China has the youngest branded foods market
in the world. Brands were almost unknown until foreign investment was allowed in the
1980s. Many companies were at first reluctant to invest in a country where connections
were vital to do business, and where distributing goods across a city, let alone across
the country, was a major challenge.
Coca-Cola and PepsiCo. may have started the
ball rolling in the late 1970s, but Nestlé did not invest in China until 1990, and the
pace of foreign investment in the food industry did not start to pick up until the early
1990s. In most respects, therefore, the branded processed food market is less than a
decade old.
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By GlobalDataThe country has now attracted more foreign
investment than any other emerging market. Moreover, this has been seen across all sectors
of the food industry, and companies from Europe, North America, Japan and other Asian
countries have all invested in China.
National vs regional markets
The size of China and the vast distances
between the major population centres led many observers to believe that a series of
regional markets would develop, with both domestic and international companies being
stronger in some regions than others.
However, Seymour – Cooke’s 1996 retail
audit made it clear that a national market for processed foods was already being
established, and that the major foreign investors (as well as some domestic groups) were
distributing their products nationwide.
In that survey 135 national brands were
identified, with most sectors of the food industry having at least five brands which were
distributed across the country.
In the late 1990s the major food companies
have improved their distribution networks and more private distributors have emerged. The
result is that the market leaders in all the major food categories are able to supply all
the major urban markets. Despite this, markets still have regional characteristics with
respect to domestic companies. Many of these are only just starting to emerge and are
discussed below.
The success of international
investors
International food companies have done well
in the food sectors in which they have invested, at least in terms of market share. This
is in large part because, prior to the entry of these companies, there was very little
processed and branded food produced domestically. Foreign investors have thus been
developing the market from the bottom up.
Multinationals now account for the lions
share of the sales of “western” foods, including biscuits, processed cheese,
baby meals, tomato ketchup, mayonnaise, canned soup, branded butter, margarine, jam,
chocolate confectionery, chewing gum and milk powder. However, in many other sectors,
local challengers are starting to emerge.
Local groups start to emerge
In the emerging markets of Latin America
and South East Asia local companies have competed head-to-head with international groups.
In China there were few local processed food companies when foreign investment first
started, and those which were doing business were state-owned and of doubtful commercial
viability. It seemed unlikely that they would be able to compete with the Unilevers and
Nestlés of this world, and there seemed little chance of a domestic food industry
emerging.
However, this situation may now be
changing. In the first place the distinction between local and international groups is
becoming more blurred. The return of Hong Kong to Chinese rule means that major companies
such as Lam Soon (with significant interests in cooking oil in mainland China), Watson
(soft drinks) and Vitasoy (soymilk) can arguably be classed as domestic companies.
The influence of other overseas Chinese
capital and companies is also being felt. The leading producer of instant noodles is Ting
Hsin which produces the Chef Kang brand and is owned by Taiwanese Chinese, but has its
headquarters in the Cayman Islands and is focused on the Chinese mainland. In 1998 Ting
Hsin acquired Wei Chuan, the second largest food company in Taiwan, in what was thought to
be the first example of a mainland Chinese company buying into Taiwan. The second largest
instant noodle company is President, which is based in Taiwan, and has made an offer for
its rival on the mainland.
There has also been cross-fertilisation in
the snack sector, where Taiwan’s largest rice cake producer, Want Want, has come to
dominate the domestic market which now accounts for 80% of company sales.
But “true” local groups are also
starting to make their presence felt. COFCO, with estimated sales of $13 billion is
certainly the largest of these, but this is more of a state-owned commodity import-export
agency than a processed food group. Jianlibao, the long-established leading domestic
supplier of soft drinks, has found it difficult to compete against the two cola giants,
but still has significant strengths in non-carbonated soft drinks. The company had sales
of $725 million in 1997 and has been rumoured to be seeking a listing on the Hong Kong
Stock Exchange. The Coconut Tree Group is also a major producer of soft drinks. In ice
cream, the Yili Group, based in Inner Mongolia, has taken on Nestlé and Unilever in
Beijing and had sales of about $100 million in 1998. Yili also produces frozen foods,
where it competes with dozens of emerging local companies. Most supply only on a regional
basis, but the largest, Dragon and Phoenix, has achieved national distribution.
Domestic companies have tended to
concentrate on sectors which have not attracted foreign investment (ie in general
“Chinese” rather than western foods) and those where the production technology
is simple. Examples include frozen food (which is focused on commodity meats, dumplings,
wonton, etc), oat-based breakfast cereals, tea, pastes and sugar confectionery. Seymour –
Cooke’s retail audit noted a dozen local frozen food companies in Beijing, a similar
number of tea suppliers in Chengdu and half a dozen suppliers of oat-based breakfast
cereals in Guangzhou. Few domestic companies have been brave enough to challenge the
multinationals in more high-tech branded western foods such as canned soup, chewing gum
and instant coffee.
…And the market fragments
Markets tend to consolidate as they mature.
In China the reverse is happening as new domestic groups and second tier joint ventures
form. These may not be taking sales from the major international food companies, but, as
the market expands, they appear to be taking market shares through offering products at
lower prices.
In many categories of processed foods
international groups accounted for a smaller proportion of the market in 1999 than in
1996. Examples include breakfast cereals, baby food, soy milk powder, UHT milk, yoghurt
and spices. The result is that there are now a large number of smaller companies supplying
regional markets. Some of these are domestic, others are officially classified as joint
ventures, but they involve little-known western or overseas Chinese partners.
In the longer term it is of course likely
that the major food groups will out-compete these new companies. But in the mean time, as
the consumer foods markets continue to expand and consumers remain price conscious, there
is clearly scope for local companies to enter the market and compete successfully.
The distribution headache eases
Distribution is often cited as the biggest
single brake on the development of the consumer goods market in general, and retailing in
particular. In China the distribution of goods is inefficient, slow and expensive.
The reasons for this are well known and
well documented: the long distances between the major population centres in China; the
poor state of the road and rail infrastructure; the inefficiency of the state sector; the
underdevelopment of the private sector; and, hitherto, the relatively low volumes of
consumers goods which needed to be distributed across the country.
There are now signs that the situation will
improve. The reasons for this are listed below.
- Improving road infrastructure, with
considerable combined investments from the state, international agencies and the private
sector. - Private hauliers who can offer a reliable
nationwide service are emerging. - An increase in the size of the FMCG market
is leading to economies of scale, thus reducing unit costs. - Some major international distribution
companies have entered the sector. - Food manufacturers (including Nestlé,
Unilever and Coca-Cola) and fast food operators (e.g. McDonalds, KFC) are investing in
their own distribution systems. - The development of supermarket chains and
hypermarkets presents, for the first time, a viable customer base for distributors. - Beijing continues to deregulate the sector,
if only slowly. In 1997 19 domestic companies were given permission to import and export
products for the first time. These are mainly chain stores but include a catering company.
14 product categories, however, remain reserved for state monopoly importers.
Retail chains develop
At the same time as distributors get their
acts together, so their task is being made easier by the emergence of retail chains. Most
processed food is still sold through small private grocery-type shops run by individual
families. These are difficult and expensive to supply, and there is little control over
storage and display.
The good news is that domestic supermarket
chains have started to develop, with the two largest being Hualian and Lianhua, each of
whom now have more than 100 stores. There has also been some consolidation in the domestic
industry as the government, with both of the leading chains acquiring smaller rivals,
indicating the growing maturity of food retailing.
Further cause for optimism is the fact that
there has been considerable foreign investment in food retailing over the last five years.
The two leading Hong Kong retailers, Dairy Farm and Hutchison Whampoa, have invested in
supermarkets and convenience stores, whilst Makro of the Netherlands, Metro of Germany and
Carrefour of France all have hypermarkets or wholesale outlets in China. Wal-Mart, the
world’s largest retailer, has three stores in the south of the country.
These companies still account for a very
small proportion of the food retail market in China, but it is estimated that supermarkets
now account for 25% of processed food sales in the cities. And there are thought to be
around 30 companies in Shanghai who operate chain stores, accounting for about 800 stores.
Clearly the more rapidly these multiples develop, the easier it will be for food
processors to supply the retail market.
FOREIGN INVESTMENT STRATEGIES
The joint venture route
Initial investment strategies have focused
on joint venture plants built on grenfield sites, with most companies opting for a single
factory to supply nationwide, at least initially. This was because of the level of risk
involved and the small size of the national market. Examples include Philip Morris and
Nestlé (instant coffee), Mars and Cadbury (chocolate confectionery), Danone (biscuits)
and Kellogg‘s (breakfast cereals).
There have been two major exceptions to
this rule. Firstly, the major soft drinks companies, have had to invest in a national
network of bottling plants because of the bulky nature of the product and the high volumes
consumed.
Both Coca-Cola and PepsiCo have invested in
such a network, with Coca-Cola being the largest single investor in the food and drink
industry. The company has invested US$ 1.1 billion in China and their 23rd plant, a $30
million investment in Chengdu in Sichuan Province, was opened in May 1999. The factory
brings Coca-Cola products to another 112 million people and the company claim that they
can now supply 80% of China’s population.
Companies have also found it difficult to
transport frozen and chilled foods because the cold chain is at best unreliable and at
worst non-existent. The result has been that frozen foods are dominated by local domestic
companies (and chilled foods are largely restricted to dairy products). But both Nestlé
and Unilever have invested in the ice cream market and been forced to set up regional
plants, with the Swiss company having four factories and Unilever five.
Companies then invested in developing their
distribution networks and in marketing their products to build volume and market share.
Most are still concentrating on these key strategies. However, by the mid-1990s a new
phase of development was starting to emerge as international food groups started to
acquire local food companies.
Local acquisitions
One of the first was Danone which bought a
stake in Hangzhou Wahaha, a leading domestic milk drinks producer, in 1995. It was no
coincidence that the target was one of the few domestic producers to own a well-known
brand, but Wahaha was also attractive because of its established distribution network. The
company also produced mineral water, in which Danone has global ambitions, and in June
1998 Danone acquired two local companies associated with producing and distributing Yili
mineral water in Guangdong Province. Then, in August 1998 Danone, acquired a 60% stake in
Shenzhen Mineral Water Co, which claims to account for 11% of sales nationwide.
Unilever has also gone down the acquisition
route. The company took most analysts by surprise when it acquired Lao Cai, the leading
brand of soy sauce in Shanghai, in mid-1998 for US$10 million. This was Unilever’s first
venture into ‘Chinese’ foods, as the group had previously focused on ice cream and tea.
The move prompted speculation that
Unilever’s returns from its chosen western foods were disappointing, but, whatever
the motives, this sets up an interesting battle between companies from very different
cultures, since Wei Chuan Foods (the second largest food company in Taiwan) has started
producing soy sauce in Shanghai and Wuhan, and President Enterprises of Taiwan signed a
letter of intent in March 1999 to build a soy sauce factory in Kunshan economic zone
(Jiangsu Province). Kikkoman, the largest producer of soy sauce in the world, also has a
sales office in Shanghai and is investigating the feasibility of building a plant in
China. There are also numerous small domestic producers of soy sauce.
In 1999 Unilever acquired two other local
companies: HongKong-based Watson’s Mountain Ice Cream (the leading supplier in
Shanghai); and the Beijing Tea Processing Factory which produces the Gingham brand, a
major seller in Beijing.
These acquisitions are also indicative of
the growing maturity of the domestic Chinese food industry. Not only are there local
companies which are worth buying, but foreign investors have sufficient confidence in the
legal and accounting systems to be able to place a value on the companies in which they
are interested. This is in itself a significant development.
Sample Supermarket
Prices in Beijing, April 1999
|
Brand |
Description |
Average price |
|
Alliance |
Deluxe biscuit assortment, 750 gr wax paper packaging |
27.17 |
|
Anchor |
Butter, 227 gr |
13.23 |
|
Cadbury |
Dairy Milk chocolate, 250 gr |
43.38 |
|
Camel |
Soybean oil, 1.8 litre |
43.79 |
|
Campbell’s |
Creamed corn soup with mushroom, 305 gr can |
8.88 |
|
Chef Kang |
Chinese noodles in fried soybean sauce, 300 gr plastic packaging |
4.20 |
|
Coca-Cola |
355 ml can |
1.99 |
|
Entremont |
Hard cheese 10 slices, 200 gr |
21.69 |
|
Flora |
Table margarine, 250 gr plastic box |
20.28 |
|
Fulinmen |
Soybean oil, 2.5 kg tin |
33.90 |
|
Heinz |
Fruit & rice cereals (baby food), 225 gr cartons |
12.39 |
|
Hellman’s |
Mayonnaise, 215 ml glass jar |
9.50 |
|
Kellogg’s |
Rice Krispies breakfast cereals, 200 gr carton |
25.80 |
|
Kewpie |
Strawberry jam, 440 gr |
11.00 |
|
Knorr |
Tomato ketchup, 323 gr |
8.80 |
|
Kraft |
Cream cheese, 250 gr carton |
25.21 |
|
Kraft |
Yoghurt 200 gr, 4 cups |
9.43 |
|
Le Conte |
Hazelnut chocolate, 228 gr |
18.00 |
|
Lihua Garden |
Peanut ring biscuits, 350 gr plastic packaging |
8.53 |
|
Lotte |
Colour bubble gum, 62.5 gr |
4.23 |
|
Maxwell |
Instant coffee, 200 gr glass jar |
56.90 |
|
McCormick |
Cumin powder, 30 gr glass jar |
4.75 |
|
Mead Johnson |
Infant formula, 1 kg tin |
132.00 |
|
Nestlé |
Rice cereal with carrot (baby food), 113 gr cartons |
5.63 |
|
Nestlé |
Instant coffee, 250 gr glass jar |
73.00 |
|
Nestlé |
Fruit flavour ice cream bar, 75 gr wax paper |
1.00 |
|
Nestlé |
Whole milk powder, 500 gr plastic container |
23.00 |
|
Nissin |
Instant seafood noodles, 90 gr plastic packaging |
1.75 |
|
Parmalat |
Drinking yoghurt (strawberry), 25 gr carton |
2.70 |
|
Pepsi |
355 ml can |
1.95 |
|
President |
Instant noodles in fried beef sauce, 126 gr plastic bowl |
3.00 |
|
Redolent |
Rice glue congee, 370 gr can |
3.25 |
|
Skippy |
Chunky peanut butter, 340 gr |
12.20 |
|
Vitamax |
Black rice cereal beverage, 600 gr plastic packaging |
22.50 |
|
Wahaha |
Longan/ Lotus Seed 8 treasure gruel, 360 gr can |
3.77 |
|
Wall’s |
Chocolate flavour ice cream bar, 65 gr in wax paper |
1.50 |
|
Wrigley’s |
Juicy Fruit chewing gum, 20 bars |
23.3 |
|
Wyeth S-26 |
Infant formula, 1 kg tin |
136.29 |
|
YiLi |
Whole milk powder, 400 gr wax paper container |
13.40 |
Source: Seymour – Cooke Ltd
Note* ratios refer to the supermarket survey only
Relying on imports
The consensus has long been that companies
who wish to be major players in the Chinese market in the next century need to invest in
domestic plants, and most have taken this route. Even jam, mayonnaise and tomato ketchup
are produced locally by foreign investors. However, where markets are small, suppliers
continue to export to China.
Perhaps the most successful importer is
Ferrero Rocher of Italy which has about 5% of the domestic chocolate confectionery market
secured through imports alone.
Stollwerck, Lindt and Sprüngli and Piasten
also export to China and have achieved good distribution. Other western foods which are
supplied by imports include canned soups (where Campbell’s is the leading supplier),
butter, margarine and cheese. However, in the case of the latter, Bongrain began
production of cheese at a plant in Tianjin in May 1998 and there is also an America-backed
company called Baotou Chis Dairy Co. Ltd making the cheese in Inner Mongolia.
Future developments
The immaturity of the Chinese food market
is demonstrated by the large number of local brands which have emerged over the last few
years and which supply only their local region. If the domestic economy continues to grow,
the processed food market will grow with it and these companies should be able to prosper,
despite the competition from international, whom they should be able to undercut. In the
longer term these companies will present possible acquisition targets for both domestic
and foreign investors and we can expect to see the Chinese food industry consolidate along
the lines of those in the west.
The other trend which can be predicted is
unique to China, and this is increasing inter-links between domestic companies and those
owned by overseas Chinese in, especially, Hong Kong and Taiwan. The Taiwanese companies
Ting Hsin (instant noodles) and Want Want (rice cakes) have already been mentioned, whilst
Lam Soon has made investments in cooking oil, Lihua Garden in biscuits, and Kerry and
Watson in soft drinks. President of Taiwan has biscuit operations on mainly Chan, and has
made an offer for a stake in Ting Hsin. And in late 1998 Ng Fu Hong (part of China
Resources Holdings of Hong Kong) acquired a 36% stake in the leading supplier of soymilk
powder and soymilk drinks in China, Xuzhou VV Food and Beverage.
The information on the Chinese
market published in these pages is extracted from the report : Food Brands in China by Seymour-Cooke Ltd.
