The recent food scandal in China raised justifiable concerns but the fundamental attraction of the country as an investment opportunity for international food companies and retailers appears undiminished, according to a new report from just-food. Ben Cooper reports.

Companies involved in either sourcing food from China or looking at its domestic food market as a growth opportunity are still reeling from the melamine-in-milk contamination scandal. But, as shocking as those events were, it has not altered the fundamental truth about China - that it is an extremely exciting growth opportunity for the food sector.

As a new report from just-food points out, China has the largest packaged food market of the five so-called BRICM (Brazil, Russia, India, China and Mexico) markets in value terms. The total packaged food market was worth US$96.2bn in 2007, according to just-food's Branded foods in China - forecasts to 2013 report. It also ranked second of the five BRICM markets, behind Russia, in terms of packaged food market growth between 2002 and 2007, having seen 65% growth in the five-year period, on the back of strong GDP expansion.

Even the recent contamination scare should not dent optimism unduly, given the imminent reform of China's food safety legislation. "China's anticipated Food Safety Law is expected to be implemented within the food industry by the end of 2008," the just-food report states. "The regulation will enforce higher hygiene and production standards. This is likely to result in a number of mergers, acquisitions and the closure of smaller businesses that are unable to meet the food safety demands, but should help to improve the quality and reputation of the industry - both in China and in the rest of the world."

While the report forecasts that packaged food growth is likely to start to slow down after 2013, the report gives an optimistic outlook for packaged food companies and international food retailers looking to invest in China.

"Previous growth has been driven by the strong economic development in China," the report states. "Demand for packaged foods grows annually as people trade up to packaged rather than loosely-packed food. The rising role of modern retail formats such as supermarkets, convenience stores and hypermarkets is also having a big impact on the type of food people are buying."

Indeed, China's grocery retail market is expected to grow by about 61.5% between 2008 and 2013, to reach a total value of CNY2.1 trillion. By 2013, the packaged food market in China will be worth approximately US$194.5bn, following growth of 73.6% from 2008.

A key catalyst in the continued development of organised retail in China is the increased presence of international retailers. While the market has attracted interest from overseas retailers since the early 1990s, the pace of investment has picked up in recent years following the relaxation in 2004 of rules governing investment by overseas retailers, with French group Carrefour leading the charge.

"China is attracting a lot of interest from global retailers and will become a focus of investment from major multinational multiples such as Tesco, Wal-Mart and Metro Group over the next five years," the report forecasts.

However, as has been seen in Russia, domestic retail groups have been reluctant to allow their international rivals to take all the spoils. As the report states: "The early success of hypermarkets with Chinese consumers prompted leading domestic players to jump on the larger store format bandwagon."

In particular, the Chinese retailers Bailian Group and Wu-Mart have developed hypermarket concepts in recent years. "In 2008 and through to 2013, hypermarkets will continue to develop and grow quickly in thriving urban areas such as Shanghai, Guangzhou and Shenzhen. They appeal to consumer interest in low prices, promotional offers, a convenient shopping experience and location," the report predicts.

The expansion of the food retail market is running in parallel with the growth in the importance of processed food in China. According to just-food estimates, one-third of all food consumed by the Chinese is processed. While the majority of this is consumed in urban regions, the popularity of processed and Western-style food in urban China is starting to be mirrored in parts of rural China. This trend is to grow "dramatically" in the next five years, the report states, as major retailers such as Carrefour seek to expand out of increasingly saturated 'first-tier' cities into other regions.

In fact, the growth of urban China in general will foster growth in processed and packaged food. The report points out that by 2050 China's official urban population will be 970m, against 450m in 2000.

Of course, urban populations tend to be richer, and the urbanisation trend is running hand in hand with increasing personal wealth and disposable income among Chinese consumers. "The increasing affluence of China's 'upper class' and the fast-growing 'middle class' provide future opportunities and potential wealth for food companies able to establish a market share and build customer loyalty in the short-to-medium term," the report states.

According to the report, China's growing middle class consumers have significantly greater spending power than their counterparts in India or Russia.

Chinese consumers also appear to have a greater affinity with shopping. A study from McKinsey & Co revealed that Chinese consumers spend more time shopping than their global counterparts, spending 9.8 hours a week in stores, compared with the BRIC average of 7.2 hours a week and just 3.6 hours a week in the US. A total of 41% of Chinese respondents identified shopping as a favoured leisure activity.

For more information, or to download this report, go to www.just-food.com/store