FandB Sustainability China Oct 2009

8/8/2019 FandB Sustainability China Oct 2009

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Sustainability market intelligence: October 2009

SUSTAINABILITY MARKET INTELLIGENCE

October 2009 Quarterly Report

The growing importance of sustainability as a market driver in some of New Zealand’s

food and beverage export markets has led the Ministry of Foreign Affairs and Tradeand New Zealand Trade and Enterprise to prepare a quarterly report for businesspeople highlighting trends and issues in key markets.

CHINA

SUMMARY:

• Organic and ‘green’ food seen as safer and healthier, but overpriced: Organicand ‘green’ foods attract significant price premiums in China, but a recentBeijing survey indicates that many see them as overpriced. Production of‘green’ food (generally equivalent to developed country standards for non-organic food) grew 8.43 percent in 2008, while sales for green food andorganics combined represented just under 3 percent of China’s food market.

• Foreign invested supermarket chains lead the way on food safety andtraceability: Supermarkets such as Carrefour, Walmart and Metro have beenemphasising the safety and traceability of their products, with Metroestablishing a deeply integrated standardised traceability system incorporatinginternational agricultural standards and providing traceability tracking codes onindividual products in stores. In line with their global corporate policies, suchstores are also leading China for other sustainability initiatives, such as store

energy/water efficiency, but domestic retail chains – the majority of the market – lag behind.

• 2008 surge in agro-food and F&B investment: Statistics showing huge growth ininvestment in agro-food processing, food production and beverage sectors(around 20-40 percent) in 2008 represent confidence in growing incomes anddemand for product variety. Products (e.g. beverages) perceived as safe andhealthy may be well-placed to capitalise on this demand.

• Food Safety Law: A new national Food Safety Law and related regulationscame into effect in June/July, clarifying the roles of different Governmentagencies, paving the way for new compulsory food safety standards, and

introducing new requirements for food safety management and records-keepingfor food companies. Whereas there may have been grey areas previously, theChinese authorities and public are taking a keen interest in ensuring that thesenew rules are met.

CONSUMER TRENDS

Organic and ‘green’ food seen as safer and healthier, but overpriced

Organic and ‘green’ certifications for food are probably the concepts most widelyknown to Chinese consumers related to the environmental credentials of food.However, reduced environmental impact is not the primary attraction of these foods,




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which are also perceived to be safer and healthier than non-certified foods. China’sorganic and ‘green’ food classification systems were covered in more detail in ourOctober 2008 market intelligence, but green foods basically represent an intermediatelevel between ordinary products and organics, with many of the requirements for greenfood being what consumers in developed countries would take for granted.

Green foods retail at 10-100 percent more than the price of normal goods, with thepremiums for organic produce even higher. Pricing also depends on factors such aswhether a product is domestically produced or imported (with the latter generallycommanding higher prices), and consumers’ confidence in the claim made (with falseclaims and counterfeit goods a pervasive concern).

In a recent small survey of supermarket shoppers in Beijing, more than 50 percentthought green food was overpriced. Fifty-two percent also thought that an acceptableprice would be no more than 10 percent higher than non-green food, while almost 28percent said they were willing to accept a 10-40 percent price premium. Given that,according to 2007 statistics, Chinese urban households spent around 35 percent oftheir income on food (more than twice the figure for New Zealand households) thisprice sensitivity is not surprising. The same survey also found a positive correlationbetween higher incomes and education levels, and consumption of green foods andconcern for the environment. Women in the 30-40 age group were also the most likelyto be concerned about food safety and nutrition.

Green and organic foods represent a small but growing portion of the Chinese foodmarket. According to the China Green Food Development Centre, in 2008, 90 milliontonnes of green food was produced, a year on year increase of 8.43 percent. Sales ofgreen food and organics were RMB 227 billion/NZ$56.5 million, just under 3 percent ofthe food market. Responding pragmatically to these market conditions and price

sensitivity, in China even ‘organic’ supermarket chains stock a mixture of organic,green, and ordinary goods, with normal goods supplied at prices the market willtolerate, and premium (organic/green) products targeting expatriates and wealthyChinese.

PRIVATE SECTOR ACTIVITY

Foreign invested supermarket chains lead the way on food safety and traceability

A number of food safety scares in recent years have reinforced scepticism and fearsamong consumers. Even ahead of government regulation (see below), many(particularly foreign invested) supermarkets such as Carrefour, Walmart and Metro

have instituted their own quality control/traceability systems, as well as having theirown house brands and organic/green foods sections. Walmart’s Chinese website has aprominent “food safety” section where one can download an eight page brochure on itsquality assurance system, while Carrefour emphasises its house brands and “QualityLine”.

Metro possibly has the deepest integration of traceability in China. This majorwholesale food company supplies the hospitality trade and increasingly is open to retailcustomers. In December 2007 Metro established a wholly foreign owned enterprisecalled Star Farm Consulting. Star Farm, based in Hefei, Anhui province hasestablished a standardised traceability system. The process covers farmers’production, processing, packaging, logistics, and marketing operations. The system




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incorporates international agricultural standards such as HACCP (Hazard Analysis andCritical Control Points) and GlobalGAP. Traceability tracking codes can currently befound in stores for chilled chicken, duck, beef, fresh vegetables and herbs.

By turnover, Carrefour, Walmart and Metro ranked second, sixth and 16th respectively

in China in 2008, and combined represented about 12 percent of the market (less than1 percent by number of stores). The majority of Chinese supermarkets have notadopted such initiatives, and the majority of Chinese shoppers do not shop at asupermarket (according to the Ministry of Agriculture, in 2008 around a third ofagricultural produce in large cities such as Beijing and Shanghai was sold viasupermarkets). The overall impact of these initiatives on the Chinese retail food marketis yet to be seen.

Carrefour, Walmart, Metro and Tesco have also made investments in improving theenergy efficiency and/or water efficiency of their stores in China, in line with globaltrends. A report by the China Chain Store and Franchise Association indicates thatdomestic retail chains are lagging behind their foreign counterparts in this respect.

2008 surge in agro-food and F&B investment

Chinese statistics recorded a surge in 2008 in investment in the agro-food processing,food production and beverage sectors. In agro-food processing, investment in January-July 2009 grew 38.6 percent year-on-year (to RMB 140.3 billion/NZ$29 billion), in foodproduction also by 38.6 percent year-on-year (to RMB$81.7 billion/NZ$16.9 billion) andin the beverage sector by 20.7 percent (to RMB$53 billion/NZ$11 billion). Thisinvestment represents confidence in growing incomes and with it a demand for greatervariety of products.

Products that emphasise safety and health are among those addressing this demand.Both Coca Cola and Pepsi have tea-based products, marketed as having healthbenefits. 100 percent fruit juices are another potential growth area, as highlighted byCoca Cola’s ultimately unsuccessful bid for Huiyuan, a national brand juice producer,earlier this year (Coca Cola has been more successful in other investments).

Corporate social responsibility highlighted, but with relatively narrow focus

Corporate social responsibility is a sustainability issue which does feature regularly inthe Chinese press. For example, the state owned English daily newspaper China Daily allocates a page every week to corporate social responsibility, but the news is still inthe vein of firms (often foreign firms) donating money to charity. There does not appear

to be a holistic view of what corporate social responsibility involves.

GOVERNMENT ACTIVITY

Food Safety Law

In response to consumer concern over numerous food safety scares in China, a newFood Safety Law was passed and entered into force 1 June 2009. The aim is to ensurethe safety of food from “farm to fork”. Key outcomes of the Central Government lawinclude:




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• Clarification of the different roles and responsibilities of the Ministries of Health,Agriculture, Quality Supervision, Industry and Commerce.

• New compulsory food safety standards to be established covering everythingfrom food additives to labelling.

• Use of risk analysis in monitoring food companies and distribution networks.

• All non-approved additives banned from food production. Ministry of Health tobe responsible for assessing and approving food additives.

• Approved additives only permitted for use in the manner originally approved.Penalties include closure of plants or revocation of licences.

Regulations passed under the law and effective 20 July, also require:

• Companies to establish their own food safety management systems, covering

raw materials to production and distribution. Firms to investigate promptlypossible breaches of regulations and retain records of their processes for atleast two years.

• Wholesalers to retain sales records for at least two years. Caterers to developsystems to meet regulatory requirements around sourcing of raw ingredientsused for production.

• County and City governments to coordinate local departments of health,agriculture, quality control, industry and commerce, and food and drugadministration to supervise food processors.

Companies exporting to China should seek up to date professional advice on how thelaw and regulations apply to specific products.

Local governments are also able to pass their own regulations. Guangdong provincehas mandated that from 1 October, all agricultural food products must be labelled withan “ID”. This ID will include the name of the product, the date of production, origin ofthe goods and the contact details of the business.

DISCLAIMER:

While the Ministry of Foreign Affairs and Trade and New Zealand Trade and Enterprise have verified the information inthis document, we make no representation as to the completeness, correctness, currency, accuracy or fitness for anypurpose of the information. The Ministry of Foreign Affairs and Trade and New Zealand Trade and Enterprise will not beresponsible for any damage or loss suffered by any person arising from the information contained in this document,whether that damage or loss arises from negligence or otherwise.

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FandB Sustainability China Oct 2009