By Xinnan Li, Associate Analyst, Consumer Foods, Rabobank
One may argue that recent growth in China will not last for long. But that’s certainly not the story for food consumption. Despite GDP growing at its slowest pace since 1990, China’s consumption index remains strong. This is mainly due to a growing urban population and consumers’ rising disposable income. Food consumption trends are still led by the coastal cities, while densely populated inland regions are now playing an increasingly important role, facilitated by the development of e-commerce. Across the country, Chinese consumers are rapidly updating to safer, healthier, and ‘cooler’ options. Yet this doesn’t serve all parties equally. Food companies will need to update their portfolios and evolve their strategy in order to stay cool and attractive.
China’s urbanisation and increasing middle-class population will contribute to the growing consumer demand for food. This translates into over half a trillion US dollars’ worth of growth in food consumption through 2025, or 4.6 percent CAGR over the next ten years (see Figure 1). One hundred million more people will relocate to cities—as set out in Chairman Xi’s thirteenth Five-Year plan—reaching a 60 percent urbanisation rate. According to our estimates, the urban affluent and middle-class population will expand by 130m through 2020, leading food consumption trends and growth. In addition, Chinese urban consumers are staying confident despite the smog and macroeconomic environment. Private consumption will account for an increasingly greater percentage of the nominal GDP, growing 6 percent through 2020, according to The Economist. Consumer confidence remains high and stable throughout 2016, according to Nielsen’s Global Consumer Confidence Trend Tracker—China is in the top 8 of all major economies measured. Chinese consumers are trading up, spending more on dining out, constantly browsing new products on the shelf or online, and willing to pay more for health, convenience, and specialty products (see Figure 2).
Safer and healthier are trending
Economic development will only drive food consumption to a certain degree. After that, quality improvements outweigh quantity growth. Over the past 15 years, rural consumers have drastically decreased grain intake (by 46 percent), and increased animal protein and dairy consumption by 77 percent, according to the National Bureau of Statistics of China. Food composition for urban consumers remained relatively unchanged, with a slight increase in seafood and dairy consumption. It is now a matter of where the ingredients are sourced and how they are processed, rather than the type of food. Food products labelled as ‘healthy’ registered rapid growth in 2015, with sales from the first three quarters surpassing that of the entire year 2014. ‘Additive-free’ and ‘organic’ were the most searched words in food, but consumers are now also looking for ‘non-GMO’ and ‘family-farm raised’ labels on packaging. Alibaba reports that products with health attributes are trending on product searches—15 percent to 25 percent YOY in 2015—while ramen noodles, soda, and conventional cookies are leading the decline according to Euromonitor. Chinese consumers are upgrading to imported products over food safety concerns, to ‘additive-free’ despite a lack of definition, and to novel packaging as an expression of individualism (see Figure 3).
Distribution and innovation remain challenging
Half a trillion dollars in food consumption growth would not benefit all players equally. Despite a positive growth prospect, Big Food companies in China are in trouble. The Big Food companies are not threatened by rallies from the start-up world—as distribution and innovation remain major challenges for these start-ups—but rather challenged by the more innovation-light competition and imported counterparts. After all, everybody wants a piece of the pie. China’s top 10 packaged food manufacturers (excluding dairy companies) have seen their market share shrink since 2013, losing USD 2.8bn market share in 2014 and another USD 2.2bn in 2015 (see Figure 4).
This global phenomenon is hardly news, yet it still caught China’s Big Food companies off guard. Leading food manufacturers’ inability to innovate and adapt to changing consumer preferences, and the rise of e-commerce will continue to be hurdles standing in their path.
Consumers are increasingly going mobile
In the past five years, China has experienced an explosion in digital channels, as companies attempt to provide more choices while addressing the ‘last-mile’ issue. The breadth of different formats ranges from third-party grocery and meal delivery platforms, and interactive e-stores embedded in WeChat (the messaging app) to vending machines that sell lunch boxes, fresh produce, meat, or even freshly-squeezed orange juice. Despite fierce competition, e-commerce in China is able to generate the highest growth while being one of the largest channels. Internet retailing grew by more than 85 percent CAGR in the past five years, and mobile retailing is expected to grow 20 percent through 2020. With over 731m smartphone users and 470m mobile payment users, China’s consumers executed over USD 750bn worth of transactions in 2016 (according to Xinhua), and their shopping habits are rapidly changing, along with the products they buy (see Figure 5). Yet, no one has seemed to figure out the golden formula, with profitability still being a challenge and many already exiting the market.
Innovation is key for tomorrow
As food company leaders strategise for growth, innovation or acquisition go hand-in-hand. In the era of a boom in e-commerce, innovations are largely taking place in the shape of new business models and channels, rather than by way of updating products. A few start-ups have grown into profitable operations to disrupt the industry, but they are receiving very high valuations—similar to tech companies—and are thus an expensive item on the shopping list. Leading food companies that are rich in cash have also begun to explore new business models, leaving product innovation to small and medium-sized companies. No matter what distribution channel is used, consumers are always expecting to engage through fun and novel products on the shelf.
Luckily, for domestic companies that are slow to innovate and unable to rely on imported products, we propose two innovation-light ways to capitalise on growth: reformulation and rebranding. Reformulation—done by substituting a few ingredients—is a cost-efficient way to do this. As Chinese consumers grow in affluence and become increasingly well-travelled, popular concepts overseas can be incorporated into existing products. By introducing new concepts with familiar languages and traditional health benefits, superfoods such as chia seeds and natural sweeteners can enjoy good consumer acceptance in China. Food companies can also explore alternative ingredients for conventional products, such as rice chips or almond flour cookies, to engage curious consumers.
Remarketing is also essential to further growth in China’s consumer foods space. Influenced by adjacent South Korean and Japanese cultures, China’s urban consumers are very much looking for the cool factors in food as they do in fashion. Being in a society with collectivism at its core, individualistic expression is surging in importance in modern China’s consumerism. During a shopping experience, consumers are increasingly looking for products they can personally identify with through brand philosophy or package design. By refreshing a brand image, and updating packaging with modern design and engaging stories, food companies can create a unique brand experience and stand out from the crowd.
With half a trillion US dollars of growth in food expenditure forecast over the next decade, domestic food consumption will continue to be strong—yet not every brand will flourish on the shelf. Food companies need to act early and innovate constantly in order to remain successful in the fast-changing consumer foods space.
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