For countless years, stories originating from and about China have created the allure of untold wealth and riches. With its re-emergence into the global marketplace through the World Trade Organisation (WTO), all eyes are once again on China, where sales of functional foods could soon overtake Japan. In this first instalment of a two-part article, Bruce Hoggard sets the scene.

With the relaxation of tariffs, duties and other restrictions, this interest has expanded to include industries previously closed to foreign companies. Also, with the gradual opening of the Chinese market and the growing reach of the Internet, the Chinese consumer is being inundated and exposed to a growing array of new western-style products and services.

One of these ‘new’ categories is Functional Foods; a term used more within North America and Europe than in Asia. In China the category of Functional Foods is known as Health Food and is the general category in which western-style multi- and single vitamins and dietary supplements, tonics and bottled nutritive drinks and child-specific vitamins and dietary supplements are sold. The Chinese health food industry was first founded on herb-based health products while the Western countries developed its version of health food from minerals and vitamins.

Two Chinese characters are used when describing this category of products. The first character translates into the term “Nutrition Foods” while the second character means “Healthy Foods. Both of these characters are usually interchangeable of both descriptions can be seen on signs and shelf markers in stores throughout China.

Chinese consumers growing in sophistication – and wealth
Japan, China and India represent the three largest spenders at consumer level, based on total dollars of products purchased, for health products and dietary supplements. The Chinese market is beginning to demand better quality products as consumers become more sophisticated and aware. This will, in the future, catapult China ahead of Japan, as the combination of more products being purchased at higher prices will increase total dollar sales.

Recent research data and information from both Euromonitor and Hoggard International strongly indicates that this market potential for health foods in China will exert a very positive influence on the industry during the next ten years. Increasingly hectic lifestyles, as well as environmental pollution and unstable climatic conditions, have brought about an increased incidence of dietary problems, coughs and colds. Increased air pollution has also led to more people suffering from eye irritations. This has already driven, and will continue to drive, increased sales for over the counter (OTC) products including health foods.

Competition mounting fast, counterfeits rife
However, one constraint facing the market will be the strong international and domestic competition for this market growth. The result will be that making inroads into the Chinese market will require patience while the ability to stay in the market and develop it will be both costly and time consuming.

Another influencing factor will be product formulation and the major concerns Chinese consumers have with this entire area. According to the latest report from the Chinese Ministry of Health more than 90% of the medical products in China are fake or copies. This report can also be applied to the health food industry, although the extent of the copies may not be as great. In this industry the copies are only about 70% as effective as the genuine product and this has given Chinese-manufactured products a very bad reputation within China and Hong Kong.

The majority of educated buyers are leery of Chinese products because they are so dangerous. People accustomed to taking more of a copycat product to obtain the desired affect can have a serious if not fatal reaction when they consume an equal amount of the genuine product. The growth of the domestic health food industry, especially in Shanghai, where from 1997 to 1999 more than 86% of the health food products were adulterated with fillers and reduced active ingredients, will depend on winning back consumer confidence.

Highly disparate market
When viewing China it is important to remember the country is best viewed as a series of independent regions. Because of its geographic size, its population of 1.3 billion people and the unique properties associated with various regions and cities there can be radical differences between locations. Therefore, when discussing issues like market size, or anything in averages or comparisons, it is important to view China as more than a single market. The Chinese market has no single average capable of representing each of the individual regions as a whole.

To better understand and appreciate the Chinese market it is important to understand the definitions and the terminology used by the Chinese government and consumer. The main categories are prescription, OTC, health foods (foods making health claims) or ordinary foods (without claims).

Complex terminology
Health foods can be defined by two main characteristics that embody the category. In China, according to government sources, health foods are defined as, “those foods that complement vitamins and minerals and have special health care functions. They should be edible by people and adjust physical functions but not be for curing disease and must not do direct or indirect harm to human health.”

When discussing the terms food, health food and drugs it is important to distinguish between them given their similarities and the differences involved with these three groupings.

As a starter, both health food and ordinary food can help humans live, provide essential and basic nutrients, and have a specific colour, fragrance, taste and shape. Food items classified as a health food have a specific health care function for a specific group of individuals and are edible but have a daily-recommended dosage. In comparison ordinary food does not emphasize a specific function; is intended for a universal population, is also edible but has no stipulation on the amount that may be consumed each day.

In comparison of health food and drugs the following differences help to define the boundaries between these two classifications:

With health food the treatment of a disease cannot be the product’s sole or main objective. Instead it is meant to adjust a specific human body function. The product cannot result in any acute, and/or chronic harm from long-term use and must be taken orally. Drugs, in comparison, must have an explicit treatment plus the corresponding indication and function. The accompanying material must list any side or adverse effects it may have, and state how it is to be administered, for example either externally or taken orally.

Health food is in addition to vitamins, minerals, herbs and other supplements, or any product where the company is making health claims without conducting pharmaceutical-grade clinical trials and testing. To be considered a health food in China there are only 27 health claims allowed by the Chinese government and these are regulated by the State Food and Drug Association (SFDA). Any other claims must first meet strict federal requirements for safety and functional testing before they can be used to promote, position or sell the product. The product must have a special healthcare function and be registered as health food if it fits within the Government’s 27 pre-approved functions.

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Source: Chinese State Food and Drug Association

Bruce Hoggard is CEO of Hoggard International, a Canada-based management firm that offers assistance to companies looking to expand into challenging international markets.