China s F&B and Wine Industry Overview

China s F&B and Wine Industry Overview November 10, 2015

INTRODUCTION Objectives This research report was conducted to assist Italian Trade Commission (ICE) and Italian enterprises in establishing better understanding of the China s Food & Beverage (F&B) industry, with particular focus on China s wine industry. The report provides an overview of the industry, evaluating the demand, supply, regulatory environment and potential opportunities and barriers for Italian companies. Conducting market research in China and our methodology Generally speaking, conducting market research in China is different and significantly more challenging than it is in developed countries because of 1) the size and diversity of the country; 2) lack of fully reliable centralized/official information databases; 3) constant and extremely rapid change the whole Chinese economic system is far from being in equilibrium Therefore solid market research work must be based on multiple resources and activities Our methodology leverages a combination of resources/activities such as: All relevant background information (client data, existing available information, etc.) Secondary research (in Chinese and English), such as several different resources, from proprietary databases to access to associations or magazines, etc. Primary research, e.g. access to external business network, interviews with experts and key insiders, possible visits to trade show or selected companies, etc. Collective China knowledge/sector expertise/market research expertise with hundreds of research projects executed in and outside China Format of this report The report is organized in such a way as to provide various level of details in different places overviews, and paragraphs in the body of the report, summaries, and appendices; bullet points are used throughout the entire report to make reading easier 1

Information Sources Key sources of information for this report include: All background information Various secondary sources (including the respective trade associations for each of the sectors that the report is analyzing) Interviews with industry insiders and experts Ongoing Sovereign-China analysis of all key facts and data collected In the report, sources are mentioned for charts, tables and key data; secondary sources include dozens of Chinese sources (news reports, magazines, publications, government statistics, etc.) as well as all companies websites, press releases from various magazines, etc We mention Sovereign-China Analysis as a key reference; this refers to our elaboration and analysis of qualitative and quantitative data collected throughout the project Ongoing analysis and re-elaboration of all data collected is key to cross-check data and information and identify key trends and industry dynamics 2

EXECUTIVE SUMMARY China F&B Market Overview China continues to be the world s largest consumer market for Food and Beverage (F&B) products, after surpassing the United States in 2011. Consumer expenditure on food increased 35.4% from 2011 to 2014 with projected 5.8% increase in 2015 to a projected total of USD 926,681.2 million. China s import quantity of F&B products has increased greatly. In 2005 imported food trade was valued at over USD 10 billion and by 2014 this has more than quadrupled to USD 48 billion. In 2014, the EU was the largest importer, with F&B imports to China worth USD 9.4 billion. In 2014, the top 5 EU countries importing to China were France, The Netherlands, Germany, Ireland, and Italy, with total amount of EUR 1,237 million, 756 million, 441 million, 316 million and 298 million. The growth of the food and beverage market in general and the market for imported and domestic GI products has been driven by a number of factors, most significant of which are the two trends of rising disposable income and urbanization. The key growth drivers for the F&B sector include the following categories: - Diversifying diets - Rising Incomes - Food safety concerns and demand for imported foods - Healthier lifestyles and nutritional information - More competitive imports Wine Industry In 2014, China s production, importation and consumption of wine totalled 1.16 billion litres, 383 million litres and 1.58 billion litres, respectively. It is estimated that the demand for wine in China will increase by 10% annually in the coming years. Market penetration will spread from coastal areas to inland areas. The grape wine market value is expected to continue growing at a 17% CAGR from 2014-2018; growth and demand are still concentrated in Tier 1 cities and more developed Tier 2 cities due to the relative higher level of sophistication and maturity in wine culture in these areas. The Wine market has been affected by China s Central government s recent clampdown on unnecessary entertainment & gifting expenses using public accounts, reducing demand for higher priced wines as gifts significantly upon the change of policy stance. However, the implementation of stricter drunk-driving regulations and motivation by Chinese consumers (mainly younger Chinese) to drink less, but drink better results in a preference shift towards high-end alcohol with lower alcoholic content, such as wines. The market is dominated by top 3 domestic producers Changyu, Greatwall, and Dynasty with ~50% market share in the Chinese grape wine market; but each of these key players maintain their own regional territory without direct competition with each other. 3

Key foreign players include Jacob s Creek and Penfolds (Australia), Carlo Rossi (U.S.), Santa Rita (Chile), Zonin (Italy), Obikwa (South Africa), etc. French wines dominate the imported wine market, with over 50% market share, followed by Australian, Italian and Chilean wines. Italy ranked #5 in total wine imports into China, with import value at US$ 104 million, posing an 1% drop over 2013-2014; Italy is especially strong in the Champagne & sparkling wine and Bottled wine (i.e. in containers less than or equal to 2L) categories. Cheese & Dairy Industry Increases in production for dairy produce have been low compared to the growth of domestic demand. Production increased 2.3% per year in 2011 and 2012, declined by 5.7% in 2013 only to rise by 5.5% in 2014. China s imports of dairy products have grown in value year on year; in 2010 the value of imports stood at USD 1.93 billion, by 2014 this had risen to USD 6.2 billion. Dairy products are becoming increasingly a part of the day-to-day diet as disposable income and standards of living increase over the years; dairy products have been replacing some of Chinese consumers traditional forms of protein and calcium. The F&B market (especially dairy) was built upon an insufficiently regulated environment, resulting in various food scandals, with the 2008 melamine infant formula incident receiving international attention, negatively impacting consumer confidence in domestically manufactured F&B products. This resulted in stronger consumer and government scrutiny over the domestic F&B industry and created a preference for imported products due to a stronger reputation and higher quality. Cheese is seen as one of the most promising dairy product categories due to its strong growth from 2010-2015 despite low penetration into Chinese households. The cheese industry is expected to continue its double-digit growth, expanding at 18% CAGR from 2014-2018; this is mainly attributed to the growing popularity of Western cuisines such as pizza and pasta among Chinese consumers. Key players in the cheese market are Bongrain (Tianjin), Fonterra, Bright Dairy, Bel China and Lactalis Groupe, together accounting for 42% market share. Italy is not especially strong in the overall dairy imports (ranked #17) but it is ranked within the top 5 positions in the cheese product category of imports in 2014, among key dairy product players like New Zealand, Australia, U.S. and France. 4

Pasta Industry The pasta market in China is in its nascent stage, evident by the lack of product and format diversity. Most pasta consumed in China is in the dried pasta format, with a lack of canned/preserved pasta or chilled/fresh pasta being sold in other pasta consumption regions. China pasta market sales volume and value grew at 11% CAGR from 2010-2014 to 2300 tons and US$ 11.3 million respectively. Growth in demand is mainly attributed to growing acceptance by younger Chinese and growing popularity of Western dine-out (foodservice) options with well-received cuisines like pizza and pasta. Pasta s penetration into Chinese households is expected to grow as younger Chinese consumers become key income earners and the new grocery consumer base; their day-to-day diets are expected to gradually change and these younger Chinese are expected to gradually adopt a more Western dining tradition even at home, increasing demand for pasta. China pasta market is highly concentrated with the top 6 brands accounting ~68% of the total market sales value; private labels developed by larger retailers dominated the market with more than 21% market share in 2014. Key players in the cheese market are Pasta Zara SpA, Barilla Alimentare SpA and De Cecco SpA with foreign brands dominating more than 90% market share. Italy maintains the #1 position in pasta imports into China in 2014, leading ahead of Greece and South Korea; it is especially strong in Uncooked pasta containing eggs and Stuff pasta, taking #1 position in both import categories. Olive Oil Industry Olive oil makes up approximately 1% of the edible oil consumed in China. The value of total imports of olive oil in 2014 stood at USD 153 million. Growth is mainly attributed to growing disposable income, urbanization and growing exposure and corresponding openness to Western culture. Sales volume and value are expected to continue growing at 16-17% CAGR between 2014 and 2018 to reach 21,400 tons and US$ 411 million by 2018. There are more than 50 olive oil brands in China, most of which are imported brands like Agric, Oliovila, Betis from well-known olive oil exporting countries like Greece, Italy and Spain. Competition in this industry is expected to intensify with more foreign players like those from Australia and U.S. shifting their resources to the China market, intent on developing China as one of their key growth market. Italy is strong in olive oil imports into China, taking #2 position among Spain and Greece; Italy is strong om all olive oil categories Virgin olive oil, Non-virgin olive oil and Other oils derived from olives, taking #2 position in each of these categories. 5

Regulatory Environment China s regulatory environment is complex and constantly changing; with increasing number of food safety incidents, food safety becomes a key concern for the Chinese regulatory authorities. Key regulations that are applicable to all F&B products include the Food Hygiene Law, General Standard for the Labeling of Foods and individual standards (GuoBiaos) that correspond to the product categories manufactured or imported. Food Hygiene Law generally requires imported F&B products to undergo stringent inspection and any potential violation will result in the immediate revoke of foreign exporters import-export license into the Chinese market. General Standard for Labeling of Foods stipulates that all foreign enterprises importing into China will need to submit their Chinese food labels for approval; the process is complicated and potentially time-consuming. However, non-compliance with labeling requirements is one of the top reasons foreign F&B imports are detained, returned, or destroyed by Chinese authorities. Importers and foreign players also need to be aware of the national standards (i.e. GuoBiaos or GBs) that stipulate a series of requirements on all F&B products distributed and consumed in China; ~15% of these GB standards are compulsory, acting as pre-condition for the introduction of imported products into the Chinese market. Distribution Channel Analysis China s F&B market s level of development can differ between regions or cities, in the form of logistics infrastructures, distribution channel structures, etc. Predominant distribution strategy adopted by F&B enterprises in China relies on the use of distributors and importers (especially for the case of foreign F&B enterprises importing into China). There are some well-established F&B distributors/importers that have extensive sales networks and strong background working with foreign enterprises as well as large players in the grocery retail and HRI sector; working with these distributors/importers as partners will be beneficial to foreign enterprises importing F&B products into China. There are multiple distribution channels available for foreign F&B enterprises to access the Chinese consumer, e.g. hypermarkets, supermarkets, specialty/boutique supermarkets, traditional markets, ecommerce and foodservice outlets, etc. Imported F&B products generally pose better results in hypermarkets and in specialty supermarkets as these distribution channels have more experience working with import products and serve client bases that are generally more open towards imported F&B products as compared to supermarkets. 6