The key to winning over Chinese consumers is mastering distribution strategies, according to a new report by Rabobank, which also suggests that the country should be on the radar of European and American processed food companies that are facing flat growth at home.
The report uses the confectionery market as a microcosm of the wider processed food industry in China, illustrating why it is not too late to enter the market. Annual confectionery growth in some areas of the country is at 10%, and despite market growth of 150% over the last decade, Rabobank believes high growth potential remains.
Currently, the Chinese consume less than 1.2kg of confectionery per person every year, against a global average of 2.1kg, and buy mainly during the festive seasons, rather than all year round, as in other markets. The key for foreign brands entering this market can be distilled down to tactics applied for specific sizes of cities within the country.
China’s 22 largest cities offer a market of 54m households, with a confectionery sector of RMB37bn (US$5.9bn). Sophisticated urban consumers want premium confectionery products from North America and Europe, which benefit from the perception that they are safer and higher quality. In the big cities, foreign brands can also take advantage of modern retail networks.
Smaller cities hold massive potential
In the US$4bn market of smaller cities, where networks are less established, local brands have a stronger position and the key to success is to choose the right distribution network, says the report.
With a relatively low penetration of modern retailers, traditional stores are still where the majority of customers shop. It requires a large network of distributors and middlemen, or a large in-house distribution capacity, to get products into shops. Companies such as Nestlé have successfully partnered with local brands that have established distribution networks, but an equity stake is the key to getting the most out of such deals.
Rabobank analyst Ivan Choi says: “In China, where consumers have limited brand loyalty and distribution channels are fragmented, the main competitive differentiator is making products available to a wider selection of consumers.
“While distribution is the key to foreign companies’ success in the confectionery sub-segment, its importance is also evident in the broader processed foods sector. This is partly due to the Chinese retail market being so large and fragmented, with the top five retailers holding only a small percentage of the market.”
One size doesn't fit all
Brands must tailor their strategy to the different sub-markets within the country. Provinces in China vary greatly in their taste preferences, spoken languages and cultural practices, as well as having different distribution chains. “Foreign confectionery brands should view different provinces as different markets and adjust products accordingly when contemplating a ‘China’ market entry strategy,” Choi advises.
In a market where consumers place brand name as a secondary decision factor, European and North American brands are in better position to trump local Chinese brands with their perceived premium brand position and safe quality image, but all this will hinge on these companies identifying their optimal distribution strategy to succeed in China, the report concludes.