China set for functional food boom – part two
Last week Bruce Hoggard introduced us to an exciting market where functional foods are riding a tide of increased wealth and concern about health and food safety. In this second instalment he examines the opportunities and pitfalls for western companies hoping to tap this large and lucrative market. Some have already made their mark, but it ain't as easy as it looks, folks.
NB To read the first part of this feature, click here.
During the past 20 years the concept of health food has grown in popularity within North America and Europe, driven by people's increased health and fitness concerns. Although western-style health foods are relatively new, about 20 years old, the Chinese market is showing encouraging signs as sales of Traditional Chinese Medicines (TCM) with more than 5,000 years of market presence are being challenged by foreign dietary supplements and health foods.
Foreign health food brands during the last five years have increased by 12% annually. In fact, given the quality issues surrounding Chinese made supplements, 15 out of 100 consumers in China purchasing healthcare products are choosing foreign brands. This ratio is expected to continue climbing over the next several years. A part of this increased popularity will be a result of child-specific products as they become more widely available in the market as more companies target the "Little Emperors".
Safety scares have held back growth
Looking back at the industry, the 1980s were the primary development era of the modern health food industry. It was led by the introduction of foreign brands to the Chinese market and the realisation there may be alternatives to TCM. This resulted in several years of rapid growth and prosperity in the mid 90s spurred on, in part, by the government's introduction of regulations and its encouragement to use health food products.
Product quality issues and several scares associated with tainted products caused the industry to fall off in the late 90s and around the turn-of-the century. However, the market is presently being restructured, driven by Government intervention and regulations following numerous public outcries over poor product quality and consumer safety concerns.
According to Martek Biosciences, maker of Herbalife and owner of GNC, China remains a relatively untapped direct selling and nutritional supplement market. With China's admission to the WTO, it is establishing direct-selling regulations to be implemented in the latter part of 2005. Once implemented and operational over the next several years, management at Martek believe the new regulations will make China one of the largest direct-selling markets in the world.
As if to echo GNC's sentiments, Amway Corporation, the largest direct seller in China, boasts the largest sales of nutritional supplements in China. It successfully markets its Nutrilite brand and had supplement sales of more than $240m in 2002 (Canadian Government) and approximately $345m (Euromonitor) in 2003.
Amway's supplements have been growing at an average of 60% in the past few years. Based on these calculations, Amway's 2004 sales of healthy food/vitamin and dietary products sales were expected to be close to $500m. Another leading US supplement brand active in China is Centrum, which retails several lines of vitamins and multivitamins for both adults and children.
Market growing fast, however you measure it
Throughout the next 5 years the Chinese health food industry will be driven by these new regulatory developments, product and company accountability, increased consumer understanding and education and an expanding product selection. It is anticipated this will result in the Chinese health food products industry, at approximately $3.0bn in 2003, growing an average of 15% to 30% in each of the next five years. On a global basis, functional or healthy foods will experience a 9.1% annual growth rate.
Huang Ming Da, chief of the National Centre of TCM at the China Academy of TCM located in Beijing, indicated the Chinese health food market would reach close to $12bn by 2010. Meanwhile the State Food and Drug Administration is predicting annual sales in the dietary supplement category will reach $16bn by 2010. Both numbers would indicate China will be growing at between 16% and 18% overall while certain companies, such as Amway and certain industries, such as vitamins and supplements, may grow faster than the industry average.
However, according to Eric Jens, former Vice President of Marketing for Health Care Investments at Hutchinson Healthcare Cooperation Opportunity (HHCO), the health care division of Hutchinson Whampoa Ltd., measuring the size of the Chinese's health food market remains difficult. In fact the accurate measurement of sales in many differing categories will be made more difficult and daunting as China has between five million and seven million retail outlets compared to approximately 230,000 in the United States.
Already 3000 functional food brands in China
In the beginning of 2004, China's formal regulator of the health food industry, the State Food and Drug Administration (SFDA), had certified a total of 5000 functional food products for sale in China; 800 of these products were from foreign sources. These 5000 products represented 3000 separate brand names with an average brand age of nine years. Presently, approximately 2000 of these products are on the shelves in Chinese supermarkets, hypermarkets and pharmacies.
Within China companies from the United States control roughly 50% of the Chinese State Food and Drug Administration (SFDA) health food import certificates. The American health food products have a positive reputation of delivering high quality and reliability in the Chinese market. This is particularly true when competing against various domestic brands. In particular, the United States dominates the Chinese import market for fish oil, specifically with tuna and salmon-based products. Other minor competitors in the market are from Canada and Australia.
In 2004 the overall sales figure for health food in China, from the Singapore Euromonitor and the Pharmavite News Bureau, were calculated to be $3.376bn, an increase of approximately 17% from the 2003 figure of $2.884bn. The expected 2005 value is close to $4bn.
Regional differences persist
As previously mentioned, these "total" figures can be deceptive, as China is comprised of so many varied and diverse regions where sales of products can vary dramatically. Therefore, China is best described according to its regions, and within each region giving the breakdown for sales of the broad category vitamins and dietary supplements. This includes calcium supplements, mineral supplements, fish oils, garlic, ginseng, ginkgo biloba, evening primrose oil, Echinacea, St John's wort and other dietary supplements such as flax oil and borage oil.
According to Euromonitor in the UK and Singapore the 2004 regional sales were: East China (Shanghai), $822.0; Mid China (Xian), $486.4; North/Northeast China (Beijing, Tianjin, Dalian), $727.8; Northwest China (Yumen), $239.5; South China (Guangzhou, Shenzhen), $753.2; Southwest China (Kunming), $347.8. For geographical reference a major city in the region was included with the sales figures.
Several factors are fuelling this staggering growth rate, the first being the large population in China. A second reason is improving income levels are allowing Chinese consumers to purchase more than anytime in the country's history. This combined with increased access to global trends (travel and media) are allowing them to fulfill desires to be trendy. A third contributing factor is the increased awareness and concern over health issues driven by SARS and the Bird Flu.
The remarkable size of the Chinese market, along with its inviting and attractive nature, means it often offers too many opportunities for any one company to handle. This makes walking into a trap, whether it is the wrong business partner, an uncooperative government official, cutthroat competition or a shifting regulatory framework, very easy. To counter these potential pitfalls and compensate for a poorly structured market and an uncertain environment, a company headed to China requires a strong and focussed internal organisation.
In fact, China has recently been compared to the Medieval Europe of yesteryear. China's major cities are large and crowded, and companies must be represented in each city if they want to create total brand awareness and brand value. Without this crucial positioning the Chinese consumer's awareness is often muted and they do not recognise or accept the product or brand as being a serious contender in the market. However in the major cities, such as Shanghai, companies will be lucky if they break even because these larger cities generally have higher costs and poorer sales. In many cases the locations in cities such as Beijing, Shanghai, and Guangzhou are nothing more than advertising and marketing vehicles to promote the brand.
However, even when these considerations are factored in, the Chinese market for healthy foods is both impressive in current size and the potential it offers. However, China, as in any industry, is not for the weak of heart or a short-term fix to weak domestic sales. It is also a market where personal relationships and an appreciation and understanding of the culture are extremely valuable to the success of any venture.
Bruce Hoggard is CEO of Hoggard International, a Canada-based management firm that offers assistance to companies looking to expand into challenging international markets.
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