| Make foodmate.com your Homepage | Wap | Archiver
Advanced Top
Search Promotion
Search Promotion
Post New Products
Post New Products
Business Center
Business Center
Current Position:Home » Documents » Food Industry Reports » China »

China Food & Beverage 2012

  • Published: 2012-12-04
  • File Format: PDF
  • Views: 1032   
  • Size: 2.59M
  • Language: English
  • Download Times: 1355
enter the download page
As Chinese consumers become wealthier, they are growing more selective. China’s F&B companies have spotted this trend – which we expect to catch on fast in the next decade – and are increasingly adopting strategies to leverage both distribution and branding. 

Debunking the China consumption myth

China’s consumption story is well known: the trend of rising income and urbanisation will continue to boost consumption prospects. Investing in the Food and Beverage (F&B) sector, which supplies a basic necessity, is generally thought to be a natural play on the consumption theme, especially in an economic downturn. However, we argue this industry has evolved in terms of complexity. Stock picks within the sector, therefore, will require fresh perspectives. We often come across two observations on the China F&B sector: 1) the sector is resilient in economic downturns and 2) the brand loyalty of Chinese consumers is low, which in our view, are proving to be different. We believe that:

The F&B sector remains sensitive to economic conditions, especially given the large group of lowincome consumers it caters to. Rural consumers widely spend on F&B products as gifts/tokens of appreciation, which is correlated with the economic performance.

Chinese consumers’ brand loyalty is higher than what was thought. Yum! Brands’ Kentucky Fried Chicken (KFC) is a classic example, given its effective penetration of the local market. Two top brands still dominate the instant noodles and carbonated drinks market.

Shift in focus towards branding and higher quality products

Consumers are going beyond the basic necessities to focus more on higher quality and branding. This trend is catching on fast in the wake of continual food safety issues in China. Over the past decade, F&B companies have progressed by expanding their distribution networks to reach more customers. For instance,Tingyi achieved sales at a CAGR of 24% between 2001 and 2011, while its number of direct retailers increased at a 14% CAGR. Although China’s GDP per capita grew from around USD1,038 in 2002 to USD5,570 in 2011, we estimate around c.60% of the population was still earning less than USD5,500.

We have seen a rise in spending power of the higher-income Chinese consumers and their willingness to pay a premium for better quality and branded products. We believe lower income earners will increasingly follow this preference over the next 10 years. We call this ‘income evolution’ in the report.

Distribution is still key, but branding differentiates
Current industry leaders are large players with established sizeable and effective distribution networks, allowing them to achieve both operating scale and the ability to respond to market changes faster. Within the diverse F&B industry, Tingyi and Want Want clearly have excelled in this regard, in our view. The efficiency of Tsingtao’s sizeable production network has been undermined by its limited penetration in the local beer market, in our view, as it lacks the volume to improve utilization.

We believe distribution networks will still play in important role for most F&B companies in the next 10 years, as the distribution market in many regions is fragmented and infrastructure in many rural areas is still underdeveloped. However, as the country’s infrastructural bottlenecks have eased, we believe that the benefit for F&B companies investing in distribution networks will slowly decline as bargaining power shifts from vendors to retailers and that China will become a more brand-driven market. In our view, Tingyi, Want Want, Tsingtao, and Uni-President China (UPC) have all successfully established clear brand images, while Mengniu Dairy’s reputation has suffered some setbacks due to the milk scandal. 

We believe that Chinese consumer preferences will only become more refined going forward. A brand is more than just a name on a product. We foresee increased branding sophistication over the next decade and argue that brand management would be the key factor for F&B companies, differentiating them along various parameters such as track record, variety and quality (in terms of taste, nutritious value and food safety). These can be achieved through advertising, M&A, JVs, upstream investment (proven to be a good strategy in preventing food contamination in many cases) and product innovation (a recent good example is UPC’s successful launch of pickled cabbage and beef flavoured noodles and milk tea products). 

Factoring in our aforementioned income distribution ratio in China, we believe branding and distribution will emerge as the two key factors, of equal significance, in determining F&B companies’ success in the coming years. On the one hand, a strong distribution network brings the advantage of higher market penetration, reaching a large group of low-income earners. On the other hand, companies with solid branding can capture a larger number of people in the high-income group in the premium branded products space. This will help strengthen their presence in this new and expanding market segment and thereby achieve higher margins.

Who is well positioned?
Taking into consideration the distribution size and positioning, we prefer Tingyi and Want Want. We like UPC and Tsingtao for their branding strategy, but further investment in their distribution networks to increase market share might dilute their profitability, in our view. Mengniu’s near-term efforts to rebuild the brand image will determine its ability to maintain its sector leader status.

[ Documents search ]  [ ]  [ Notify friends ]  [ Print ]  [ Close ]

0 in all [view all]  Related Comments
more..Related Documents
Featured Documents
Top download this topics
Popular download
Powered by Global FoodMate
Message Center(0)