recently.