UHT Milk: A Long-Life Dairy Solution

Introduction

What is UHT Milk?

UHT milk means Ultra Temperature Processing, and it is also referred to as long-life milk since it has a long shelf life of about 6 months (Wade, 2010). This kind of milk is developed using a technology which treats milk within the range of 139C and 142 C for 2-4 seconds along with homogenization (Sing-Yin, 2018).

UK UHT Milk Industry

In the UK, it is estimated that approximately 120 million liters of UHT milk are produced domestically, with the dominant producers being Crediton Dairies (RABDF, 2018). UHT margins are considered quite low, and there is usually an intense import competition on UHT milk.

Supply Chain in UK

It has been discovered that the dairy processors in the UK are not capable of producing the formats of flavored milk in decent quantities hence the need for imports' UHT milk imports in the UK as of 2015 are approximately 200 million liters (Michael, 2016). By 2015, UK imported UHT milk products from a variety of nations; 24% from France, 15% from Germany, 30% from Ireland, 28% from other European Union (EU) nations and 1% from non-EU nations (Agriciulture & Horticulture Development Board, 2016).

China UHT Milk Industry

In China, there is exponential growth in the demand for imported UHT milk (Inouye, 2018). This is because of the decreasing amount of UHT milk produced domestically. In 2019, domestic production of UHT milk in China fell by 34.7 million metric tons, which represents a decline by 1%. The reason for decreased production is the decreased number of dairy cattle.

Supply Chain in China

Small dairy firms in China are exiting the market faster than the mid- to large-scale dairy firms (Inouye, 2018). Research indicates that Chinese consumption of UHT milk rose from 8,000 in 2010 to 150,000 tons in 2013 and by 2020, it is expected that China’s demand for UHT milk would grow to about 590,000 tons (Gerald, 2018).

Chinese Preference of UHT Milk

China imports more fresh milk products and this is evident by a 13% year on year increase in imports of UHT milk which is equivalent to an increase of 850,000 tons of milk. The increased imports in milk products is meant to offset the diminishing domestic production (Inouye, 2018).

Business Driving Forces In China

AvoMilk Dairies ought to be knowledgeable about the key business driving forces in the UK-China UHT milk market. One of the driving forces of the dynamics of UHT milk import and production is China’s large population and a great demand for UHT milk (Inouye, 2018). A partnership was initiated between China and the UK to enable export of dairy products from the UK to China. As a result, UK dairy companies have strengthened their presence in China. In comparison with other dairy products, UHT is cost-effective since no refrigeration is required and for this reason, the income generated through UK's dairy exports is likely to increase with the UK-China partnership (Wade, 2010). The success of this partnership can be attributed to by the price of UHT milk which is tied to the reduction in environmental pollution. Since China has a vast population, the amounts of greenhouse gases produced are higher hence the need for UHT milk. In addition, China has a high population of babies. After ending the one-child policy, China is expected to have more newborn babies by up to two million per year. Therefore, the daily consumption of UHT milk is expected to increase in the nation along with the increasing number of babies (O'Keefe, 2015).

PESTLE’s Model

Political Factors

A meeting by the UK’s prime minister and Chinese government officials also oversaw the lifting of the 20-year-old importation ban of UK's products (EU SME Centre, 2017). In addition, Liam Fox, UK’s International Trade secretary secured a deal worth millions for the supply of dairy products (that are made using milk from other nations) from the UK to China (Leung, 2017).

Economic Factors

The exponential increase in demand for UHT milk forced China to rely on imports in order to fill the demand hence the partnership with the UK. The UK-China joint economic and commission (JETCO) also strengthens the trading relations between the two countries and in 2018, UK's Prime Minister attended the JETCO meeting in Beijing with the intention of discussing the business opportunities between China and the United Kingdom (Gov.uk, 2019). China and the UK have been trading partners for a long time, and it has been noted that the Chinese population generally favors UHT milk from foreign markets

Social Factors

As aforementioned, China favors the importation of dairy milk products such as UHT milk so as to ensure the wellbeing and nutritional benefit of the Chinese population. Also, milk in China is regarded to be symbolic of a modern and affluent society, and a nation which is capable of feeding its people (Lawrence, 2019). Also, China has a large number of babies and results in high preference for UHT milk and other milk powder products (Astrid, 2017). In the UK dairy processors are taking advantage of the chemical and physical properties of longevity and the lacking need for refrigeration of UHT milk so as to increase dairy production. The British dairy farmers are working to ensure that their exports meet the needs of consumers based in international markets such as China and they have identified UHT milk as being the best kind of processed milk which can be exported overseas more efficiently (Smith, 2015).

Technological Factors

UHT processes were used to increase the longevity and decreasing spoilage of milk for the sake of fulfilling the consumer needs in the international market, especially the trade of UHT milk between UK and China. Additionally, the need to commercialize sterilized UHT milk was boosted by the invention of aseptic packaging where the milk would be placed in sterile packages and sealed hermetically (Deeth, 2012). UHT milk processing technology results in a shelf-stable product being made which can last long enough through the period of import and distribution to international markets.

Legal Factors

According to a report by the Guardian, the Brexit could render dairy products such as yoghurt, cheese, UHT milk, and butter as luxury items because the slightest delays in the supply chain from the farm to households could result in the skyrocketing of prices. The disruption of the dairy supply chain will result in scarcity post-Brexit while, already, the UK does not have enough dairy supply to sort the present demand (O'Carroll, 2018). China is known to be the largest dairy importer in the world. However, the nation has many regulations in place to address challenges faced in different kinds of supply chains, both formal and informal (Hoogwegt Group, 2016). Therefore, with a goal of protecting its local manufacturers and farmers, China’s regulations have a tendency on tightening imports of dairy products, and these include UHT milk. Apart from the nation’s desire for dairy products and protecting the local farmers, China remains cautious about restoring consumer trust and observing food safety concerns (Hoogwegt Group, 2016).

Environmental Factors

As noted earlier, UHT milk reduces the amounts of greenhouse gases emitted since it does not require refrigeration. Since 70% of milk sold in China is UHT, there is likely to be a large reduction in global warming (Hu, n.d.). For this reason, it is evident that UHT milk will have a positive impact on China’s environment. With the intense efforts of fighting global warming through decreased refrigeration, there will be increased opportunities for milk farmers to export UHT milk into China (Hu, n.d.). Also, in the UK, civil servants suggest the use of long-life (UHT) milk so as to reduce on the emissions which result in global warming. The dairy industry and farmers’ leaders in the UK are adamant about finding ways of reducing milk production’s carbon footprint (Clover, 2007).

International Trade Theories

The two most relevant international trade theories in the context of China and UK trade relations are a comparative advantage and absolute advantage theories. AvoMilk Dairies can benefit by understanding how these theories apply to the UHT milk market between China and UK. Comparative advantage is a situation whereby the production of a commodity or service in a particular country is done for a lower opportunity cost as compared to other countries. In such a scenario, the benefit of purchasing a commodity or service from a country with a comparative advantage outweighs the demerits Garcia-(Herrero and Xu 2016, p.102). A country with a comparative advantage may not be the best in producing a commodity or service, but the produced goods and services have low opportunity costs for other nations to import. However, the comparative advantage theory is more relevant for goods than services since products are relatively easier to export and import. For instance, the UK has a comparative advantage since purchasing dairy products from the country is way more beneficial for countries like China. In this case, the importation of dairy products like the UHT milk from the UK has a low opportunity cost for China because the country has an immature dairy market hence it imports the product due to its low prices (Yu, 2015). Additionally, the Chinese perceive UK dairy products as high quality. Conversely, the ability of a particular country to produce a commodity more efficiently and at a lower cost than other countries is regarded as an absolute advantage. In order for a country to achieve an absolute advantage, it has to use fewer materials in the production process, and the production duration should be shorter. The country should also have cheap labor (Badings 2017, p. 102). Generally, European countries have an absolute advantage when it comes to the production of dairy products such as UHT milk.

Trade Barriers

Formal Trade Barriers

Tariffs

China is a key importer of dairy products, however, the nation is cautious about the UHT milk products it imports. This is because of the need to protect its population and, particularly, dairy farmers. Therefore China has increased the number of tariffs on UHT milk imports from several nations. For instance, in 2018, China increased tariffs on a large portion of dairy products from the U.S by 25% (Inouye, 2018).

Quotas

The EU lifted the quota on dairy production in 2015 and this resulted in increased dairy supplies across the world (Gooch, et al., 2017). In coordination with the trade agreement made between UK and China, this ban will result in more UHT milk being imported to China.

Permits

Through the China Quality Certification Centre, China gives out permits to UK dairy companies such as Daioni to supply UHT milk products to its mainland. Permits are necessary due to their traceability and they strengthen trust from consumers regarding the UHT milk products being shipped into the nation (FarmingUK, 2015).

Informal Trade Barriers

Distribution Channels

In China, the market environment for UHT milk is faced with problems in its channels of distribution. First, it is difficult to reach out to consumers of UHT milk in china due to the complicated and fragmented media environment. The target market is split between age groups, whereby older customers (above 30) are likely to be accessed using conventional media like television and the younger customers (below 30) are decentralized and diversified in terms of the media they choose. Distribution is a challenge for UHT milk in China because dairy manufacturers have to stretch their distribution channels to include online media to facilitate the younger customers (Yu, 2015).

Cost Issues

In order to achieve certification for the importation of UHT milk in China, cost issues are an important factor. Prior to organic certification, Daioni had to undergo difficult and costly procedures whereby it had to select a certification board in China and get down to negotiate the price. Following the negotiation is the company’s incurring further expenses to pay for two officials from the certification board to fly to the UK to inspect the processing site and the farm from which UHT milk is expected to originate from (Fredenburgh, 2018).

Ethical and Social Issues in China

Ethics entails a person’s moral judgment of what is considered right or wrong while social issues are problems that influence a considerable number of people in society. Ethical and social issues arise when an SME is trying to expand to a global market since these markets have different social and ethical standards (Woodruff, 2019). China, in particular, is very adamant in its efforts to regulate the food industry, especially regarding SMEs operating in the dairy industry. This is mainly because of the historical Sanlu Milk Incident where Sanlu Milk Powder caused the death of four people and until 2008, there were 6244 more confirmed cases regarding the use of the product. The milk powder consisted melamine, a chemical with a low poisonous degree which mainly results in kidney stones, primarily among babies (Song, 2009). This food safety incident was a major social issue in China which involved a large number of dairy brands and dairy farmers went to the extent of killing their cows and throwing away their milk since there lacked any consumers purchasing their milk. Domestic milk was no longer purchased in China due to the Sanlu Milk Incident whose domino effect also ruined the reputation of China’s general food industry (Song, 2009). Following this incident, China’s government is mindful of underlying social and ethical issues in the dairy industry. This results in implementation of several trade regulations which not only protect the dairy farmers and consumers, but also social stability and confidence in dairy and food businesses in the nation (Fu & Nicoll, 2011). Any SME entering the Chinese market should consider the ethical and social issues in order to come up with viable strategies of how to conquer the market (EU SME Centre, 2017).

Cultural Preferences to be considered by the AvoMilk Dairies

UHT milk is consumed in large quantities by the Chinese population, and this can be attributed to the increase in the middle-class population. High preference for UHT milk can also be linked to higher exposure to international trends. The Chinese people have a higher preference for imported milk than homegrown milk. However; urban residents consume higher amounts of UHT milk compared to rural residents (Bai 2013, p. 540). Chinese people prefer imported milk since they consider it more superior to local milk and for the younger Chinese population; exposure to social media platforms has made them shift their preference from domestic milk to imported milk. Foreign UHT milk companies were allowed to enter the Chinese markets in the year 2014, and according to researchers, 44% of the Chinese population doubt the reliability of local milk (Fu & Nicoll, 2011). The urban Chinese population seems to regain more confidence in local milk but still favors imported milk. About 2% of Chinese consumers also prefer purchasing UHT milk online, and the popularity of e-commerce platforms is increasing in the country with the most commonly used e-commerce platforms in China being T-mall and JD.com (Bai 2013, p. 541). The preference of UHT milk among the Chinese population also goes in line with the lifestyle of these customers, and they mostly buy UHT milk in convenience stores and supermarkets. E-commerce platforms are mostly popular in urban areas while most rural residents in China prefer purchasing milk in physical stores. For instance, people from cities like Beijing have better internet connection as compared to rural residents in the western parts of China hence the higher preference for e-commerce platforms among urban residents (Lior, 2014).

Expansion Methods to be Chosen by AvoMilk Dairies

The expansion methods which are currently available to the UK/Chinese trade include various trade partnership agreements, such as making improvements in bilateral investments, policy coordination, the supporting of environmental protection agencies, and implementation of double tax agreement. The expansion methods that can be used for the importation of UHT milk into China by AvoMilk Dairies include the use of child ambassador schemes, social media platforms and in-store kiosk activities. They are discussed below in detail.

Trade Agreements

One of the most significant expansion methods available for the UK-China trade deal is improvements in bilateral investments and service trade which will elevate corporation levels between the local authorities and businesses. Policy coordination between both nations can be used for expansion and it entails the development of new trade drivers between the two nations (Leung, 2017). Corporations in environmental protection, corporate finance, and energy saving ventures are also other viable expansion strategies for the UK-China trade deal and, a future corporation will be spearheaded by infrastructural development. Since China considers the UK as a political partner, future prospects of a free trade agreement between the two countries are bright. The act of updating the double tax agreement between the two countries in order to enhance financial services also results in expansion of trade between China and the UK (Leung, 2017). Expansion of collaboration in the Belt and Road initiative is also set to improve the UK-China trade relations.

Child Ambassador Scheme for UHT Milk

The child ambassador scheme entails the use of young children to endorse a business, trade shows or a country’s product. The child ambassador scheme is important since it gives a human aspect to a product, For the UHT milk, the use of child ambassadors enlightens the world on the importance of this milk to the young population thus boosting its reputation in China (Lior 2014). Child ambassadors are also instrumental in creating awareness of the potential benefits of the UHT milk to the Chinese population, and since milk is mostly associated with children, the use of Child ambassadors seems to be a clever expansion strategy. On the flip side, child ambassadors could sometimes overshadow the product or brand (Lior, 2014).

Social Media Platforms

In China, social media platforms have been instrumental in the sale and marketing of UHT milk. E-commerce platforms, for example, are used for the purchase of UHT milk, and they may also be important in the expansion of imports (Lior, 2014). Social media as a marketing strategy in expansion of UHT milk importation is important since it is cost effective and increases product awareness in the Chinese market. Since China has excellent internet connectivity, use of social media exposes the population to world trends hence increases the demand for UHT milk. Through social media, it is easier for UK SMEs to gain greater access to the Chinese milk market (Lior 2014). Also, social media platforms improve the relationship between the UK producers and the Chinese UHT milk customers since producers are able to interact with consumers and get customer feedback

In-store Sample Kiosk Activities

In-store sample kiosk activities expose potential customers to the taste of UHT milk, and the sampling techniques include displays, free samples, coupons, and discounts. In-store sampling enables SMEs to create awareness for the benefits of UHT milk-making potential customers interested in the product and thereby increasing purchase. In-store sampling is also instrumental in expansion since it creates an attractive environment for purchase and provides a one on one interaction between the product and the consumer. On the flip side, in-store sampling is expensive for SMEs (Lior, 2014).

Suggestion for the range of expansion methods

For AvoMilk Dairies to expand its market share in the Chinese market, there should be an acceleration in innovation and product development (Bai 2013, p. 543). For instance, a UHT milk SME could introduce new and different flavors of UHT milk into the Chinese market. Another expansion strategy is leveraging on technology in order to solve business challenges. For instance, SME encountering shipping problems could implement technological interventions to solve this challenge.UK SMEs should also focus on increasing their presence in the Chinese market in order to have immediate contact with customers. Lastly, SMEs should invest more in market research in order to determine the different preferences of the Chinese dairy market and to find a niche market.

Conclusion/Recommendations

Conclusion

To conclude, UHT milk is gaining popularity in both China and the UK. China is growing into a world recognized importer of long-life milk. China encourages the production and import of UHT milk to fulfill the wellbeing and nutritional requirements of its people. In the UK, UHT milk is recognized for its longevity and dairy processors are taking advantage of the milk’s properties to channel their production, import and export activities so as to meet the needs of the international market for milk products. Both nations have come to an agreement to eliminate trade barriers which can potentially hamper the movement of UHT milk products between both nations.

Recommendations

For AvoMilk Dairies to successfully engage in UHT milk trade from the UK to China, the company can consider the driving forces for UHT mil demand and supply in China. The driving forces will reveal that the company will have to tailor its UHT milk products and packages to appeal to the larger population of children that will consume it. AvoMilk Dairies can consider other cultural driving forces which affect UHT Milk consumption in the nation, so as to adopt the correct approach of penetrating the market. In addition to market penetration, AvoMilk Dairies can find ways to mitigate the formal and informal trade barriers for UHT Milk production, and the ethical and social issues because it is evident that China is very strict in order to avoid hazards of harmful content in milk which could affect its public health. AvoMilk Dairies needs to choose the right board in China to receive accreditation so as to import UHT Milk to the nation. One suitable board for permit would be the China Quality Certification Centre (FarmingUK, 2015).

References

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Fu, J. & Nicoll, G., 2011. The Milk Scandal and Corporate Governance in China. Canberra Law Review, 10(3), pp. 103-107.

Garcia-Herrero, A. and Xu, J., 2016. What consequences would a post-Brexit China-UK trade deal have for the EU? (No. 2016/18). Bruegel Policy Contribution.

Gooch, E., Hoskin, R. & Law, J., 2017. China Dairy Supply and Demand, s.l.: United States Department of Agriculture.

Inouye, A., 2018. China's Dairy Imports Increase to Meet Growing Demand, But U.S.-Origin Products Face Strong Headwinds, s.l.: Global Agricultural Information Network.

O'Carroll, L., 2018. Dairy products 'may become luxuries' after UK leaves EU. [Online]