"Only Selling Formula and Milk Could Lead to Failure"…Dairy Industry Faces Survival Crisis [Population Decline Impacting Industry]

Dairy Industry Hit Hard by Low Birthrate
Last Year's Infant Formula Production Capacity Utilization at 1.88%
Milk Consumption Also Declining... Survival at Risk

"Wanna go drink Chocoemong?"

This is an expression used by the 'Jalpa Generation' born after the 1990s to show interest during drinking gatherings. Chocoemong is a chocolate milk launched by Namyang Dairy Products in 2011 featuring the Japanese animation character Doraemon. It has recently gained popularity among the 20s and 30s age group as a so-called 'drinking party flirting milk' due to its reputed effectiveness in relieving hangovers. Namyang Dairy Products, which once held over half of the domestic infant formula market until the early 2000s, has diversified its dairy products as demand for infant formula sharply declined due to low birth rates.

The domestic infant formula industry, which had endured the low birthrate trend for over half a century, now faces a critical turning point. The infant formula market expanded during industrialization as the number of working couples increased, leading to more mothers feeding formula. However, growth slowed entering the early 2000s low birthrate era (total fertility rate below 1.3). After the 2008 Chinese infant formula scandal, demand for Korean formula surged in the populous country, providing a foothold for recovery. Yet, the THAAD (Terminal High Altitude Area Defense) dispute and the COVID-19 pandemic have led to fierce survival battles in recent years.

Infant Formula Industry Hit Hard by Ultra-Low Birthrate... Last Year's Production Utilization Rate at 1.88%

According to the Korea Agro-Fisheries & Food Trade Corporation (aT) Food Industry Statistics Information on the 20th, last year’s production volume of infant and growing-up formula was 6,776 tons. This means only 1.88% of the total production capacity (359,603 tons) was utilized. Domestic infant formula production steadily increased from 13,730 tons in 1978 to 27,559 tons in 1992, fluctuated thereafter, rebounded after 2010, and recovered to 21,000 tons in 2017, but has drastically shrunk in recent years. Last year’s production volume fell about 67% compared to the peak in 2017.

This trend is also reflected in Namyang Dairy Products’ formula sales. According to the electronic disclosure system, Namyang’s formula sales recorded 208.3 billion KRW in 2000, then declined to around 110 billion KRW by 2006. The rebound began in 2008 following the so-called 'melamine formula' incident in China, where infants died after consuming Chinese formula. Rapid growth in China led to increased demand for safe Korean formula, significantly boosting exports. Namyang’s sales surged 150% from 150 billion KRW in 2008 to 379 billion KRW in 2013. However, continuous domestic birthrate decline and China’s slowing growth caused Namyang’s formula sales to trend downward.

South Korea entered a low birthrate era in 1983 when the total fertility rate dropped below 2.1, and has experienced ultra-low birthrate for over 20 years since 2002. The domestic infant formula industry avoided the blow of low birthrate by relying on China as a refuge market. However, after the THAAD dispute, even exports to China were blocked, delivering a direct hit from the declining birthrate.

In fact, Maeil Dairies completely halted operations at its Asan plant dedicated to infant formula production immediately after the THAAD dispute in 2018. Maeil’s production of infant formula and baby food last year averaged 62,253 units per day, down 17.8% (13,501 units) from 75,754 units a year earlier. Compared to 83,330 units per day in 2020, when daily production figures were first disclosed, production dropped 25.3% (21,077 units) over three years. The decline in production also lowered average utilization rates. Last year, the utilization rate for infant formula and baby food was 31.0%, down 6.6 percentage points from the previous year and 10.5 percentage points from 2020, less than half of the overall average utilization rate of 64.0% last year.

The sharp decline in infant formula production in recent years is due to weak domestic demand. According to aT Food Industry Statistics Information, last year’s domestic infant formula retail sales amounted to 52 billion KRW, down 10.3% from 58 billion KRW a year earlier. Infant formula sales, which were around 89.6 billion KRW in 2020, have sharply decreased every year, falling 40.2% over three years through last year.

In response to the steep drop in domestic sales, formula companies are targeting consumers with new products like Chocoemong. As a result, the share of formula sales, the core product of formula companies, has significantly decreased. For Namyang Dairy Products, the proportion of formula products in total sales shrank from 32% in 1998 to 18% last year.

The problem is that milk consumption is also declining. According to market research firm Euromonitor, last year’s domestic milk retail sales reached 2.6181 trillion KRW, a mere 4.2% increase over four years compared to 2.5132 trillion KRW in 2019. During the same period, sales of plain milk, which accounts for about two-thirds of the total milk market, decreased by 1.0% to 1.6591 trillion KRW. Although total milk sales slightly increased, they have fluctuated up and down in recent years, essentially remaining stagnant.

Due to sluggish sales of formula and milk, the dairy industry’s performance is also unsatisfactory. Maeil Dairies’ sales last year grew to 1.783 trillion KRW from 1.4631 trillion KRW in 2020, but operating profit fell from 86.5 billion KRW to 72.2 billion KRW, dropping the operating margin from 5.9% to 4.0%. Seoul Milk, the largest dairy company in Korea, surpassed 2 trillion KRW in sales for the first time last year but cannot celebrate fully. Seoul Milk posted sales of 2.0238 trillion KRW and operating profit of 51.7 billion KRW last year, improving operating margin to 2.6% from a poor 1.7% the previous year, but profitability worsened compared to 3.0% in 2020.

Survival Strategy for Dairy Industry: Targeting the Super-Aged Society

With the severe low birthrate problem making it impossible to maintain existing strategies, dairy companies are shifting their main consumer base from infants to adults. Maeil Dairies introduced the protein health functional food brand 'Selex' and balanced nutrition brand 'Mediwell,' and last month launched the senior-specialized nutrition brand 'Ostra Life' through Maeil Health Nutrition, expanding patient and elderly-friendly food products.

Maeil Dairies first launched the adult nutrition product Selex in October 2018 and established Maeil Health Nutrition in October 2021 to focus on the Selex business. From October 2018 to last year, cumulative Selex sales reached 359 billion KRW. Kim Sun-hee, Vice Chairman of Maeil Dairies, emphasized the importance of portfolio diversification suited to the low birthrate era during a lecture at the Korea Chamber of Commerce and Industry Jeju Summer Forum last month, stating, "Small companies that only sell milk will disappear after 2026."

Maeil Dairies 'Selex Core Protein Lactofree'

Namyang Dairy Products is also making a major shift from a baby food company to a life-care brand covering the entire life cycle. Recently, Namyang discontinued sales of the 'Imperial XO Liquid Formula' and accelerated portfolio changes by launching the new health functional food product 'Innercare Bone & Joint Protect' this month. Namyang plans to strengthen new product markets such as protein and health functional foods, including its protein brand 'Takefit.' Among its five factories, Namyang has obtained GMP (Good Manufacturing Practice) certification for health functional food production at its Naju and two Sejong plants and is expanding product lineups for seniors.