The market for oils and fats in China is expected to reach RBM24.9bn (US$3.0bn) in retail value sales in 2004, according to new research from Euromonitor International.

The bulk of these sales, some 99%, are made up of vegetable and seed oil, which is very popular among Chinese people because it is considered to be a daily necessity.

Increased switching to packaged products

“The vegetable and seed oil market in China is characterised by considerable switching by consumers from the traditional format of loose and sometimes unbranded oil to packaged branded products, which is the main reason behind the tremendous 225% retail volume growth of this sector in the 1998-2004 period”, says Fanija Samak, a packaged foods analyst at Euromonitor International.

Increasing health awareness and increased media reporting on the consumption of fake products in China has resulted in the Chinese being more and more conscious about the quality of cooking oil they purchase. Local brands are seizing the opportunity to strengthen their brand names by promoting their products as “safer cooking oil”, “recommended by government”, “for big and healthy families” and so on, to reassure consumers of product quality.

This has encouraged consumers to switch from loose unpackaged oil to packaged products. Such switching is most evident in urban regions, where the rapid development of the retail sector, as well as growth in purchasing power, has allowed for high market acceptance of packaged oil.

Packaged products see limited share of total oil consumption

Despite the increased switching, the proportion of packaged vegetable and seed oil, however, remains small in China, about 10-20% of total cooking oil consumption, with the rest being sold as loose. This is due to the large number of small-scale, village-based processors in less developed areas, selling directly to consumers in a variety of containers, often within a few days of production. In addition, price still plays a key role in people’s purchasing decisions in rural areas, and most rural consumers still use loose oil due to their low purchasing power.

Nonetheless, economic development has seen a gradual increase in purchasing power across the country, and Euromonitor International expects this to lead to a gradual increase in the market penetration of packaged oil in the vast rural markets in the medium to long term.

Intensifying competition in urban markets

In the meantime, competition continues to be mainly in urban areas, where higher purchasing power has seen a rapid switch from loose to packaged oil on the back of growing awareness of its high quality, hygiene benefits and convenience. TV advertising has played an important role in increasing brand awareness and improving a company’s image in what is an increasingly competitive market.

For the average consumer, the bigger the name, the better the quality, especially in cooking oil. The leading companies, therefore, spend more than RMB100m annually on advertising their brands on national and regional TV channels, in order to have as wide a brand coverage as possible. Advertising on buses and on billboards in public places is another popular way of increasing consumers’ awareness of a brand.

According to Samak, intensifying competition has also resulted in key players using price discounts to boost volume sales. Moreover, the much lower unit price of loose unpackaged oil has prompted manufacturers to keep their prices competitive to woo consumers.

Product development through fortification and “healthier” oils

Given the substantial sales potential and intensifying competition, key players such as COFCO and Shanghai Kerry are increasingly looking to consolidate and strengthen their positions through various brand extensions. Intensifying competition has squeezed profits, and companies are forced to go for higher margin products, such as corn oil, sunflower seed oil and safflower oil. Generally, margins on such oils are 10% higher than those for peanut oil, salad oil and mixed oils. The rising health consciousness in recent years has resulted in companies making greater efforts to promote healthy products that meet consumer demand.

In addition, a key development in China over the 2003-2004 period was the introduction of fortified brand extensions. Both key and emerging players have been fortifying their vegetable and seed oil products with Vitamin A and E or with concentrated gamma-linolenic acid. The health claim attached to the latter is that it provides the ideal balance of linolenic acid and gamma-linolenic acid. High temperature cooking causes the body to absorb more linolenic acid than gamma-linolenic acid, which is believed to have health benefits, such as increasing intelligence, protecting vision and easing blood pressure.

New developments in packaging

“Packaging has also played an important role in companies’ efforts to increase and strengthen their position in the market”, comments Samak. COFCO, for example, introduced its Fortune Vitamin A Cooking Oil in 2003 in a unique opaque plastic packaging, which is claimed to protect the vitamin A added in the oil from being destroyed by light. This is a departure from the typical clear plastic packaging used in most vegetable and seed oil.

Inspired by consumers’ preference for clear packaging in order that they can see the product, Shanghai Kerry went one step further to introduce a form of improved packaging that is clear and protects the Vitamin A from damage by ultra violet rays, by using a transparent anti-UV material.

Further new packaging developments included a design by the Knife brand that can prevent leaking and accumulation of oil on the lid after use. The fan leaf design of the lid can also adjust the stream so that the consumer has better control over the amount of oil being poured out.

Future outlook

Increased health awareness and demand for high quality products as well as rising disposable income across the country will continue to drive consumers’ willingness to switch from low-grade cheap oil sold in loose format to packaged products with strong branding, according to Samak. Moreover, Euromonitor International anticipates that the growing awareness of nutrition and the economic affluence of key cities such as Shanghai and Guangzhou will see a growing demand for “healthier” and fortified vegetable and seed oil, which will in turn continue to drive new product developments.

View related research:

Packaged Food in China

The World Market for Packaged Food 2004