The emergence of an increasingly sophisticated consumer class in the world’s most populous market has created a unique playing field for the globe’s premier brands. The centrality of food and drink to China’s 1.3billion people has created a market of extremes. On one hand, the rapid adoption into everyday life of previously foreign tastes (think pizza) demonstrates an adventurous and open-minded palate. On the other hand, a continuing spate of food quality scandals has raised levels of cynicism and doubt among Chinese consumers. Yet despite that, the increasing consumption of previously unknown tastes and flavors appears to continue unabated.
Despite rising food costs globally, the appetite of China for the world’s food continues to increase. According to China Customs statistics, in the first 5 months of 2011, China’s food import & export value totaled USD 35.09 billion, up 36.2% year-on-year. At a commodity level, food imported into China continues its steep rise. China is now forecast to be the top market for U.S. agricultural exports by the end of 2011 at USD 20 billion, surpassing Canada at USD 18.5 billion. China accounts for almost 60 percent of world soybean imports, 40 percent of world cotton imports and about 20 percent of total soybean oil imports. These three commodities accounted for about three quarters of total US agricultural exports to China in 2010.
Within this general trend is the increasing consumption of western food and drink products by Chinese consumers. This is driven in part by the increasingly easy access to imported food and drink products, often via internationally branded supermarkets and groceries. For example, France-based supermarket chain Carrefour plans to open 22-25 new stores in China by the end of this year 2011. The company currently has 182 supermarkets in 47 cities in China and achieved revenue of RMB 42 billion last year. Walmart as of May 2011 has 338 shops in 124 Chinese cities, with 90,000 employees and annual sales of some US$7 billion.
Increasing Focus on Healthier Food Among China’s Middle Class
On-going food safety issues coupled with rising wealth seems to have boosted a relatively rapid development of health consciousness among Chinese consumers. From sufficient caloric intake just a generation ago, concerns around food have shifted to nutrition and health. The rise of organic has been particularly impressive, considering the “luxury” cost levels of organic food compared to the still relatively modest average incomes in China (USD7,600 which ranks China number 125 in the world). This means consumers are increasingly able and also seem to be more willing, to put their money where their mouth is – as long as the taste component is acceptable – to pony up more for healthier alternatives.
According to a survey by Global Intelligence Alliance (GIA) amongst 67 Asian consumer and retail industry professionals in China, India and South East Asia in November 2010, 70% said consumers in China have become more willing to pay more for better quality food and beverage over the last 12-18 months. While some speculation ensued that the temporary shock in demand would subside, two years after the infant formula melamine scandal, consumer preferences seem to have permanently switch to international and premium local brands over cheaper local options.
Western Flavors in Chinese Diets against this backdrop
China has seen a phenomenal proliferation of western fast food brands, most notably KFC (which opened first in Beijing in 1987) followed shortly by McDonald’s. Although local fast food brands like Kungfu, Yonghe King, Da Niang Dumpling, etc still dominate the sector with 70% market share, western brands are catching up. By the end of 2010, KFC operated over 3,000 restaurants in China compared to only 400 from Kungfu. McDonald’s announced that it would open 1,000 new restaurants in China by 2013.
With rapid expansion far beyond the Tier 1 cities in China, the leading western fast food brands are effectively bringing western tastes to Chinese palates on an unprecedented scale. They are aided in their efforts by the profusion of American and European food and drink manufacturers, who are also getting a much broader range of tastes and flavors within easy reach of Chinese consumers.
Developing Sweet tooth
China is definitely developing a sweet tooth, having seen a 48% increase in per capita sugar consumption in China over the last decade (according to the USDA). As in other countries, sweet beverages are a significan and growing source of sugar consumption.
Data from Swire Pacific, a major soft drink distributor, show that soft drink sales in its sales areas rose five-fold on average between 1999 and 2009 compared to a 7% growth in the US over the same period.
Thirty years ago, most of China’s citizens had never even tasted chocolate. Many still haven’t. But that is changing quickly. Synovate’s Media Atlas China study found that nearly 40% of consumers in Tier 1 cities consumed chocolate at least once a month or more. That number climbed to nearly 60% for consumers aged 15 to 24 year olds living in Tier 1 cities. A whopping 54.5% of females aged 20-40 consumed chocolate once a month or more. The differences between patterns of chocolate consumption between total population versus the young is an illustrative example of how quickly China’s consumers have taken to exotic, foreign tastes.
Despite a 35% share increase in the global chocolate market (USD975m in 2010 compared to USD 633m in 2008), that still only accounts for less than one percent – indicating the huge potential for more chocolate consumption in China.10 This did not go unnoticed. Nestlé, the Swiss foods group, has invested US$1.7bn into Hsu Fu Chi, the Chinese sweets company in 2011, one of China’s largest foreign investments.
In Chocolate Fortunes: The Battle for the Hearts, Minds, and Wallets of China’s Consumers, Lawrence L. Allen tells the story of how Hershey, Nestle, Cadbury, Mars, and Ferrero Rocher have fought to create (and then corner) China’s vast potential chocolate market. A former executive for Hershey and Nestle, Allen spent seven years in China working to bring chocolate to the region. Allen tells us, for example, how Ferrero buy phentermine without prescription Rocher, the family-owned Italian company responsible for bringing us Nutella, carved out a niche in China by combining tight quality control with dense distribution and maintaining high price points to protect its premium positioning.
Mars seems to have done best, with 39% share of the China retail chocolate market. Their secret seems to have been commitment to quality and freshness, taking it step by step instead of over-reaching, highly flexible in response to consumer needs as well as consistently spending more on advertising and in-store promotion than its competitors. Mars also seems to have developed the strongest local management team, managing unheard of rates of retention of local senior staff.
Other manufacturers were not as fortunate. Cadbury overestimated demand and how much was a normalserving to Chinese consumers. As of 2008, Cadbury’s China branch accounted for only 0.5% of its worldwide sales. Hershey squandered an early lead and has virtually disappeared from China’s shelves.” Yet with all this activity, Chinese only consume a fraction of the chocolate that Westerners do – 146 million pounds of chocolate per year – which comes to slightly less than 2 ounces per person. With China’s potential chocolate market (people living in major cities) being estimated at 100 million people, or 8% of the population, there’s along way to go before this market is even close to be saturated.
Coffee as an indicator of internationalized tastes China’s demand for coffee grows an estimated 15 to 20% a year (the world average is around 2%), and is expected to reach 300,000 tonnes annually by 2020. Coffee sales currently account for a little over 20% of the hot drinks market in China, compared to around 70% for tea.14 According to Synovate’s Media Atlas China survey (MAC), Nearly 1 in 10 Chinese consumers in Tier 1 cities have visited a coffee shop at least once a month or more. This has been helped by both international and regional brands expanding rapidly in the market.
From its first store in 1999, Starbucks now operates 450 stores in China itself and plans to triple that number to 1,500 by 2015. In 2009, the company introduced to its customers a coffee blend that includes beans grown in Yunnan, “South of the Clouds.”
At home, Chinese consumers are more likely to add hot water or milk to a packet of instant coffee (often with powdered milk and sugar already added) instead of brewing from ground beans. According to Synovate’s Media Atlas China survey (MAC), one in 5 Chinese consumers drink instant coffee at least once a month or more in Tier 1 cities with that proportion rising to 24.9% for Chinese consumers aged 15-24 living in Tier 1 cities.
This actually highlights another unique trend in China, the growing demand among domestic consumers for coffee has created a concurrent demand for locally sourced coffee beans to such an extent that farmers inChina’s southwest are switching from growing tea to growing coffee. Much of the coffee processed at Nestle’sinstant coffee factory in Dongguan comes from Yunnan, and the company has been instrumental in training coffee farmers in best practice techniques, opening an experimental and demonstration farm in 1997.16
“Yunnan arabica now accounts for 95% of China’s coffee production, and plantation coverage has more thanquintupled to around 23,000 hectares,” explains Stuart Eunson, whose Beijing and Shanghai-based company,
Arabica Coffee Roasters, now sources 20% of its beans from Yunnan. With a further 20,000 hectares of land considered suitable for coffee cultivation, there’s certainly room for further growth.
How could we think about food and drink without mentioning one of the fastest growing categories in China: wine. Although having enjoyed a healthy domestic production industry, a taste for imported wines has accompanied the meteoric rise of incomes, particularly among China’s newly wealthy. A recent study conducted by VisaCard Worldwide based on a survey of 1,800 respondents with an annual income exceeding $16,000 in Beijing, Shanghai and Guangzhou, confirmed that 80.7% think French wine is best, followed by Italian then Chinese brands (ahead of Spanish, Australian and German wines).
This phenomenon is not confined to the wealthy. According to Meininger’s Wine Business International, Chinese wine consumption overall is predicted to increase by 70% by 2011, making China the eighth biggest consumer of wine in the world by 2012. According to the China Brewing Association, China wine sales have seen an average increase of 20% over the past years, against an international growth rate of just 1%~2%. As China’s consumers start to acquire a taste for the finer things in life, enjoying a glass of wine with food tops the list of new lifestyle habits forming in China.
Similar to the production trends for coffee, China is now one of the biggest producers of wine in the world – ranking 7th in 2010, according to a study by the International Wine and Spirit Record (IWSR) for Vinexpo, the wine fair that takes place in Bordeaux and in Hong Kong. Until 2007, China did not even appear among the 10 biggest producers in the world. China is forecast to experience the biggest growth spurt yet in wine production – a whopping 77% from 2010 to 2014.20
Conclusions & Implications
As a nation of consumers already widely omnivorous and relatively unburdened by consistent and homogenous strictures resulting in a narrowly prescribed menu, tastes have been unfettered by both increased access to new and exotic flavours as well as the purchasing power to try them. Combined with a relatively open mind to try new things, the development of the Chinese palate has been more prone than in other markets to be influenced by marketing communications campaigns across China.
This means enormous flexibility in terms of Chinese consumers picking up new habits and lifestyle changes, particularly in Tier 1 cities – and simultaneously an open field in terms of what marketers can create and communicate. The scale of new product and category adoption in China is truly unprecedented, and although pitfalls are many, getting the right information about consumers remains the key to any successful strategy in China.