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10/01/2011

Delivering in China

China's consumers appear ripe for American food products and retail chains, and the U.S. food industry is acting quickly to tap the rapidly emerging market.

Thanks to urbanization, growing international influence and rising disposable incomes, consumption patterns in China are shifting, presenting new opportunities for retailers and food manufacturers.

"The Chinese trust foreign and American brands more than domestic ones."

– Shaun Rein,

China Market Research Group

"The Chinese consumer market is the greatest growth story of the next decade," says Shaun Rein, managing director of the Shanghai-based China Market Research Group and author of the upcoming book "The End of Cheap China: Economic and Cultural Trends That Will Disrupt the World."

China has more than 1 million millionaires, 100 billionaires and 350 million people living in households earning between $6,000 and $15,000 a year, Rein says.

Those numbers make China one of the largest food and beverage markets globally – and the pace of consumption is expected to grow 10 percent to 15 percent in 2011 over the estimated $210 billion spent in 2010, reports InterChina Consulting, which advises companies that want to do business in China.

CHINA QUICK FACTS

    • Population: more than 1.33 billion people
    • Population distribution: across 9.6 million square kilometers, or 3.7 million square miles
    • Demographics: about one-quarter of the population is 14 or younger; two-thirds are 15 to 64 years old; 7 percent are 65 and older, according to World Bank statistics
    • Gross national product: expected to increase by 9.3 percent, fueled by investment, consumption and exports, according to World Bank data released in May 2011
    • Social media: typical teen-ager is online more than 23 hours a week, according to Shanghai-based China Market Research Group, and uses home-grown microblogging systems instead of Twitter or Facebook, which are blocked in China

Retail sales in China are projected to grow 16 percent to 18 percent this year, well above current projections for the United States, Rein says. At the same time, increased concerns among the Chinese about the quality and safety of food made in China are spurring consumers there to buy American products when they're available.

Kraft success stories

China already has become a key market for Kraft Foods, one of the fastest-growing consumer packaged goods companies in China. "We see great growth potential in this market and opportunities to build on successes we've achieved over the past four to five years," says Lisa Gibbons, Kraft's director of corporate affairs, developing markets.

It wasn't always this way. In 2006, Kraft's China business was small and not even profitable, Gibbons says. "Our business was in a classic vicious cycle … with low gross margins. So growth for the sake of growth was a waste of time because there was no hope of making money."

Kraft decided to limit its focus to "a few things that mattered," Gibbons says, turning around the company's China profile in the process. "We took the global positioning of Oreo and global technology and paired it with local consumer insights" to come up with new forms of Oreo and locally relevant product flavors, she says. While introducing Oreos with green tea ice cream-flavored filling in China, Kraft also emphasized the depth of local talent, Gibbons says.

A market in its infancy

China and other emerging nations also are high priorities for Abbott Laboratories Inc., which makes nutrition and powdered milk products as well as healthcare products. For the past few years, the Abbott Park, Ill.-based company has been emphasizing an expansion in China as part of a larger strategy to target emerging markets, which represented nearly 42 percent of Abbott Nutrition's global sales during the first half of the year.

Kraft caters to Chinese tastes with green tea ice cream-flavor Oreos.

Noting that more than 17 million infants are born in China each year, the company in August announced plans to spend $230 million to build a nutrition manufacturing facility in Jiaxing, China, to meet growing demand for its powdered milk products for Chinese infants and children.

"Building a strong local manufacturing base will position us to better provide Chinese parents the same high-quality products they rely on today, even faster," John Landgraf, executive vice president of nutritional products at Abbott, said in a news release. The plant, which will be Abbott's third facility in China for its nutrition and pharmaceuticals business when it opens in 2013, is designed to expand the company's capacity as it strives to increase its nutrition revenues in China to more than $1 billion by 2014.

"Building a strong local manufacturing base will position us to better provide Chinese parents the same high-quality products they rely on today, even faster."

– John Landgraf,

Abbott Laboratories Inc.

The China challenge

Developing talent with knowledge of the local market is one of several challenges food companies face in China. Despite promising demand, navigating China's market can be daunting for U.S. companies. For example, a PricewaterhouseCoopers-Grocery Manufacturers Association report, "Thriving in a Connected World," released in June 2011, cites "major operational challenges," ranging from sourcing and distribution issues to legal and cultural barriers.

But even though some food and beverage segments in China have become saturated, opportunities abound in categories in earlier stages of evolution, such as flavored drinks, tea-based beverages, bottled juices, ready meals and dairy products, InterChina says. That also holds true for Western products like carbonated drinks, wine and spirits, olive oil, bakery and cereals.

City sites

While Shanghai and Beijing might attract most of the attention from major corporations, companies also would be well served to look toward China's smaller cities for growth.

"Consumers in coastal areas like Shanghai overall are far wealthier than consumers in the central and western part of the country," Rein says. "However, it would be a huge mistake for Western brands to focus on wealthier cities in a rollout," he says. The sheer number of consumers makes other markets ripe for new food introductions.

Cities within China are commonly grouped into three tiers to describe their populations and gross domestic products, notes the PwC-GMA report.

Shanghai and Beijing, which are tier 1 cities, are reaching the saturation point in some product categories. "Competition for consumer dollars is high, and costs of real estate, labor and advertising are very high," Rein notes.

Still, food marketers might find plenty of demand for their products in populous secondary markets, experts say. "The fastest growth is coming from third- and fourth-tier cities, where consumers' incomes are rising, and where they are desperate to spend their money," Rein says.

China's National People's Congress in March approved a five-year plan that aims to boost the incomes of the 900 million Chinese who are below middle class and bridge the economic and social differences between China's coast and the interior, largely through expanded domestic demand and improved industrial infrastructure.

"The drivers of future economic growth have already begun to shift from being export-driven toward an increased reliance on domestic consumption," InterChina notes. The government's initiative, designed to increase consumption, is expected to boost consumer packaged goods companies, according to the PwC-GMA report.

Consumer connections

But Western businesses still face the dilemma of how to best reach individual Chinese consumers. The kind of detailed marketing data that is commonly available in developed countries can be elusive, the PwC-GMA study points out, and some companies fall back on on-the-ground market assessments from local partners.

China's consumer hot spots
China Provinces
Population
Gross domestic product (in USD)
Shanghai
23 million
$23 billion
Beijing
20 million
$20.8 billion
Shandong
96 million
$10.9 billion
Hebei
72 million
$7.3 billion
Hunan
66 million
$6.5 billion
Henan
94 million
$6.4 billion
Sichuan
80 million
$5.3 billion
Source:http://chinatoday.com/data/china.population.htm.

One common insight is increased concern over product quality. Chinese consumers are willing to pay a premium for brands they trust, Rein says.

"The Chinese trust foreign and American brands more than domestic ones because they think American companies are less likely to cut corners in the production process," he says.

Chinese consumers' concerns about expired or poor-quality products also are benefiting foreign-based retailers such as European mega-retailer Carrefour, which entered China in 1995, and Walmart, which arrived in 1996, Rein says. "Chinese trust they will only sell non-expired, genuine products and will have better supply chain oversight than domestic retailers," he says.

A matter of trust

At the same time, domestic chains in China like Lianhu that are selling premium products are putting pressure on Walmart. "It is critical that foreign firms leverage their positioning of trust to continue to ensure quality control," Rein says.

Some domestic Chinese stores purposely mimic well-known European and American retailers – which points out a major cultural distinction about intellectual property philosophy between the United States and China. The severity of the problem hit home recently when a fake Apple store was discovered in Kunming, a city in southwest China. The store was a carbon copy of a real Apple store, yet was an unauthorized reseller of Apple products, according to a Wall Street Journal report.

Chinese consumers are aware of the issue, and shoppers routinely scrutinize food products for legitimacy, Rein says. "If people can afford it, then they will buy imported products because of the food-quality control scandals," he suggests, referring to reports of unscrupulous businesses adding coloring and additives to pork and selling it as beef.

"After that, they go after foreign products made in China which they trust, like Kraft, or well-branded domestic firms like Mengniu that have built trust with consumers."

And that trust is a major asset U.S. food companies can leverage to grow market share in what's becoming the new frontier, say experts.

"Consumer brands must win China or they will lose the world," Rein says.

Freelance business writer Suzanne Cosgrove is a former real estate editor for the Chicago Tribune. She also has covered commodities for Thomson Reuters and Knight-Ridder Financial News and has served as the Chicago Bureau chief for Market News International.