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12 Dec 2013

Changing tastes

Christopher K Leung

by Christopher K Leung

Analyst, HSBC

Changing tastes

China's growing milk consumption reflects rising living standards and changing tastes

Wen Jiabao, the former Chinese Premier, once used milk as a symbol for China’s rising wealth and living standards. At a visit to a farm in 2006, he said that it was his “dream” to ensure all Chinese people could get enough milk.

Seven years on, statistics suggest that the country is making progress towards that dream. China’s per capita liquid milk consumption rose from 1kg per head in 2000 to 9.4kg in 2011, according to official reports. It is not just a taste for raw milk that is driving the increase. Coffee, yoghurt and lactic drinks are also rising in popularity.

We calculate that Chinese demand for milk has consistently outstripped supply in each of the past four years, with prices rising at an average of 12 per cent a year

A number of reasons may explain milk’s rising appeal. First and foremost it is a source of protein and calcium; many parents encourage children to drink it for the health benefits. It also holds a certain prestige for some because of its associations with foreign travel and cosmopolitan culture.

At the same time that liquid milk has grown in popularity, so has milk powder. With Chinese demand outstripping local supply, imported milk powder has become important, accounting for 33 per cent of the milk powder market (including infant formula) in 2012.

Amidst growing demand, China’s dairy industry has run into problems with the quality of both domestic and imported products. But the authorities are taking action. Premier Li Keqiang has promised to punish violations of safety regulations, and the government has tightened import criteria. Many Chinese consumers have also turned to more expensive branded products with higher safety standards and nutritional value.

The focus on quality is even more pronounced when it comes to infant formula, which has experienced double-digit growth in recent years. The share of high-end products rose from 32 per cent in 2009 to 39 per cent in 2012, and we think it will increase to 49 per cent by 2015 as more Chinese parents are able to pay a premium for the best products.

Quality scares have had some impact on consumption. After widespread coverage of problems in late 2011, liquid milk consumption rose just 4 per cent in 2012, a long way below the average growth rate over the previous decade. But in the first half of 2013, year-on-year growth recovered to more than 10 per cent.

We calculate that Chinese demand for milk has consistently outstripped supply in each of the past four years, with prices rising at an average of 12 per cent a year. So it might seem counter-intuitive that we expect the population of milkable cows in China to fall from around 14.5 million in 2012 to 14.2 million in 2013. That is because of another change in consumption habits – China’s growing appetite for meat. Beef prices have been rising even faster than milk prices, and we think a number of small-scale farmers have chosen to slaughter their cattle.

In the long term, higher protein diets may have far-reaching implications. In Japan, for instance, eating habits changed markedly in the second half of the twentieth century, contributing to a nationwide growth spurt. By 2004, 17-year old Japanese boys were on average nine centimetres taller than their 1950 counterparts, according to Japan’s Ministry of Education. Such a change has wide-ranging implications, affecting healthcare needs and consumer trends, for example, requiring clothes retailers to rethink their products.

Despite recent increases in consumption, however, Chinese people still drink far less milk than people in neighbouring and Western countries. People in Korea or Japan drink on average more than three times as much milk as people in China; people in Australia or the UK drink on average twelve times as much.

The pace at which Chinese tastes are evolving is a barometer of economic growth and rising living standards in the world’s second largest economy.

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