When will Mengniu, with declining revenue and profits, be able to regain its lost ground?

The adjustment period for the dairy industry is long, and Mengniu has yet to see the dawn.

In the first half of the year, Mengniu achieved operating revenue of 41.567 billion yuan, a year-on-year decline of 6.9%, with both sales and prices experiencing low single-digit declines.

Benefiting from the decrease in raw milk prices, Mengniu's gross profit margin increased by 1.4 percentage points to 41.7% in the first half of the year, driving operating profit to grow by over 13.4% year-on-year, reaching 3.5 billion yuan.

The decline in raw milk prices also put pressure on the performance of joint ventures represented by Modern Farming, causing Mengniu to bear a book loss of 545 million yuan, offsetting the recovery of net profit from cost reductions.

In the first half of the year, Mengniu's net profit attributable to shareholders decreased by 16.4% year-on-year to 2.046 billion yuan, with a net profit margin down by 0.6 percentage points.

The company's management pointed out that if the losses from the joint venture are excluded, the net profit attributable to shareholders could actually remain flat compared to the same period last year.

The industry outlook for demand recovery and improvement in the competitive landscape is not optimistic.

The number of dairy cows in China has been continuously declining since 2024, remaining in a state of year-on-year negative growth after entering 2025.

Although the industry is in a capacity clearing phase, supported by the resilience of the industrial chain, milk production still achieved a year-on-year growth of 0.5% in the first half of the year, while milk prices continued to hover around 3 yuan per kilogram.

The market generally expects that the substantial reversal of the cycle has been postponed to 2026.

The pressure Mengniu faces comes not only from weak macro consumption and industry cycle impacts but also more from imbalances in category structure and channel layout.

With ambient liquid milk occupying an absolute core of the revenue structure, Mengniu's second growth curve remains unclear.

If breakthroughs cannot be made in structural weaknesses, Mengniu may find it difficult to escape the situation of being jointly pressured by the industry's weak recovery cycle.

Basic Situation Not Stabilized

Dairy consumption remained under pressure in the first half of the year, with ambient liquid milk facing particularly severe pressure.

Nielsen IQ data shows that from January to May, national liquid milk sales fell by 7.5% year-on-year, with the decline further expanding to 9.6% in June.

Against this backdrop, Mengniu's liquid milk business continued its double-digit decline trend in the first half of the year, decreasing by 11.2% year-on-year to 32.2 billion yuan, with its revenue share dropping by 3.8 percentage points to 77.4%, falling below 80% for the first time in recent years.

Compared to the high point two years ago, Mengniu's semi-annual revenue from liquid milk has shrunk by nearly 10 billion yuan. During the same period, Yili's liquid milk revenue fell by 15%, reducing its scale by about 6.3 billion yuan.

In this view, Mengniu faces relatively more obvious contraction pressure in the liquid milk market.

This also means that in just two years, the gap in market share between the two giants in the liquid milk market has expanded by 4 billion yuan.

However, when breaking down the liquid milk business, the low-temperature segment has maintained its position as the market leader for 21 consecutive years, with fresh milk achieving over 20% growth, while only the ambient segment is still declining.

According to Gao Fei, president of Mengniu Group, Mengniu's diversification of categories and optimization of category structure have already shown initial results.

In the first half of the year, Mengniu's ice cream and cheese businesses performed outstandingly, with year-on-year growth rates exceeding 10%. The milk powder segment, which had previously recorded significant impairments, also achieved a growth of 2.5% However, the above business still accounts for less than a quarter.

In addition to category structure issues, Mengniu currently faces numerous challenges:

Firstly, there is competitive pressure from within the industry.

The continuous decline in raw milk prices has reduced the production costs for small and medium-sized dairy enterprises, prompting them to more actively engage in price wars, which erodes the market share of leading companies. Industry leaders, on the other hand, have to bear higher costs for raw milk powder processing, increasing operational pressure.

Secondly, there is a structural shift in consumption scenarios and channels.

Traditional channels represented by supermarkets are declining, with their share being divided among online platforms, warehouse membership stores, snack wholesale channels, and instant retail.

Emerging channels such as Hema, Sam's Club, and Pang Donglai, along with self-operated dairy products and new tea drinks, are also encroaching on the market space of traditional brands due to their channel traffic advantages and cost-effectiveness.

Mengniu's market expectations for the second half of the year are not optimistic.

Management stated that the revenue from liquid milk in the second quarter narrowed significantly compared to the first quarter, and it continued to decline in July and August.

Although the third quarter may see a boost from the dual festivals, management has observed that the impact of gifting on overall demand is diminishing, and the terminal demand during the Mid-Autumn Festival and National Day may be weaker than in previous years. As a result, the annual guidance has been revised down from low single-digit growth at the beginning of the year to a decline in mid to high single digits.

Profit Pressure

Under the leadership of Gao Fei, Mengniu has demonstrated a prudent operational strategy.

Externally, this is reflected in the reduction of investment scale and strict control of capital expenditures.

In the first half of 2025, Mengniu's capital expenditures saw a year-on-year decline of 40%, reducing by 600 million yuan to 1 billion yuan.

This is a continuation of the proactive control from the previous year—In 2024, Mengniu's capital expenditures decreased from 4 billion yuan in the same period last year to 3.5 billion yuan, a year-on-year decline of 15%.

In August, Mengniu sold 100% equity of its New Zealand milk powder factory under its subsidiary Yashili International to New Zealand dairy company a2 for NZD 282 million (approximately 1.2 billion yuan).

This factory is the first overseas production base operated by Mengniu-Yashili and is the first milk powder factory built from scratch by a Chinese company in New Zealand, with an initial total investment of no less than 1.1 billion yuan.

Mengniu stated that the sale of Yashili's New Zealand assets is part of a series of management actions in the past two years to proactively control capital expenditures, assess inefficient assets, and adjust and optimize the asset portfolio.

Internally, the focus is on improving operational efficiency, actively relieving inventory, and compressing costs.

In the first half of the year, Mengniu's inventory turnover days decreased to 36 days, significantly shortening by 4.3 days compared to the same period last year, mainly due to a substantial reduction in bulk powder and finished product inventory.

Continuous strengthening of expense control has led to a year-on-year decrease of approximately 1 billion yuan in sales and distribution expenses, down to 11.614 billion yuan, resulting in a year-on-year decrease of 0.5 percentage points in the sales expense ratio.

Due to a higher proportion of direct sales channels and a later penetration into channels, Mengniu's sales expense ratio has remained higher than Yili's for nearly a decade. The market judges that as channel reforms deepen in the future, there is still room for optimization of the company's sales expense ratio.

At the same time, personnel optimization has been continuously promoted.

In the first half of 2025, Mengniu's total number of employees was further reduced from 41,000 to 38,800 Cost-cutting and downsizing measures have optimized Mengniu's profitability to some extent.

In the first half of 2025, Mengniu's operating profit margin increased by 1.5 percentage points year-on-year to 8.5%, achieving further growth compared to the full-year figure of 8.2% in 2024. This continues the trend of Mengniu's operating profit margin increasing by 34, 40, and 193 basis points respectively from 2022 to 2024.

According to Lin Wenjia, Chief Consumer Analyst at Ping An International, whether Mengniu can continue to achieve its target of expanding operating profit margins by 30-50 basis points each year will mainly depend on the company's further breakthroughs in optimizing product categories and improving operational efficiency.

Mengniu stated that the operating profit margins for products like milk powder and ice cream are still lower than those of ambient products, but it is expected that they will surpass them in the next two to three years.

The company plans to enhance overall profitability through continuous optimization of product categories.

For Mengniu, the current stage shows a slight easing of the supply-demand imbalance in raw milk compared to 2024. The reduction in excess milk supply and the gradual stabilization of milk prices are expected to significantly improve the impairment of spray-dried milk powder.

However, Lin Wenjia believes that as raw milk prices stabilize, the marginal improvement in gross margins from milk prices will weaken. Nevertheless, the industry's demand and competitive landscape are unlikely to improve in the short term, which may put pressure on Mengniu's sales prices and gross margins.

A new round of price competition is beginning to emerge.

Management stated in the earnings call that they have already reduced prices on some ambient products in May, with expected impacts to be seen in the second half of the year.

This not only means that price factors will continue to exert pressure on revenue in the second half of the year but will also lead to operational negative leverage, further squeezing profit margins.

Mengniu expects its full-year operating profit margin to remain flat compared to last year, meaning that its profit margin in the second half will face downward pressure.

Product Restructuring

Against the backdrop of continued pressure on overall industry growth, dairy companies tend to prioritize resolving supply-demand mismatches through product innovation and category development.

In the first half of the year, Mengniu has been active in product development, significantly accelerating the pace of new product launches.

In just six months, it launched over a hundred new products, covering a full category matrix including ambient, chilled, ice cream, functional milk, and infant formula.

The ambient division launched 72 new products, the fresh milk segment introduced 15 new products, and the ice cream category saw over 20 innovative products launched.

This year, Mengniu has begun to emphasize the "Three Drinks": drink milk, drink good milk, and drink the right milk, which respectively refer to quality-price ratio, premiumization, and functional products.

Additionally, it aims to shift consumer habits from "drinking milk" to "eating milk products."

China is still in a development stage dominated by liquid milk, with cheese and butter accounting for only 2.6% and 0.5% of the domestic dairy consumption structure in 2024.

Targeting platforms such as JD.com, Tmall, Pinduoduo, Pang Donglai, Hema, and Sam's Club, Mengniu has launched numerous customized and exclusive products.

Some new products have performed exceptionally well, such as the "Guanyiruyou Early 8 Ton Bucket," which became a bestseller at Sam's Club, and the new 200ml Master Limited Edition of Telunsu, which surpassed monthly sales of 100 million yuan.

At the same time, Mengniu is actively expanding into emerging channels amid shifting consumer trends, transforming itself from a traditional supplier to a co-creation partner for solutions, providing specialized and customized dairy application solutions Gao Fei revealed at the performance briefing that Mengniu has established a B2B division named "Milk Cube."

Currently, the "Mengniu Professional Dairy Products" set up for the B2B sector already has three product categories: pure milk, cream, and milk base. Major consumer giants such as Starbucks, Bawang Chaji, Mixue Ice City, and Parkson China are all on Mengniu's B2B client list.

With the continuous advancement of deep processing layout, Mengniu will also continuously enrich its matrix of high value-added B2B products such as dairy fat, cheese, lactoferrin, and whey protein, further driving revenue growth.

In the long run, there is still ample room for optimization and upgrading in the dairy consumption structure. Forward-looking investments and strategic positioning will directly impact the share distribution and market position in the next phase of competition.

Mengniu's long-term goal is to expand into deep processing of dairy products, thereby promoting the upgrading and value enhancement of the entire industry chain.

Gao Fei stated that in 2024, China's total dairy imports will be nearly 2.77 million tons, equivalent to about 17 million tons of raw milk, with imports of butter, condensed milk, and milk protein continuing to rise, indicating that the industry has a long-term reliance on imports in the field of solid dairy products and high value-added raw materials.

"This is not only a prominent shortcoming of the industry at present but also a key direction for our transformation and upgrading that urgently needs to be broken through, as well as the space for industry development," Gao Fei said