Part 9: Food and Beverage
The following is part nine of a ten part report evaluating the progress of key Chinese industries as they expand overseas (see the introduction to this series, part 1, part 2, part 3, part 4, part 5, part 6, part 7 and part 8). CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's food and beverage industry.
The food and beverage industry is another Chinese industry in which the vast majority of large industry leaders—80% in this case— have already taken meaningful steps in the move to expand overseas.
Even after transport, Chinese-produced food and beverage products have a considerable price advantage in overseas markets. All respondent companies who had begun the move cited large demand for such cheaper but comparable quality products as the main reason for their push abroad. Some respondents are using high demand in overseas Chinese communities in particular to make inroads into foreign markets. Beverage company Wahaha, for example, has gotten onto shelves in the US by selling their children's protein and vitamin drinks in Asian specialty stores despite getting embroiled in a nasty and debilitating legal fight with its partner Danone.
In addition to tapping overseas demand, 75% of respondents moving overseas considered building brand reputation a top motivating factor in the move abroad. Passing the strict tests required for entry into overseas markets and being able to label themselves "international" lends a certain amount of status and cache they then hope to use for marketing and further brand building, both abroad and at home. Building trust within the domestic home market is critically important for these brands and Chinese consumers are as worried as American and European consumers about the safety of the products they ingest.
The majority of respondent companies without plans to move abroad in the near future cited the potential of the domestic Chinese market as the main factor keeping their attention at home. Many regional leaders, for example, see a higher return on investment from expansion into other profitable regions within China than from moving into another country as China's 800 million new consumers, formerly peasants, have more disposable incomes and start to drive sales in 4th and 5th tier cities. Smart multinational firms like P&G (NYSE:PG), Coke (NYSE:KO), and Cadbury (CBY) are already moving into these areas and targeting these new consumers.
All respondent companies interviewed are taking an export-based approach to going overseas, using distributors to help them identify retailers and establish sales networks in their target markets. Often these companies will choose to partner with overseas Chinese distributors to help bridge cultural gaps and other communication challenges. Distributors often also fill a more general, all-purpose advisor role, advising companies on how to best to move forward given local laws and market conditions.
In addition to exporting under their own brand, 50% of respondents going abroad are selling generic products to local retailers. While this does not directly help build brand reputation, it helps companies gain experience in an international business environment. Furthermore, working with a major retail partner like Wal-Mart (NYSE:WMT) provides an opportunity to learn from a market leader. In general, these sort of partnerships are a good opportunity to learn about foreign regulations, market conditions, and consumer preferences without having to cough up for marketing or worry about finding the right sales channels.
Currently the most popular destination for Chinese food and beverage exports is emerging markets. 100% of respondent companies moving abroad export to countries and regions such as Southeast Asia, Eastern Europe, Russia, and Africa. The majority also export to developed markets in Europe and North America, and all plan to increase their focus there going forward.
While these companies plan to continue to use export as their main method of overseas expansion for near future, they are exploring ways other ways of pushing their overseas development. One respondent, for example, is currently considering developing a factory abroad to help reduce transportation costs and the trouble of import/export rules and tariffs.
Maintaining a top quality product is the highest concern for companies going abroad. Especially in light of recent negative incidents involving China food exports, these companies want to ensure their clients and customers are consistently 100% satisfied with their product, and are exceeding the requirements of regulatory bodies like the FDA to ensure quality consistency.
For many respondents that have not yet started moving abroad, meeting international regulations and laws is a considerable challenge. Some companies might want to export products containing meat, for example, but are constrained by complex regulations in the target market on how meat can be imported, and from where. As one frozen dumpling company explained, "we'd really like to export our dumplings abroad, but our best-selling dumplings contain meat, and many of our target markets ban the import of meat in this form." Many respondent companies have invested in R&D and hired experts from abroad to help them overcome the challenges these rules and regulations present.
Learning the ropes and business ground rules in their target markets is another significant challenge facing these companies, and a main reason most respondents have chosen to move abroad via export, at least initially. Closely related is the problem of cultural differences, both in business and in adapting product taste to local markets. As mentioned previously, many respondents hire overseas Chinese as their distributors to help bridge gaps in business culture. Many companies are also investing in R&D to help better tailor their products to local consumer preferences.
CMR also encourages companies not to stop at OEM as their main way of tapping overseas markets. Though establishing the correct brand image abroad can be time consuming and costly, CMR research has found that Chinese brands are very competitive in certain overseas markets where they can capitalize on their price advantages. However, more than other industries, Chinese food producers must be careful to "get it right" the first time when building their brand image in overseas markets. Given widespread fear of imports from China due to the recent tainted milk scandal which has hurt the reputations of even leading producers Mengniu and Yili, these companies must be extra certain they get nothing but good press. Companies should not be overly reliant on distributors as they develop their entry strategies; it is worth the investment in a larger on-the-ground advisory team than distributor alone.
The next several sections of this report will be published on Seeking Alpha by product category. For more information about this report and accompanying charts and graphs, please contact CMR directly at cmrconsulting.com.cn/services/consumerp.html.
CMR Senior Analyst Ben Cavender, Analysts Natalie Zhu, Meredith Sun, and Charlotte MacAusland, and Summer Intern Christie Sze Contributed to this report.