Food Industry and China
Overview of the Food Industry in China
November 26, 2014
This article has been produced by the efforts of the following members:
Meghan Schwan – Main Contributing Research Assistant
Louis-Claude Perrault-Carré – Team Leader for China-Industry
With a population of roughly 1.4 billion and a consumer market that continues to evolve through urbanization and rising disposable incomes, China’s market is a tempting and potentially lucrative proposition for foreign investors – particularly within the rapidly expanding Chinese food industry.[1] The purpose of this post is to provide an overview of the food industry in China and highlight a number of factors that businesses should consider when seeking entry into the Chinese food market, including consumer preferences, grocery retailers, and market entry.
China’s population growth (expected to peak at 1.54 billion in 2040), increasing disposable income, and an expanding economy are currently re-shaping consumer food and beverage preferences.[2] With rising incomes, consumers are increasingly willing to spend more on grocery products and are turning towards higher quality items.[3] Contrary to other Asian nations, in China foreign goods are perceived as being of higher quality and value - partly due to previous food safety concerns regarding domestic products.[4] Consequently, the target market for imported products is a higher-income consumer. This consumer is willing to pay a premium for higher quality, and health and wellness products. [5] This demand is expected to grow as urban migration continues to expand in China,[6] as this growth is much less prevalent in rural areas.[7]
The Chinese supermarket industry is highly fragmented, due to the geographic size of the nation and from China’s historical tradition of having small, wholesale and retail segments selling local produce under the control of provincial and city bureaus.[8] No retailer, thus far, has been able to emerge and grasp a dominant position in all regions of the nation. Consequently, the market for grocers in China is shared between five major companies - China Resources Enterprise Limited (12.7%), RT-MART International Ltd (8.3%), Wal-Mart China (8.2%), Carrefour Chin Inc (5.0%), and Lianhua Supermarket Holdings Co., Ltd (4.0%) – that together hold 38.2%. of the market. The remaining 61.8% is shared among a multitude of independent or smaller companies.[9]
Leading supermarket chains, such as Lianhau, operate across multiple formats, from bigger stores to smaller units, catering to different consumers in large, medium, and smaller cities. In doing so, these companies are giving themselves a deeper presence within particular regions and can tailor their stores to consumer income levels and product preferences.[10] Hypermarkets, a superstore combining a supermarket and a department store, are becoming the main growth format in China’s grocery retail sector, as a result of the rising population and disposable income levels, providing high quality, low cost products.[11] As urbanization progresses, hypermarkets are expected to penetrate into rural and smaller cities.[12] Hypermarkets are expected to have the largest growth potential in the Chinese market; especially as consumers move towards weekly shopping trips.[13]
Navigating China’s complex supply chain is perhaps one of the largest barriers businesses must face when entering into the Chinese food market. Suppliers face the challenge of dealing with import regulation, labeling requirements, customs, varying Chinese (provincial and national) laws and regulations, and finding warehousing for their products - amongst others.[14] The great majority of exporters will need to work with importers and distributors within China who have a strong network of contacts among the various retail channels in order to get their products into supermarkets.[15] It is imperative that businesses work with importers/distributors that have sound knowledge of local markets and have good standing relations with major retailers.
China is always changing, in terms of consumers – population, income levels, and demand for high quality, premium, and health and wellness products are all on the rise. This is the perfect opportunity to businesses to invest into the Chinese food market, but as mentioned, there are risks involved. The fragmented nature of Chinese grocers, especially that some of the major players are owned and operated by the Chinese government, means that suppliers need to be very wary. There are also risks involved with the importing and distributing aspects of doing business in China. One needs to build relationships and work with the local and regional agents and distributors in order to get their products onto store shelves. The complex regulatory processes implemented by the Chinese government, in terms of importing, customs, labelling, etc… are all risks that need to be considered, especially since these are not national protocols, but change by region.
