China’s dairy industry entered 2025 under acute pressure as consumers pared back purchases and core product categories cooled. Retail-sales data for January–November show an 8.8% year‑on‑year fall across all channels, with offline sales—still the primary consumer touchpoint—down nearly 11.8%. Even staples that once underpinned growth have faltered: plain milk and yogurt each slid by more than 8% and cheese plunged almost 20%.
The slump has rippled through corporate accounts. Leading groups that have long relied on scale are reporting squeezed profits and weakening channel confidence. Yili’s first‑half 2025 net profit attributable to shareholders eased by about 4.4%, while its advance dealer receipts—a metric of downstream demand and distributor trust—collapsed by roughly 61.8%. Mengniu, having endured a steep earnings drop in 2024, saw revenue shrink another 6.9% in the first half of 2025 and recorded a deterioration in gross margin.
These headline numbers mask a deeper structural problem: China’s dairy market remains heavily dependent on liquid milk—accounting for roughly 86% of commodity milk output—yet that pillar is wobbling. Yili and Mengniu both reported double‑digit or near‑double‑digit declines in liquid‑milk revenue in recent reporting periods, and national dairy output dipped 0.3% in the first half of 2025. What looked like a cycle correction has the character of a systemic, across‑the‑board slowdown rather than a short‑term wobble.
Faced with a shrinking pie, incumbents have adopted aggressive, forward‑looking customer acquisition tactics—most conspicuously in the infant‑formula market. Market leaders launched large nationwide “birth subsidies” to secure the coveted ‘first milk’ choice of newborns’ families. Feihe kicked off the round with a 1.2 billion yuan program, Yili followed with 1.6 billion yuan, and Junlebao matched that figure; together the three have earmarked about 4.4 billion yuan for subsidies. The logic is straightforward: first brand choice engenders stickiness, so firms are willing to prepay future revenue through hefty short‑term incentives.
But the subsidy war has amplified tensions with distribution partners. Heavy online discounts upset offline pricing structures and dealer margins, prompting brands to tighten price control through “one‑can–one‑code” traceability and geographic e‑fence systems. Those same surveillance tools, intended to prevent diversion, have been weaponized: reports of third parties harvesting codes from consumer returns or secondary‑market cans to expose alleged channel breaches suggest an adversarial turn in supplier–distributor relations.
With price competition grinding down margins, companies are pivoting to higher‑margin, differentiated products. Since the revised national standards took effect, more than forty infant‑formula SKUs have been reformulated or rebranded, often around functional claims—brain development, vision support, digestion and immunity. Major dairy groups are extending this logic beyond infant nutrition into adult and lifecycle products: protein‑fortified yogurts for fitness consumers, probiotic sleep‑support drinks, A2 and organic lines, and a wider push into milk‑based health supplements.
The move to “functionalization” is strategically rational but fraught. Developing genuinely differentiated, clinically validated nutritional claims requires sustained R&D investment and long market‑education cycles; Yili and Mengniu have both boosted research spending, yet returns will be slow. Distribution frictions persist because high‑price, low‑turnover functional SKUs clash with the short‑cash‑cycle priorities of supermarket buyers and many e‑commerce merchants. Analysts warn of a predictable second wave of homogeneity as rivals pile onto the same popular functional themes, risking a new round of pseudo‑innovation and marketing battles rather than durable differentiation.
To diversify risk and find new volume, firms are also expanding into business‑to‑business channels and partnering with foodservice and retail chains, while regional players seek capital through IPOs to fund R&D and scale. The strategic picture ahead is one of consolidation and segmentation: brands with deep pockets, proprietary ingredients or genuine clinical advantages are likely to pull away, while smaller names face a squeeze between low‑cost private labels and an escalating investment arms race.
China’s dairy industry is therefore at an inflection point. The shift from a scale‑driven “quantity” era to a quality‑and‑functionality era is inevitable, but the transition will be capital‑intensive, politically visible and operationally complex. Outcomes will depend on firms’ ability to navigate channel economics, secure unique technical advantages, and win consumer trust in a market where price sensitivity and health expectations are both rising.