After three years of the Covid-19 pandemic, Chinese consumers are more aware of the importance of health and food safety than ever, giving rise to new trends that are driving growth in China’s food and beverage (F&B) industry. This represents new investment opportunities in the F&B sector for UK companies, as Kristina Koehler-Coluccia from Woodburn Accountants & Advisors explains
Projections suggest that revenue in the Chinese food market will amount to US$1,386 billion in 2023. The market is expected to grow annually by 9.34% (CAGR 2023-2027), and, most notably, approximately 34.6% of total revenue will be generated through online sales by the end of the year.
Consumers are choosing healthier, more premium brands
The trend of consumption “upgrading” in China is not a new one, with consumers in higher-tier cities already used to buying premium and luxury products. However, today, more Chinese people in lower-tier cities are choosing more branded products, and while the pandemic dampened spending to some extent, the trend is still present and increasing.
The F&B industry is experiencing a similar pattern. Affluent and informed Chinese consumers have begun to prioritise better health and a better quality of life. As a result, products aligned with healthier lifestyles have seen increased demand.
This is evident across the beverage industry. Packaged drinking water is the biggest beverage segment in China’s soft beverage market. While purified drinking water has a majority share of this segment, natural water and mineral water have increased rapidly in recent years because of growing health consciousness. Likewise, reduced or no-sugar teas, cleansing juices and nutritional drinks have all experienced higher demand.
A recent survey revealed that 86% of consumers from tier 1 and 2 cities considered food safety before buying produce. Fresh food, including vegetables, eggs, meat and fruits, is a high-demand category as it is considered natural and chemical-free. In line with this, healthy packaged food such as salads is another area that is seeing growth.
Besides health and safety, Chinese consumers are showing a preference for premium brands. Relating to alcoholic beverages, consumers are now placing more value on experience and enjoyment and hence are prepared to pay more for products that fulfil this need.
Companies that offer a variety of premium products that focus on the idea of being “authentic, natural, healthy and high quality” will enjoy a significant advantage in the Chinese F&B industry.
Food shopping moves online
Like consumption upgrading, online shopping is not a new development. Mandatory Covid lockdowns accelerated the pace of adoption among consumers, and e-commerce is now a vital part of consumer shopping behaviour in China, with 34.6% of total revenue generated through online sales.
The e-grocery (fresh produce and fast-moving consumer goods) rate, however, has lagged at 10% penetration, and this is likely due to the short shelf-life of fresh food, which puts demand on logistics, as well as offline channels such as convenience stores that cater to on-demand items. Improved infrastructure and distribution channels, as well as brands shifting online, are expected to accelerate e-grocery penetration rates to 33% by 2025.
Digitally savvy younger consumers enjoy the convenience of buying groceries online. And it is not just consumers in tier 1 and 2 cities that are doing so; shoppers in tier 3-5 cities are also embracing this trend and are expected to contribute to more than half of the increment in the e-grocery market size between 2019-2025.
Another area hit hard by Covid lockdowns was the food service sector. However, China has the fastest-growing food service market in Asia, estimated to reach US$ 914.09 billion by 2027. China’s per capita income has been growing year on year, so eating out is becoming the norm. The market demand for food services is increasing since its citizens are looking for a more convenient life, which implies that the future will also have a broader foodservice market.
During the health and economic crisis created by Covid, the purchase of local products also became significant for Chinese consumers. Despite the financial difficulties many families face, the quality of food products remained top of mind. During lockdowns, home delivery had seen tremendous growth; however, as dine-out reopened, the situation returned to balance.
Innovative products in demand
With competition in the F&B industry in China increasing rapidly, companies are looking to innovation to attract consumers. New products, new packaging, new channels and new ways of marketing are also part of the latest market strategies.
In the beverage segment, companies are continuously creating new products to cater to younger consumers. Likewise, China’s local condiment producers have launched customised, functional products to meet the demands of different consumers. For example, in the soy sauce category, there are customised sauces for clay pot dishes, Hainanese chicken rice and steamed fish. The retail prices of these sauces may be more than double those of ordinary products.
Technology is also playing a huge role in helping innovation; for example, the popularity of live streaming has helped many new product launches attract the attention of younger consumers. Online live broadcasting and direct-to-customer (DTC) online sales channels have become popular and efficient ways to reach consumers for brand building, marketing and sales, especially for emerging brands.
What F&B categories are seeing the most growth?
In terms of F&B categories, analysts believe that premium alcoholic drinks, yoghurt and fresh dairy, innovative compound condiments, packaged drinks and health supplements will experience above-average growth rates.
Experts admit that the current Covid situation in China makes consumer trends unpredictable at the moment, despite China’s official data showing low infection figures and few deaths. Observers believe the lifting of the strict controls on movement could, in fact, boost the economy, regardless of the resulting increase in infections.
Chim Lee, a China/Asia analyst for the UK-based Economist Intelligence Unit (EIU), predicts that the end of China’s Zero-Covid policy will have a mixed but ultimately net-positive impact on packaged food sales. Lee notes that, relative to other retail categories, food sales were a bright spot in 2022, as the packaged food industry benefited from people stockpiling food in anticipation of lockdowns and other restrictions on mobility.
Research group GlobalData noted that the overall value sales of packaged food in China crossed the US$1 trillion milestone in 2022, with an increase projected in 2023. GlobalData says meat, dairy, soy, bakery and cereals are set to be the largest categories in 2023, contributing well over half of the overall packaged food sales in China by value.
Citing a recent survey conducted among several securities brokerages, analysts from Stockstar found that a total of 30 food stocks traded on Chinese bourses achieved growth in net profits in 2022. It singled out Guangxi-based Yanjin Shop Food, which mainly manufactures and sells snack foods containing nuts, tropical fruits and marine products, for its year-on-year profit growth (up 102.3%).
The service also highlighted three other companies: Sichuan-based Teway Food Group, which manufactures hot pot ingredients (for the home-based cooking of tabletop hot pot recipes), seasonings and condiments; Shandong-based Delisi Food, which processes and sells meat products; and Shanghai-based dairy-maker Milkground (each exceeding 70% year-on-year profit growth).
Even as China pursued its Zero-Covid policy and implemented sporadic lockdowns, the packaged food industry still attracted investment. Multinational cheese maker Bel snapped up 70% of Chinese cheesemaker Shandong Junjun Cheese Co. Bubs Australia entered into a venture for infant-formula production in China, while Thai Union Group set out plans to invest in China’s pet food market. Major south-east Asian dairy group Vinamilk invested in its domestic production in part to help support exports to China.
Research by GlobalData suggests there was a dip in deal-making in China last year, but some observers believe that the country’s packaged food sector may be headed into a period of consolidation, as the shift away from Zero-Covid could cause issues along the supply chain and upend consumer demand patterns. In general, the overall situation may benefit the larger players who have better funding to weather a disjointed consumer market over the next one to two quarters and with a better distribution ability.
In the meantime, the green food sector in China also experienced significant growth. Green food is defined as food that is sourced from high-quality environments and produced using specific techniques with strict production quality process control, rendering these products safe for human consumption.
For example, innovations in technology have sparked a plant-based food renaissance. In China, the plant-based meat industry is projected to be a $13 billion industry in 2023. And with long-term plans to reduce meat consumption by 50% this year, China is becoming a key target for businesses looking to expand or enter the plant-based food industry.
Studies have shown that transitioning to a plant-based diet can reduce carbon footprint by up to 73%. Moreover, China’s growing middle class have the expendable income to make more health-conscious purchasing decisions.
What policies and regulations should brands be aware of?
In the past decade, Chinese consumers have been increasingly focusing on the safety and quality of food products, especially after a few highly publicised cases of adulterated products. Since 1 March 2023, the only regulation in China that specifically addresses the general requirements for manufacturing and selling food-related products (including food-contact materials and articles) has come into effect.
China’s State Administration for Market Regulation (SAMR) released the Interim Measures for the Supervision and Administration of the Quality and Safety of Food-Related Products (“Interim Measures”) developed from a draft version that was published on 31 July 2020 for comment. Compared with the overarching Food Safety Law (FSL), the Interim Measures refine some requirements targeted at food-related products but are not significantly different from the existing laws and regulations or current practice.
Although the Chinese government has developed more stringent regulatory measures, serious incidents have been recorded in the past, including unsanitary conditions in factories and contamination of food products by pathogenic microorganisms, pesticides and heavy metals. The most famous case was contaminated baby formula, which resulted in the death of six infants and over 50,000 hospitalisations.
For this reason, the Interim Measures list a series of prohibited food-related products, such as products that use raw materials and additives not conforming to food safety standards, as well as other substances that may endanger human health or use additives beyond the scope or limitation.
The list includes products that have been ordered by the government to be prohibited/phased out from the market, products that forge the origin or forge or falsely use another’s factory name, address, etc. and any other products that do not conform to laws, regulations and food safety standards.
In recent years, China has also tightened its management of plastic pollution and has banned the production of certain plastic items, such as ultra-thin plastic shopping bags with a thickness of less than 0.025 mm. Industry players will need to pay closer attention to the development of industrial policies that will affect the supply of food-contact plastic products, since more restrictive policies are expected in the future.
Basic quality control requirements in the whole production process of food-related products are included as well. These requirements are principles and do not exceed what is expected for production quality management of food-related products.
Food products must have “identification information” (e.g., name, production date, shelf life, type, category, precautions and warnings) which does not necessarily refer to “labelling” information. In this respect, the Chinese GB (“Guo Biao”, Chinese for “National Standard”) food packaging standards are more specific. For example, GB 4806.1-2016, the General Safety Standard, regards the information on the label, the instruction manual, or the declaration of compliance all as product identification information, and therefore allows the identification information to be provided on the label, in the instruction manual, or in accompanying documentation. Fines will be imposed on food manufacturers and operators who violate these rules.
Companies must obtain a Food Production License to engage in food production in China. The General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) is responsible for the nationwide administration of food production licensing, while local Quality and Technical Supervision Bureaus (QTSBs) are responsible for administrating the scheme within their respective administrative regions.
In terms of requirements, the enterprise must possess the means for processing the specified type and volume of food products and must maintain the cleanliness of facilities. All staff involved in food service must undergo China Food and Drug Administration (CFDA)-approved safety training, and a system must be in place for ensuring food product safety, including the prevention of cross-contamination. These requirements also apply to Food Distribution and Catering Licenses.
Applicants for a Food Production License should additionally set up a health inspection and inspection records system or other health management systems for their personnel, establish a goods purchasing and pre-delivery inspection records system, and other food safety management systems for basic food ingredient inspections and manufacturing processes.
Site inspection by two to four inspectors will be conducted at the food production venue, and a product sample inspection will be required. Food Production Licenses are valid for three years, and applications for renewal should be submitted six months prior to expiry.
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