China’s growing appetite for dairy

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23 September 2015

Antoaneta Becker

- China and food

- Consumer Trends - Food safety rules

- China’s Dairy Market

- Introduction to CBBC and our work

Outline

民以食为天 People regard food as heaven

China famine 大饥饿

• Great Leap Forward

- millions starved to death

• National obsession with being fed in the past

• Current focus on quality and safety of food

China’s agricultural realities

• 20% of the world’s population, 10% of the world’s arable land, 6% of global water resources.

• Low quality of China’s natural resources

• Shrinking farming capacity

• Outdated agricultural policies

• Rising consumption of protein and calorie

The environment

Pollution affects:

- 40% of China’s rivers

- 20% of land

(2014 National five-year soil survey)

Media reports:

- 10% of domestic rice has excessive levels of cadmium

Source: Luxury China, Marketing Opportunities & Potential, Chevalier & Lu

Beijing

Shanghai

Guangzhou

Shenzhen

Chongqing Foshan

Tianjin Chengdu Wuhan

Shantou Hangzhou Xian

Jinan Shenyang Nanjing

Dongguan Xiamen

Wenzhou Changzhou

Taizhou Wuxi Zhuhai

Ningbo Zhongshan

Qingdao, Changsha, Kunming, Harbin, Fuzhou, Tangshan, Yantai, Dalian, Suzhou, Shijiazhuang, Zibo

Highest income, large population, highest GDP

Tier 2c – Mainstream Lower incomes, large

population base

Tier 2b – Niche Wealthy Consumers, relatively small market size

Tier 2a - “Climbers” – Large population, high incomes, high GDP

China today

The Rise of Middle Income Consumers

Middle income • £6,000 - £23,000 a year Age Majority under 45 years old Location • Better geographic distribution • Lower tier cities (60% → 85%) • Inland cities (13% → 40%) Online Shopping

Mintel Attitudinal Segmentation

Progressive Affluent

Trendy Aspirer

Value-led Buyer

Conservative Spender

18%

28%

26%

28%

• 85% shop online • £100 a month (15% of salary) • 67% bought imported products • 25% of purchases on foreign brands • 60% use social media

Harsh new Food Safety Law

Key aspects:

• Administrative Detention for offenders Individuals who add inedible substances to food can face up jail.

• Higher Fines and Compensation Authorities can fine producers up to 30 times the value of their products. Consumers can demand reparation of three times the loss they suffer from substandard food.

• Regulatory authority The China Food and Drug Administration (CFDA) is the primary regulatory authority in charge of food safety.

• E-commerce Third-party online platforms required to register the real identity of vendors and review their licenses. Consumers can seek claims against platforms that fail to provide data of retailers.

Focus on milk powder

• All producers must register all their milk formulas with central-level CFDA.

• Forbidden to import in bulk and then repackage baby-formula. To be imported in its minimum retail package – with a Chinese label directly printed (not pasted).

• Milk powder producers to test every batch of their product

危机 Crisis or opportunity

• A boon for foreign food producers? The melamine scandal in 2008 created market share opportunities for high-quality producers

• Or spurring greater competition in the market?

Merging and restructuring is already underway in the milk powder and liquid milk industry

China Inspired retail

And cooking

Standing out by fitting in

Selling green tea to China Chinese new year cheer

© IGD 2014

Grocery market structure – the basics…

Source: IGD Research

$1,211bn

Market Introduction

Traditional retail 70%

55%

30%

15%

Number of modern trade outlets

by city tier

4 Key cities

29 2nd tier cities

253 3rd tier citiesand Lower levelcities

Note:

4 Key cities: Shanghai, Beijing, Guangzhou, Chengdu

2nd tier cities: provincial capitals

3rd tier cities: prefecture level cities

3.5 mn

Modern retail 5% of retail store count

© IGD 2014

Highly fragmented but consolidation is underway

Note: excludes Cash & Carry and Members Club operations

(1) China Resources Vanguard figures include CRE and Tesco China

(2) Walmart China figures include Walmart China and Yihaodian

(3) Sun Art figures include RT-Mart and Auchan China

(4) NGS figures include Nonggongshang, Kedi, Alldays and Wuyuan

Source: IGD Datacentre

Grocery Retail Market Share 2013

China Resources Vanguard Sun Art

Walmart

Carrefour

Yonghui

Lianhua

NGS

Wumart

Lotte Shopping

SPAR China

Others

Others, 94.2%

Market Introduction

4.3% China

75% UK

34% Thailand

Top 5 retailers market share

Rise of E-Commerce & Social Media

- China is Largest E-Commerce Market in the world - Over 600 million internet users (larger than USA) - E-commerce sales in 2014 over RMB 3 trillion (over £ 300 bn) - Over 240m Chinese e-consumers - Singles Day (11.11) – Alibaba sales USD9.3bn (45% via

mobile devices)

- Emerging Online Food and Drink Supply - May 2012 – SFBest.com launched -30% sales are fresh

fruit, seafood and meat - JD.com (July 2012) and Yihaodian (2013) started

selling fresh produce - Online sales of fresh food in 2013 = RMB 13 bn

( 221% from 2012)

© IGD 2014

Grocery retailing online Ecommerce players in

grocery Grocery retailers expanding Emerging specialists

Retail Channels for Imported Products

Traditional retailers moving online

Rise of E-Commerce & Social Media

Chinese consumers increasingly use Social Media to share comments about products

0 10 20 30 40 50

Social media user review

Friends/Word of Mouth

Ecommerce websites

Official Brand website

Media Online platform

Brand official news

Information Channels for Purchasing Decisions

Source: KPMG “China’s Connected Consumers

The Great British Brands festival

launches on Alibaba

Liquid Milk - Among all dairy products –

fastest production and consumption growth rate

- Volumes of imported liquid milk increased 70% in 2014 versus 2013 (China Dairy Association)

- High price of local premium products – costly primary source and difficult to manage

- International UHT milk brands are strongest but concerns over extended shelf life

Focus on organic - Mainly UHT organic products

available at present but South Korean and Japanese competitors are already exporting fresh organic too

- In Beijing and Shanghai 71 percent of consumers ready to pay a premium of 20 to 50 percent for organic (USCBC survey)

- New e-commerce platforms for organic

FieldsChina.com

KateandKimi.com

Competition heating up

Green Yard – China organic Imported organic milk

Cheese exports: growing from a very low base

All flavours and types

Main players:

- Bongrain (France)

- Fronterra

- Bright Dairy & Food Co

New entrants:

- Sanyuan

- Mengniu

Yoghurt

From this To this

Regulatory update

• All pre-packaged food products for sale in China should have Chinese labels before arriving at shores.

• For special products for infants and certain groups, the label should indicate nutrition information.

• Products without Chinese labels shall be labeled under the supervision of quarantine staff before going for sale in market.

Advice for market entry

Consider joining a trade visit to an exhibition –

FHC China – China’s signature trade show

Programme will include:

- British Food and Drink Reception

- Day of hosted site visits to local food retail and

food service outlets

Opportunity to exhibit at the FHC

show as part of UK Pavilion

Things to Remember!

1. China is not one market, but many - do your research – start small, build a strong foundation then expand

2. Retailers are trying to build point of reference, while expanding – help them by providing reliable imported products

4. Food Safety top of mind for retailers and consumers alike – ensure your supply chain provides safety from source

5. Consumers are looking for convenience, and premium solutions – choose products that meet consumer needs

6. E-commerce & Social Media are driving consumer growth – one potential way to explore opportunities

3. Choose a good partner to work with – strong understanding of local practicalities & customers

Shanghai

Shenzhen

Guangzhou

Beijing

Chengdu

Tianjin

Hangzhou

Nanjing

Chongqing

CBBC & Our China Footprint

Shenyang

Wuhan

Changsha

Xi’an

• Membership organisation with c 1000 members • Established over 60 years • Specialist China business network

Qingdao

- c.100 staff in 13 offices

- Delivering all UKTI China on-demand services

- Membership programme

- Practical assistance, one-off research projects

• UKTI Partner of Choice for China • Strong partnership in UK and

China • Offering strong support for UK

business in China

Antoaneta Becker Regional Manager, SW England Email: Antoaneta.becker@cbbc.org UK Mob: +44 (0) 7984 175 318 Claire Urry Executive Director Email: claire.urry@cbbc.org UK Mob: +44 (0) 7950 390 207 For more information please visit our website: www.cbbc.org www.cbbc.org/sectors/foodanddrink