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Warning: Factors That Could Crush Feihe's High-Flying Dream

The crisis alert for Feihe has not been completely lifted.

The greatest crisis is the recent public opinion storm that Heilongjiang Feihe Dairy Co., Ltd. has found itself in.

On October 3rd, Feihe signed a letter of intent for technical cooperation with Japan Kyowa Hakko Biochemical Co., Ltd. in Tokyo. This was a normal inter-company technical exchange cooperation, but it unexpectedly triggered baseless speculation about "Feihe importing Japanese raw materials."

In a short time, a large number of comments spread rapidly on the Internet, severely affecting Feihe's brand reputation.

On October 18th, Feihe issued a statement through official channels, stating that it had reported the false statements on the Internet to the public security authorities, and the police had also filed a case for investigation. Feihe emphasized that the cooperation with Japan Kyowa Hakko was only for technical exchange and did not involve the import of raw materials or the use of formulas. At the same time, Feihe stated that the company has always cooperated with many universities and scientific research institutions at home and abroad, aiming to gather the world's leading scientific research resources to provide higher quality milk powder for Chinese babies.

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In terms of performance, Feihe has seen a decline in performance for two consecutive years in recent years, with both revenue and profits showing a downward trend. In 2022 and 2023, Feihe achieved operating income of 21.311 billion yuan and 19.532 billion yuan, respectively, a year-on-year decrease of 6.43% and 8.34%; a total of 4.942 billion yuan and 3.39 billion yuan in net profit attributable to the parent company after deducting non-recurring gains and losses, a year-on-year decrease of 28.07% and 31.4%.

Feihe achieved a revenue of 10.09 billion yuan in the first half of 2024, a year-on-year increase of 3.7%; net profit of 1.91 billion yuan, a year-on-year increase of 18.1%. This performance indicates that Feihe has re-entered a growth track after two consecutive years of performance decline.

However, the inventory problem seems to have always been a major challenge for Feihe. High inventory has forced Feihe to take a series of measures to reduce inventory, such as actively reducing channel inventory and implementing the "fresh strategy". However, the inventory problem has still not been effectively resolved, leading to confusion in the pricing system.

According to market research data, there is a large price difference for Feihe's products in different channels. Taking the Xingfeifan Zhuorui 2nd stage (750g) product as an example, the selling price of this product in the "Feihe Official Flagship Store" on Taobao is 280 yuan per can, but the price in offline maternity and baby stores ranges from 210 to 265 yuan per can, with additional gifts. This confusion in the pricing system not only affects consumer purchasing decisions but also causes some damage to Feihe's brand image.

In the capital market, Feihe has been "cold". Feihe has gone through twists and turns from the US stock market to the Hong Kong stock market, and encountered the embarrassing situation of breaking the issue on the first day of listing. Now the overall stock performance is not good, and investors are cautious about Feihe's future development prospects.A dairy analyst stated that this is primarily due to the decline in Feihe's performance, inventory issues, and the chaos in the pricing system, which have led investors to question Feihe's profitability and development potential.

Faced with the dilemma of a decline in both revenue and profit, Feihe needs to take proactive and effective measures to respond. The dairy analyst suggested that, on one hand, Feihe could increase investment in research and development, launch new products that better meet market demands, and enhance the competitiveness of its products. On the other hand, Feihe could strengthen channel management, optimize the pricing system, and improve brand image and consumer trust. At the same time, Feihe could also actively explore new markets, seek new growth points, and achieve sustainable development.

However, the operational pressure hidden behind remains significant. On one hand, Feihe's growth mainly comes from the optimization of product structure in the domestic market. The company's ultra-high-end products have achieved revenue growth, but the revenue from high-end series has declined. As the domestic infant formula market enters a phase of stock competition, Feihe's future high-end strategy will face bottlenecks. Data from the National Bureau of Statistics shows that in 2023, the number of newborns in China dropped to about 9 million, further reducing potential market demand.

Moreover, Feihe raised the prices of its main products in the first half of this year, and some industry insiders believe that further price increases may suppress consumer demand.

On the other hand, Feihe's internationalization pace is relatively slow. According to its semi-annual report, Feihe's total revenue in the U.S. market was only 81 million yuan, and in the Canadian market, it was only 26 million yuan, with both accounting for no more than 1% of total revenue. In comparison, Ausnutria Dairy, another domestic infant formula brand, seems to have gone further on the path of internationalization.

In addition, Feihe is also facing questions about product quality. In 2024, Feihe encountered multiple consumer complaints on the Black Cat Complaints platform and the 12315 platform, mainly involving product quality, food safety, advertising promotion, and after-sales service. For example, some consumers claimed to have found live insects and foreign objects in Feihe's formula. This has had a certain impact on Feihe's long-emphasized "high-quality" image.

In summary, after experiencing this public opinion storm, although Feihe has actively taken measures to maintain its brand reputation, it still faces many challenges in the gradually saturated domestic market, slow international progress, and product quality control. We have tried to summarize several potential crisis alerts, all of which could be the "straws" that break the camel's back of its high-flying dream. In the future, whether Feihe can continue to maintain its growth momentum and stand firm in the fierce market competition remains to be seen.

Business Show-01

Feihe's signing of a technical cooperation letter of intent with Kyowa Hakko Biochemical Co., Ltd. in Japan has sparked speculation about "importing Japanese raw materials". Although a statement was issued to clarify, Feihe inevitably became embroiled in a public opinion whirlpool for a long time.

This storm has had a great impact on Feihe's brand image. In the hearts of consumers, Feihe has always been known as a domestic infant formula brand that is "more suitable for the physique of Chinese babies". The cooperation with a Japanese company has caused many consumers to feel worried and disappointed. Especially after the Japanese nuclear leak incident, consumers have doubts about the safety of Japanese food and worry that Feihe's products will be affected by nuclear radiation.According to relevant data, the Japanese milk powder market is renowned for its strict quality control and high safety standards. However, some Chinese parents reserve their stance on the Japanese standards and technology introduced by Feihe. They believe that as a domestic milk powder brand, Feihe should adhere to local development and cooperate with domestic enterprises. This ethnic sentiment factor also affects consumers' attitudes towards Feihe to some extent.

Feihe is facing a significant crisis of trust in this turmoil. Consumer trust in milk powder products is based on product quality and safety. The controversy triggered by this cooperation has led consumers to worry about the quality and safety of Feihe's products, thereby reducing their trust in the Feihe brand. If Feihe cannot respond to consumer concerns in a timely and effective manner to dispel their doubts, this decline in trust may have an adverse impact on Feihe's long-term development.

In addition, Feihe's stock price has also been affected by this incident. After the news spread, Feihe's stock price experienced a certain degree of decline. Although Feihe issued a statement to stop the three consecutive days of stock price decline, the future trend of the stock price is still full of uncertainty. In this public opinion storm, whether Feihe can reshape its brand image and regain consumer trust remains to be seen.

Feihe's growth mainly comes from the optimization of product structure in the domestic market. However, as the domestic infant formula market enters the competition for market share, its high-end strategy faces a bottleneck.

According to data from the National Bureau of Statistics, the number of newborns in China in 2023 has dropped to about 9 million, further reducing potential market demand. To cope with the weak market, Feihe increased the prices of its main products in the first half of this year. However, some industry insiders believe that the current pricing of Feihe's products is already close to the high level, and further price increases may suppress consumer demand.

In the increasingly fierce market competition, consumers' sensitivity to the price of milk powder is also increasing. Taking a can of Feihe's high-end milk powder as an example, its price may reach hundreds of yuan, and some consumers may choose other brands or products due to the high price.

Moreover, as consumers' requirements for the quality and safety of milk powder continue to increase, they also pay more attention to the cost-effectiveness of the product. If Feihe's high-end milk powder is too expensive and does not have a clear advantage in terms of quality and safety, consumers may turn to other brands.

Looking at the international market situation, data shows that Feihe's total revenue in the US market is only 81 million yuan, and the total revenue in the Canadian market is only 26 million yuan, both accounting for no more than 1% of total revenue. Compared with Ausnutria Dairy, a domestic milk powder brand, its internationalization process is obviously slow. Ausnutria Dairy's core brand Kabrita's overseas revenue in the first half of 2024 was 290 million yuan, a year-on-year increase of 50.7%, accounting for 16.1% of the revenue from the goat milk powder business.

Industry analysis suggests that Feihe's internationalization road is difficult, mainly because domestic milk powder companies still have relatively small sales in the international market. Although the population birth rate in emerging markets such as Southeast Asia is still positive, the market situation in these regions is complex, with different markets, resident income situations, and laws and regulations in each country, and they are also markets where Western powers focus on layout.Facing such a complex international market environment, Feihe needs to invest more resources and energy to expand into overseas markets. However, in the face of fierce competition in the domestic market, Feihe may find it difficult to allocate sufficient resources to advance its internationalization process, which may also pose significant challenges for Feihe on the path to globalization.

For milk powder users, the most important aspect is the quality of the milk powder. Feihe milk powder has been frequently complained about by consumers in recent years, with quality issues serving as a constant alarm bell.

According to frequent consumer feedback on platforms such as the Black Cat Complaints platform and the 12315 platform, Feihe milk powder has issues with foreign objects and spoilage. According to statistics from "Great Consumer Home," as of September 26, 2024, there were 914 complaints about "Feihe" on the Black Cat Complaints platform, and 630 complaints on the 12315 platform, mainly involving product quality and food safety issues.

For example, some consumers reported finding black foreign objects similar to dregs and small blue particles in the milk powder, while others claimed that the milk powder had a strong fishy smell. Although some consumers received compensation, they still felt uneasy.

In addition, there were consumer complaints about "milk powder being too salty," with customer service explaining that it was caused by chloride ions, but consumers were not satisfied with this response, fearing it would have adverse effects on children's health.

Feihe milk powder has always positioned itself as high-end, with high prices. In the first half of 2020, Feihe Chairman Leng Youbin once bluntly stated, "Feihe milk powder, when converted to a price per kilogram, is the most expensive in the world."

However, high prices do not equate to high quality. The continuous quality issues of Feihe milk powder have led consumers to question the quality of its products. The discrepancy between high prices and high quality puts Feihe at risk of losing consumer trust.

Infant formula milk powder is related to the healthy growth of children, and quality is crucial. As a representative brand of domestic milk powder, Feihe should place greater emphasis on product quality, strengthen quality control, and ensure that consumers can buy safe and reliable milk powder.

In today's highly competitive milk powder market, only by truly achieving superior quality can Feihe win the trust and support of consumers and achieve sustainable development.Business Show-04

Public information indicates that Feihe, formerly known as the Heilongjiang Zhaoguang Farm Dairy Factory, was established in 1962 and has a long history.

From an industry perspective, the domestic birth rate has declined, leading to a corresponding decrease in the demand for infant formula. Investors are generally cautious about the entire industry. Data shows that the number of newborns in China dropped to about 9 million in 2023, further reducing potential market demand. This situation is expected to continue in the future, and the impact may be further amplified, posing a common challenge for domestic infant formula companies.

Feihe is a brand in the Chinese dairy industry that is predominantly focused on infant formula, compared to comprehensive giants like Yili and Mengniu, as well as new forces in the dairy industry such as Junlebao. Feihe has the disadvantage of having a single product variety. It is significantly weaker in its ability to withstand fluctuations in the number of newborns.

On the other hand, Feihe has the issue of excessively high sales expenses. The prospectus shows that Feihe's sales expenses in 2017 and 2018 were 2.139 billion yuan and 3.661 billion yuan, respectively, accounting for more than one-third of the annual revenue. In contrast, Feihe's R&D costs were significantly lower, with only 0.15 billion yuan in 2017 and 1.09 billion yuan in 2018, basically maintaining around 1%. The high sales expenses are considered high among manufacturing listed companies, indirectly showing the intense competition in the infant formula industry where Feihe operates.

Behind the high sales expenses is the high gross margin of infant formula. Feihe's high-end formula, "Star Feifan," had a gross margin as high as 79.3% last year. Although this indicator has declined somewhat in the first half of this year, it still reached 76.3%.

Amid increasingly fierce market competition and foreign brands also starting to lower prices, the sustainability of such a high gross margin is questioned, directly relating to whether Feihe's operating status can continue to develop sustainably.

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