Chinese dairy groups will need to break out the cheque book if they are to avoid going the way of their stagnating Japanese rivals, Rabobank has said.
China's dairy sector, having enjoyed "years of rising volumes" and of increasing prices in their domestic market, now faces a "new reality" as market expansion slows, the bank said.
"Slower economic growth and the maturation of several product categories has trimmed underlying volume growth," besides making it more difficult to improve profits by focusing on higher value products.
The rise of Yili in the world rankings had stalled with the company at 10th place, according to a Rabobank table of the world's top dairy firms by turnover, although Mengniu gained three rungs to rank 11th, overtaking the likes of Unilever and France's Sodiaal.
Further promotion for Chinese dairy groups up the world league is "likely to be far slower in coming years", unless they rely on acquisitions as well as organic growth, Rabobank said.
"The next phase" in the evolution of the country's industry "may well see China develop into the home of the newest ranks of dairy multinationals".
The bank noted "huge inflows of inbound investment by foreign companies" into China's dairy sector.
The lender highlighted as a "cautionary tale" the fate of Japanese groups, which had failed to respond to a slowing domestic market by expanding abroad.
Meiji this year stood at 17th in the league, compared with 10th two years ago, while Morinaga had fallen from 13th place to being outside the global top 20.
Rabobank noted that global growth in the diary sector was "very weak" over the last year.
"The dairy industry is generally blessed with positive fundamentals that are likely to ensure ongoing growth in the years to come," said Rabobank, citing growing populations, urbanisation, rising incomes and changing consumer tastes in emerging markets.
"But the rate of growth in the global industry is no longer what it was a decade ago, and eking out profitable growth is becoming more challenging," the bank said.
The bank estimated that the 20 largest dairy companies generated sales of $23bn in 2014.
This represents a nominal growth of 5%, although Rabobank pegged retail dairy price inflation at 4-5% in key market over the same period.
"Slow economic growth and high pricing ensured only fractional volume growth in the key EU, US and Chinese dairy markets in 2014," said Rabobank, while sales in many emerging markets were reduced in dollar terms due to currency effects.
There were also few large scale acquisitions or mergers, slowing sales growth among top 20 dairy groups.
While the diary mergers and acquisitions market remained active this year, "2014 saw the value of mergers and acquisitions fall significantly below that in the prior year, with fewer large deals completed," said Rabobank.