Imported F&B distribution in China Daniel Pedraza, July 2018

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1 Implementing Partners Imported F&B distribution in China Daniel Pedraza, July 2018 A project financed by the European Union

2 Get Ready for China! The EU SME Centre is an EU Commission funded project which helps EU SMEs prepare to do business in China by providing them with a range of information, advice, training and support services. The Centre is implemented by a consortium of six partners and was established in October It successfully completed its first phase in July 2014 and has now entered its second phase which will run until July

3 Today s speaker Contact Bio China Director at Eibens Consulting Living and working in China since 2012 Strong focus on food and beverage import and distribution processes and trade barriers Daniel Pedraza daniel.pedraza@eibens.com Daniel Pedraza Nogueira Previously worked for the European Chamber of Commerce in China and Extenda (Trade Promotion Agency of Andalusia) in Beijing as well as private companies Double BA of Business Administration and Economy from the University of Malaga and Master of International Business by EOI Business School. 3

4 Agenda Introduction to China s F&B distribution Product categories Purchasing drivers Importers/Distributors Sales channels Negotiating and accessing the market

5 Introduction to China s F&B distribution

6 Introduction to China s F&B distribution Market overview In a fast growing market in need for foreign food, opportunities will necessarily appear. The question is how to be the one taking advantage of them and it will not be easy, fast or just a one time effort. Where is the growth? What products? What channels? What regions? What consumer profile? Traditional Channels? Ecommerce? Tier 1-2 Cities? Tier 3-4 Cities? Established distributor? New distributors? What volume of sales can be reasonably expected?

7 Billion USD Introduction to China s F&B distribution 60 Evolution of all China F&B imports Fruit in China 55 USD 54.4 bn USD 39.7 bn Souce: China Customs

8 Introduction to China s F&B distribution Development of China s opportunities on the F&B industry Stage 1: European producers go to a few importers in larger cities that serve a small market Stage 2: T1 cities sell to distributors in smaller cities. More competitors attack the market Stage 3: Market grows, T2 cities start to sell important quantities. T1 cities are saturated Stage 4: E-commerce explosion. Retail X

9 Product categories

10 Product categories Situation now. China s total imports in value per product category in 2017 Pork, beef, poultry and offal Dairy and infant formula Seafood Bulk cereals and grains Fruits and nuts Wine, liquors, beer Choc, bakery, Food confec prep. Other billion USD Souce: China Customs

11 Product categories Importers/distributors per category Meat Dairy Products Fishery and seafood Bulk cereals and grain Fruits and vegetables Alcohol Prepackaged food Requires a specific import license. Highly specialised For retail sales of dairy products it works similarly to pre-packaged food. Dairy products for industrial or professional use (butter, cream, whey, milk powder among others) it is highly specialized. Requires a specific import license. Highly specialised Major companies, mostly SOEs and requires a specific import license. Import quotas may be in place Requires a specific import license. Highly specialised Hard alcohol, wine and low graduation drinks and maybe other non alcoholic drinks. Most common and generic type. Includes packaged cereals, pastry, confectionary, non alcoholic beverages, snacks, honey, jams, candies, olive oil, vinegar, etc. and now even packaged 10/26/201830/11/10 cured pork or canned fish or low alcohol drinks 11

12 Purchasing drivers

13 Purchasing drivers Importers largely base their purchasing decissions on: Fruit in China Origin Price Image. Marketing/Packaging Management. Value by reducing risk EG Shelf life 12 months

14 Purchasing drivers Consumers: Limited knowledge about new products, but big apetite for them Fruit in China Cost is less of a concern. Value for money or image are the key metrics Health awareness has started and will grow in importance along with China s middle class Basket size has been reduced, while purchasing frequency has been increased. Convenience when purchasing top of mind.

15 Purchasing drivers Consumers trading up or down to a more or less expensive brand 25% Trade down Trade up 20% 15% 10% 5% Fruit in China 0% China USA Germany Source: McKinsey 2018 Global sentiment survey

16 Negotiating and entering the market

17 Negotiating and entering the market Exclusivity Fruit in China They will certainly ask for it, but is it worth it? Not unless you are certain China is fragmented. Can t reach the entire country Based on local contact. All China They exaggerate the (sub)distribution network Will not allow you to compare Will lose control Internet, new tech and exclusivity Make sure to leave a way out Multibrand strategies are growing

18 Negotiating and entering the market Fruit in China For the main players in distribution in China (distributors, retailers and E- commerce) market share often comes before profitability, which affects the market: Small retail shops Retail chain E-commerce Foodservice Impact of the real estate Distributors serving them What purpose do you serve to them? Market share vs Profitability

19 Negotiating and entering the market Entry fees Fruit in China What do they do with your (marketing) budget? How much does it really cost to entry retail chains or foodservice? How does it work in general. Asking for money individually, negotiating in bulk Representing always the common case as the only case Uncontrolled from the exporter Per channel Evolution Examples We must look for playing a bigger role in it.

20 Importers/Distributors

21 Importers/Distributors Leading Distributors Established Distributors Exporters own distribution Newcomers Occasional Distributors With different focus but they cover all sales channels They are now concentrating portfolio Entry and payment terms normally set Require a marketing budget Increasing private label Retailers Online platforms

22 Importers/Distributors Leading Distributors Established Distributors Exporters own distribution Newcomers Occasional Distributors Retailers May not have a relevant position in all channels Still expanding portfolio Entry and payment terms normally set with some negotiation options Try to require a marketing budget Some of them are starting with private label Online platforms 10/26/201830/11/10

23 Importers/Distributors Leading Distributors Established Distributors Exporters own distribution Newcomers Occasional Distributors May not have a relevant position in all channels Mostly working their products only, with exceptions on wine. Despite having their own structure, they still require substantial support from subdistributors Retailers Online platforms 10/26/201830/11/10

24 Importers/Distributors Leading Distributors Established Distributors Exporters own distribution Newcomers Occasional Distributors Retailers Online platforms Normally do not have a relevant position in all channels and work mostly on one. As there are new or relatively new, their portfolio is still open and growing, creating more possibilities. Some where previously local distributors that did not import or are coming from other industries However, their level of penetration, experience and product knowledge is still a work in progress They are usually trying to build their subdistribution network 10/26/201830/11/10

25 Importers/Distributors Leading Distributors Established Distributors Exporters own distribution Newcomers Occasional Distributors Retailers Online platforms Do not really have a distribution network A common example are big companies that buy products such as wine for their own consumption and gifting, that eventually expand to further distribute the products on some occasions Based mostly in personal contacts therefore regular distribution channels such as chains are not normally targeted but local foodservice, gifting or few independent local shops Their technical capabilities are normally low 10/26/201830/11/10

26 Importers/Distributors Leading Distributors Established Distributors Exporters own distribution Newcomers Occasional Distributors Retailers Online platforms Direct imports are very uncommon in China. Even most of those who apparently do, used another company for the issue Direct or semi-direct imports might be found in market tested, low complexity, high rotation, products. Complexity of the regulatory environment and import process pushes the distributors to concentrate in sales only, which is hard enough 10/26/201830/11/10

27 Importers/Distributors Leading Distributors Established Distributors Exporters own distribution Newcomers Occasional Distributors Retailers Online platforms Although E-commerce platforms play a growing role in F&B distribution, as importers the position is less clear Some platforms do not manage any imports nor buy directly, only rent the space in their platform Direct purchases from platforms are limited but possible, normally on demanding cooperation terms Conditions change considerably from one platform to another Existence of niche platforms 10/26/201830/11/10

28 Sales channels

29 Sales channels TRADITIONAL RETAIL E-COMMERCE HYPER MARKETS SPECIALTY STORES SUPER MARKETS CVS TRA DITIO NAL CRO SS- BOR DER FOODSERVICE

30 Traditional retail International Hypermarkets High awareness of imported brands and products However, imports rarely constitute more than 5% of total SKUs Slowing growth rate Supermarkets Dominated by local players Imported food is relatively scarce Consumer base is price sensitive Rarely importing Smaller supermarkets not growing, becoming CVS Specialty Supermarket Stores Originally designed to attract foreign residents in particular areas More than 50% of the products on the shelves are imported The import/distribution teams can source products directly from foreign suppliers Entry fees and high margins for imported products Convenience Stores Becoming increasingly important distribution channels Rotation is more important Alcoholic beverages are the most common imported product

31 Traditional retail Convenience Stores CVS Multiplying number of stores Growing fast, becoming a key sales channel. 19.5% average growth in 2016 among top 20 convenience stores in China* International chains (Japanese). Greater offer of imported product and proper management. Asian products over represented Domestic chains. Limited offer of imported product and not as good management as Japanese chains. Concentrated in T1 and T2 Entry fees but high rotation. CVS offer a clear image of what is working in the market Smaller formats, less SKUs per category Product types: impulsive-shopping products or products frequently purchased *Source: China Chain Store and Franchise Association (CCFA) CVS located in gas stations not included in the analysis

32 Traditional e-commerce Traditional e-commerce Expected to grow to 25% of total retail sales by Specialised platforms claim to grow % yearly, general platforms 25% Dozens of different platforms, both general and specialised Almost unlimited offer of imported products. Wide coverage Difficult to outstand among competitors Marketing campaign essential Low prices and frequent promotions Two business models Shop-in-shop Buying and reselling product 10/26/201830/11/10 1 Source: iresearch 2 Source: PWC. E-commerce in China-The future is already here

33 Traditional e-commerce Growing in investment and sales very rapidly Large number of players, but concentration is happening around JD&Tencent and Alibaba. Companies not invested by them will probably disappear or be absorbed. Investment in cold chain and delivery is huge. Pushing fresh produce departments. They are starting to source directly two types of products: Hero products. Example: Iberico ham. Products that sell volume. Example: fruits, meat. They still lack any processing capacity, so they need to source products ready to be delivered to the consumer. 10/26/201830/11/10

34 Sales channels Cross-border E-commerce Benefited by different regulations Lower duties (difference is getting smaller) Less regulated (for a reduced group of products) Less controled B2C Products can be already in China (CBEC Comprehensive Pilot Areas) or the exporter must be able to send them via airfreight. Products limited must be included in a positive list 10/26/201830/11/10

35 Sales channels Cross-border E-commerce Adequate sales channel for products that are: 10/26/201830/11/10

36 Sales channels Foodservice High-end hotel and restaurant industry is an important channel for imported foods Growth directly related to the country s or city s behaviour 2017 foodservice revenue in China grew 10.7% to nearly RMB 4 trillion 1 Consumer foodservice in China is expected to grow by 6.7% annually until Imported products are gaining recognition in menus Foodservice divisions of international companies selling ingredients to restaurants are growing more than 10% 3 Foreign restaurants, hotels and bars are growing, but mainly limited to T1 and secondly T2 and T3. In T1 cities, improved food standards, expensive real estate and increasing labour costs, shorten the price gap between foreign meals and domestic food. High margins Low stock. They place small orders and have local distributors or place orders online Long payment terms, which may lead to non-payment if the business closes 1 Source: BordBia. Under 30s are the heart of foodservice in China 2 Source: Euromonitor 3 Source: BAIN&Company. China's Two-Speed Growth: In and Out of the Home

37 Sales channels Foodservice Eating out and ordering meals online are common habits among Chinese urban consumers New foreign products and dishes constitute a new experience for the consumer and are sold at a premium. New foodservice concepts are popping up around foreign products. Example: beef joints and craft beer microbreweries with foreign ingredients. 10/26/201830/11/10

38 Related Publications For more insights into China s F&B Sector you can take a look to our sector reports and guidelines, including: How to Sell Your Food & Beverage Products Online in China How to Set Up a Cross-Border Shop on WeChat For more, visit 10/26/201830/11/10

39 Get Ready for China