Food brands to boom in China

04 May 2011

BEIJING: Food brands, quick service chains and grocery retailers stand to benefit from a huge surge in sales across China - but also face sizeable obstacles to long-term growth.

A study by the Boston Consulting Group suggested an "unprecedented shift" in eating habits now underway throughout the world's most populous nation is set to have a "transformational impact."

In the first instance, such a transition encompasses greater expenditure levels, alongside incorporating moves towards different categories like packaged and frozen food.

"Farmers, manufacturers, energy producers, retailers, and consumers across the country are about to see their lives changed forever by what more than a billion people are choosing to eat," said Michael Silverstein, a BCG senior partner.

"For some companies, the challenge to determine how to profit from the new trend will be too great, and they will struggle to survive."

Overall, Chinese shoppers are expected to spend $1,000bn on food in 2020, measured against $350bn in 2010, as rising disposable incomes stimulate an evolution in dietary patterns.

To take just one example, pork and chicken made up 19% of the average diet last year, a figure anticipated to hit 28% by 2020, as people eat an extra 400bn portions annually.

However, new behaviours might further encourage price inflation regarding raw materials, as intense competition means a metric tonne of corn could command $292 by 2020, up from $186 in 2010.

"Although there will be productivity gains over the next decade, this price increase will find its way through the system and all the way to the consumer in the shopping mall," said Silverstein.

Mead Johnson, which makes infant formula offerings like Enfamil, in a segment where trusted brands are particularly important, has observed many such issues at work.

"The Chinese government currently is very much focused on quality and food safety, but are also aware of the risk of food inflation, and there are some food categories that they are putting under control or under watch," said Stephen Golsby, its ceo.

"We're not immune to these sensitivities, and we have to be watchful as we consider taking further price increases."

Elsewhere, BCG's analysis outlined three core tactics brand owners and retailers should pursue, not least related to the central matter of how much they charge for products.

"On price, companies need to respond quickly with price changes-up or down-and this requires meticulous preparation," said Silverstein.

"Raise the price by either lifting the price point or shrinking the size of the product; and collaborate (with retailers or manufacturers) in order to retain the loyalty of the shopper."

The case of fast-food chain McDonald's highlights the dangers of attempting to abandon a low-cost positioning and increase prices.

"Back in November, we went to off of that strategy for one month and saw a little business dip," said McDonald's chief operating officer, Donald Thompson.
"So we've gone right back to our value messaging around lunch and breakfast, and it's paying great dividends."
Secondly, BCG argued, it is vital for organisations to ensure they make products from a variety of raw materials, and have a suitably broad roster of suppliers.
"On hedging, companies need to expand this capability, so that they can lock in profit," added Silverstein.

Data sourced from Boston Consulting Group; additional content by Warc staff