While its double-digit growth story may no longer be making headlines, in terms of gross domestic product, China’s economy continues to expand. That expansion is creating new opportunities for foreign food and beverage companies — provided they have the right products and a willingness to take a less-travelled path to earning market share.
Although China’s GDP growth has slowed to 5.5 percent, its consumer economy is still on track to reach $6.5 trillion by 2020. Fueling this spending is the fusion of three trends, namely:
- The creation and expansion of an upper-middle class in China.
- The emergence of the first generation of Chinese raised as global consumers.
- The increased penetration of cross-border e-commerce, which enables Chinese consumers to seek out the goods they want when they want them at a pace we've never witnessed before.
Thanks to the combined force of these trends, many foreign brands are finding new traction and double-digit growth in this market. Their success, however, relies on creative approaches.
Going Smaller to Get Bigger Results
China’s first-tier cities — such as Shanghai, Beijing, and Guangzhou — have GDPs that exceed $300 billion. They are also crowded with people and a lot of consumer options in brick and mortar as well as e-commerce.
Lower-tier cities, however, have been largely overlooked by foreign brands. As affluence spreads through these cities, foreign brands now have an opportunity to emulate the kind of success that many have found in those first-tier markets. They can do so by focusing on the hundreds of lower-tier cities where they would still be among the first to enter the market. Being the new kid on the block is sometimes a good thing!
To illustrate, we can look at the case of Carlsberg. In 1999, the brand retreated from China after selling its Shanghai brewery. After reentering, Carlsberg now has more than 60 percent share of the western China beer market. It has succeeded in becoming a bigger fish in many smaller ponds by targeting the areas where regional beer consumption is growing by 12 percent annually — more than twice the national rate. Aiming for lower-tier markets paid off; with fewer competitors, it was easier for Carlsberg to compete in western China to win consumers.
Following the Affluence
A recent report projects that the spending power of consumers living in China’s lower-tier cities will reach $9.7 trillion by 2030. By comparison, China’s entire economy was $9.96 trillion in 2015.
If you are wondering whether regional affluence will really be sufficient to support such an increase, consider this: In 2000, the middle class accounted for roughly 4 percent of China’s urban population. By 2022, it will reach 76 percent. For perspective, that means China’s middle-class population is projected to be 1.7 times larger than the entire U.S. population.
These five verticals currently stand a good chance of thriving in China's more affluent middle class today:
- Imported (Branded) Seafood. Since 2009, Chinese sales of Scottish-supplied salmon have nearly doubled. Chilean exports have experienced similar growth. That growth is expected to continue. Foreign companies from countries known for strong labeling and food safety standards have the advantage. The Chinese import market sees this as a mark of quality and will prefer imported to local options.
- Preventative Health Products. "Antioxidant” and “gluten-free” are now global buzzwords. Allergen-free food and nutritional supplements — especially those that serve a medical purpose, such as the treatment of diabetes and digestive disorders — are doing well. China’s retail health market is projected to reach $67 billion by 2020. Chinese consumers are the world’s most health-conscious, and 73 percent of them will pay a premium for healthier products.
- Premium Brands. Superior tastes and status matter now more than ever before in China, and people are making the switch to lifestyle options that reflect their developing middle-class values. Wherever possible, consumers are looking to upgrade their food and beverage choices. Recognizing this, Nongfu Spring, a Chinese beverage brand that originally started in the bottled water space, recently undertook a considerable investment to reposition itself as the premium local beverage company. The company, which had previously experienced a quality issue with its low-end product, recently won awards for the packaging design of its teas and waters. Now, you can find the Nongfu brand branching into milk-based beverages such as matcha tea, coffee, and juice.
- Performance Beverages. In addition to health supplements, Chinese consumers are developing a taste for energy drinks. Most of the consumption, which totals about 3 liters per capita, is still concentrated in larger urban areas. With the global average consumption of 7 liters, and a vast population living outside of these areas, there is much room for expansion and for new players.
- Healthier Food and Specialty Restaurant Chains. With more than 2 million facilities, the fast food industry in China has continued to experience 13 percent revenue growth annually since 2008. Embracing the trend toward quick convenience, stressed and pressed Chinese consumers — particularly younger cohorts that are ordering in at an alarming pace — are looking for faster, healthier dining and food delivery choices.
Walk Shanghai’s downtown streets and you can see the prevalent emergence of “farm to table” and "artisanal" cafes, such as Seesaw Café, and salad bar concepts, such as Green & Safe and Sproutworks.
As affluence continues to spread geographically on the mainland, Chinese growth opportunities remain abundant for food and beverage companies that are willing and able to follow it. In turn, following the money, even into lower-tier cities, will become exponentially more lucrative for those with the drive and insight to expand into regions that are hungry for more choices.