Date File No. Our ref. Food Team Case No.

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1 Date File No. Our ref. Food Team Case No.

2 1. Summary Macroeconomic indicators Consumption of major food products Urban and rural consumption patterns Imported foods Trends in food consumption... 8 Page 2

3 Consumption is assumed to be the main driver of the Chinese economy in the coming decade, and China s food sector is currently one of the country s fastest growing sectors, with output rising by more than 20% annually. This development is backed by continuous growth in GDP as well as increased income levels and buying power among consumers. Especially the rapidly growing middle class whose consumption patterns are shifting towards food items of higher value such as more meat and dairy remains a key driver. This will also open up for increased food exports to China in coming years. Food consumption levels are closely linked to macroeconomic performance, and China s accelerating economic growth, which has lifted large segments of the population out of poverty and increased the size of the middle class remarkably and continues to do so, has been a key driver of the food sector s rapid growth. This development is also reflected in Chinese consumers buying power which has seen rapid expansion in later year. From 1990 to 2011 PPP-adjusted GDP per capita has seen more than a nine-fold increase, which has fuelled and will continue to fuel consumer spending. GDP at PPP per capita Int. $ per capita 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - Source: Business Monitor International However consumption s contribution to GDP has seen a steady decline in the past two decades, while the savings component has experienced a parallel increase. This economic distribution remains one of China s economy s main weak points. Page 3

4 Consumption and savings as % of GDP 60 % Consumption Source: World Bank Savings The Chinese government is however intensifying focus to stimulating consumption as a way to spur overall economic growth. Consumption stimulus is a main focus in the latest 5-year plan, and the topic of sustainable growth to be achieved through increased consumer spending was also reiterated in Premier Wen Jiabao s 2012 opening speech to congress. Measures for achievement of this goal include a complete overhaul of the social security system, which is currently the main factor behind the high savings rates. The high savings rate does however also mean that consumer spending on essentials like food is relatively well cushioned from negative economic shocks. A 2012 McKinsey report estimates, that consumption s part of GDP will increase to 43% by 2020, and thus become the main driver of the Chinese economy. Structure of consumption will however also be subject to change, and while spending on food is estimated to decrease from 28% of disposable income in 2010 to 20% in 2020 the development will entail a structural shift towards aspirational spending that will open up and expand many new segments in the Chinese food market, such as organic, convenience, health, etc. Factors such as economic growth, rising disposable incomes and urbanization have been keys in the development of Chinese consumers consumption patterns. Traditionally the Chinese diet has been mainly grain-based, but food categories such as wheat, coarse grains and rice have all seen diminishing roles as consumers Page 4

5 have shifted towards products which have historically been in scarce demand due to their high-value nature and low levels of disposable incomes. Today food products such as meat, dairy, sugar and oils have all gained a stronger foothold in the diet of a typical Chinese citizen. The dairy sector is currently one of the most dynamic sub-sectors in China s food industry, underscored by growth rates from of fresh dairy and milk powder of 347% and 4795% respectively. Going forward dairy product consumption is expected to continue its expansion at high space, especially for UHT milk and milk powder, reflecting Chinese consumers preference for products with longer shelf life. Meat is another food category experiencing rapid growth. Pork remains the Chinese consumer s preferred type of meat, and per capita consumption almost doubled from 15 kg to 29 kg from 1990 to OECD however projects that poultry will be the most dynamically growing meat category until 2020, reflecting Chinese consumers increased attention to health and adaption of Western eating habits. Per capita annual consumption of major food products (kg) * Wheat Coarse grains Rice Vegetable oils Meat Fresh dairy products Milk powder Sugar Source: OECD Agricultural Outlook Developments in per capita annual consumption of major food products (kg) * Wheat -24.0% -10.5% Coarse grains -45.7% -18.4% Rice -14.1% -6.7% Vegetable oils 235.2% 18.2% Meat 167.7% 16.6% Fresh dairy products 346.8% 34.5% Milk powder % 21.4% Sugar 76.6% 40.0% Source: OECD Agricultural Outlook Page 5

6 While China has seen its economy progress dynamically as a whole in later years, large disparities remain between urban and rural areas, which are also reflected in food consumption patterns. The Engel coefficient represents the percentage of household income spent on food. As income increases the coefficient will in turn decrease as consumption shifts towards more discretionary spending. According to official, Chinese sources the Engel coefficient fell from 1990 to 2010 in both urban and rural areas, reflecting a general increase in disposable incomes and living standards. The Engel coefficient in urban areas fell from 54.2% in 1990 to 35.7% in 2010, while it fell from 58.8% in 1990 to 41.1% in 2010 in rural areas. Note that the data differs from that of McKinsey due to different methodical approaches. Engel coefficient in urban and rural areas (%) Urban Rural Source: China Statistical Yearbook 2011 More specifically the development can be seen as to how food consumption patterns differ between urban and rural areas. The food consumption of the rural population reflects a lower income level why the diet is typically focused on grains such as rice. As illustrated by the table below the rural population consumes more than twice as many grains as urban citizens. On the contrary higher value food products such as meat and milk are eaten to a much smaller extent in rural areas, comprising just 58% and 25% of the meat and milk consumption levels seen in city areas. As urbanization continues and rural citizens become more affluent their consumption patterns are estimated to follow the same path as that of the urban residents. Rural consumption as % of urban consumption 2010 Grains 223% Meat 58% Fresh vegetables 80% Edible vegetable oil 62% Milk 25% Source: OECD Agricultural Outlook Page 6

7 China s imports of food show have shown strong growth in recent years. The development is mainly driven by rising disposable incomes, urbanization, consumers developing tastes for foreign food products as well as the frequent occurrence of food safety scandals, which to some extent have undermined trust in Chinese production processes. The United States is currently the largest food exporter to China. Among the EU countries France is the largest food exporter as wine constitutes a substantial part of exports. In addition to wine, there is still substantial potential to be found by food exporters in a number of subsectors. These include dairy products, pasta, olive oil, confectionery and infant formula. Top 5 food exporters to China, Million EUR USA Malaysia Indonesia EU Canada Source: TradeData International 2011 From a Danish point of view, pork meat products remain the largest food export item. In just one decade exports to China have grown more than 700% and reached a total value of 1.8 million DKK in Pork meat exports to China differ from those of near-by, traditional Danish export markets in the sense that Chinese consumers demand nearly all edible parts of the pig. This also includes byproducts such as pigs feet, intestines, etc., which has turned out to be a lucrative case for Danish exports of pork. In addition to pork meat products, Denmark also exports considerable amounts of fish and dairy products to the Chinese market. Page 7

8 India Brazil Mexico Italy Taiwan Argentina China France Spain Russia Turkey Global 2010 Egypt Africa Germany Thailand Korea Canada Poland Japan Indonesia Australia USA Czech Rep. UK Sweden Danish exports of pork products to China Billion DKK Source: Statistics Denmark Food consumption in China is not merely expanding in aggregate terms, but the structure of consumption is seeing profound changes in these years as well. This is mirrored in increasing demands for food of high quality and safety levels. Food safety China is frequently hit by food scandals, the melamine crisis of 2008 being the most notable example. The effect of food hygiene scares has in turn been felt across the industry and the food sub-sectors continue to be exposed to demand fluctuations as consumer confidence remains vulnerable. Food safety in a global perspective Q: I worry about how safe the food I buy is - Agree or Disagree? Source: Roper Reports Worldwide 2010 Page 8

9 A survey from 2010 conducted by Roper Reports underscored how food safety is playing an increasingly large role in the minds of Chinese consumers. Two thirds of the Chinese respondents worry about food safety, making China the 7th highest ranking country on the list. Increased public attention to food safety does however pose market opportunities for food importers. According to a 2011 report from Euromonitor International, Chinese consumers increasingly opt for food products from renowned, international manufactures as food products of foreign origin are perceived to be safer and of better quality. In turn these products are sold at higher prices than their domestically produced counterparts, and the market for high-value food is expected to expand hand-in-hand with that of the Chinese middle class. Organic food The market for organic food is in its fledging start-up phase, and can still be considered a niche market. Official Chinese sources do however predict that the country will become the World s 3rd largest consumer of organic food by 2020, and in this perspective the market still poses substantial long-term potential to organic food producers in spite of its current, immature growth stage. The majority of sales of organic food are derived from sales in the packaged food sub-sector, where baby food and vegetable oils are the main categories. Organic vegetable and seed oil is the fastest developing category as it saw value growth of 30% from 2010 to 2011, and the same growth level is expected in coming years. Baby food experienced 11% value growth in the same period and similar growth rates are expected until The popularity of organic baby food, which is mainly comprised of infant formula, must been seen in the wake of the food scandals, which have hit China in recent years, increasing public focus on food safety especially in the category of infant formula. Business Monitor International expects total market size of organic packaged food to reach 484 million RMB in 2015, equivalent to a 135% increase in value terms. Sales of organic packaged food by category Million RMB * 2012* 2013* 2014* 2015* Baby Food Oils and Fats Rice Other Food Packaged Food Source: Business Monitor International *Projected values Future growth of organic food products is estimated to be driven forward by the growing middle class, as organic food products still retail at prices which few Page 9

10 Chinese people can afford up to five times higher than conventionally produced food products. Affluent Chinese consumers are however also prepared to pay the price premium as organic products are not only considered to be status symbols, but are also perceived as being healthier, safer and of higher quality than their conventionally grown counterparts. Pre-packaged food The Chinese market for pre-packaged, processed food is rapidly expanding. From 2005 to 2010 exports of pre-packaged food from EU has increased by 350%. The trend is especially apparent among urban dwellers whose lifestyles are starting to resemble those of the Western world, where convenience plays a large role in the mind of the consumer. Exports of pre-packaged food to China from EU27 Million EUR Source: EU Commision 2011 The market is still far from saturated as Chinese consumer spending on processed, packaged products accounts for just 10% of total expenditure on food. In Japan and the United States the equivalent figures are 48% and 57% respectively. The development is thus estimated to continue in coming years as the affluent and aspirational client base of Chinese consumers grows larger. Page 10

11 Pre-packaged food export to China from EU27, 2010 Prepared food and sauces 20% Confectionery 7% Milk products 7% Alcoholic beverages 53% Edible oils 5% Other 5% Frozen fruit and nuts 3% Source: EU Commission, 2011 Dining out As consumers disposable incomes rise, urbanization continues, and the Chinese population increasingly adapts Western habits, the market for food service expands analogously. The number of transactions has grown from 81.3 billion to billion from 2005 to 2010, equivalent to a 43% increase. The value of the market has however increased by 81% during the same period, underscoring how the food service market is not only expanding in volume terms, but that consumers are spending larger amounts of money on each meal. Euromonitor International forecast that the market will reach a turnover of 3350 billion RMB by 2015, while the average value of each transaction will continue to increase. Value of food service market in China 2500 Billion RMB Source: Euromonitor International Page 11