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Discussion document:
Food Market CHINA:
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Food Market CHINA:
Chances from Key Trends for European Firms
Hong Kong / Shanghai / Munich, January 2014
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Content
1. Preliminary remarks and Management Summary 2
2. General trends in the Chinese food market 5
3. E-commerce for food 10
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4. M&A in the Chinese food sector 16
5. Strategic Implications from MelchersRaffel 20
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▐1. Preliminary remarks and Management Summary
� This paper intends to share the most recent shopping trend and buying behavior
changes of food market in China and our main perspectives on the opportunities
present in this sector
� The data shown in this paper is for reference only to understand the general trend
and competitive environment, whereas some of the numbers being best estimates.
Examples given here are selected for illustrative purpose and should not be
considered as an exhaustive list
Preliminary Remarks
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� MelchersRaffel would be glad to discuss strategic impacts and strategic options
with interested management of food companies.
� General growth of food market in China is further triggered in a top market segment
for international and imported brands due to many food scandals in the past.
� Beside “classic” distribution channels, e-commerce shopping for food is more andmore used by Chinese consumers.
� For international brands, there is a potential to grow in the huge Chinese food
market with hybrid distribution activities.
� Chinese companies are very interested in European food markets for partnership,
acquisition etc. as they want to make use of the European brand, market access
Management Summary
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and quality standards.
� Besides a well designed and functioning organic growth strategy with aligned
marketing and sales elements, European food brands should look for partnerships
in terms of acquisition or “network capital” with well established and suitable
Chinese players.
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▐2. General trends in the Chinese food market
716 774 867 979 1.065 1.154 1.247 1.344 1.444
The Chinese food market has experienced strong growth in recent years and is
expected to continue to grow at a CAGR of 8% in the next 3 – 5 years
▐ The Chinese food market has been growing at a rapid pace for several years. The number of high-income earner is surging, benefiting from a significant rise in wages. This has resulted in a soaring demand for new products, concepts and brands
Current situation
Overview of the Chinese food industry
China packaged food market value
Bn RMB
(c. 168bn EUR)
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2008 2009 2010 2011 2012 2013 2014 2015 2016
▐ Both international and domestic grocery retailers are expanding quickly in China with diverse formats and entering new regions
▐ Hypermarkets and supermarkets continue to account for the greatest proportion of overall sales. Meanwhile, internet retailing is booming due to its competitive prices and home delivery services
China packaged food industry distribution
Hypermarket, supermarket;
63%
Food & drinks
specialists; 18%
Convenience store and gas station; 16%
Others incl. online; 3%
Source: Euromonitor
China’s Top 10 Grocery Retailers in 2012
Local Chinese companies dominate the grocery sector in China, only 2 foreign
companies can be found in the top 10 players list
Ownership Company name China retail sales, bn RMBGrowth
2011-2012# of POS
# of provinces
in operation
Chinese Bailian Group 3.3% 5,147 20
Chinese Vanguard 13.8% 4,423 27
Chinese RT-Mart 17.7% 219 21
Foreign Walmart 3.6% 395 2058
72
94
122(14bn EUR)
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Foreign Walmart 3.6% 395 20
Chinese Chongqing Trading 14% 327 3
Foreign Carrefour 0.2% 218 21
Chinese Dashang Group 4.7% 170 NE/N/W
Chinese NGS Group 0.2% 2,734 5
Chinese Yonghui Group 37% 249 4
Chinese Wuhan Wushang 29.8% 98 126
27
30
37
45
54
58
Date Food
category
Key description
2003-2004
Infant milk powder
� Babies were found to have abnormal big heads because of the in-take of toxic milk powder
2005–2006
Egg � Sudan dyes, an industrial addictive, was found in the “premium red-hearted” eggs
2008 Infant milk powder
� Milk powder produced by the Hebei SanluGroup was found to be contaminated with Melamine
Numerous toxic food scandals were reported in the past 10 years in China. Worries
about food safety have led many Chinese consumers to turn to imported goods
In 2008, problematic Sanlu milk powder
was recalled and destroyed by the
Shanghai government
List of major food scandals in China in the past 10 years
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Melamine� Babies began falling sick with kidney
problems as early 2007
2008 Wine & spirits
� 95% of Maotai, a brand of traditional Chinese spirits, is believed to be fake, made from industrial-use methanol
2010 Cookingoil
� Several Chinese workshops were chargedfor turning discarded waste and sewage into recycled cooking oil, creating food hazard
2011 and 2013
Ginger � Aldicarb, a highly poisonous carbamatepesticide, was used at “three to six times” above the recommended level on ginger crops in Shandong
In 2010, poisonous chemicals contained in recycled cooking oil were found to be
100-times more toxic than Arsenic trioxide
Source: MelchersRaffel analysis
Market size of imported food in China, 2007 – 2018EBn RMB
Mainly driven by the growing middle-class and food safety concerns, the imported
food market in China is expected to reach c. 480 bn RMB by 2018
480
▐ Growing middle class
▐ Increasing demand for food variety
▐ Rising concerns on food safety
Key drivers of increasing imported food
(c. 56bn EUR)
“China will become the world’s largest
market by 2018.”
- American Association of Food Industry
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3663
2008 2012 2018E
CAGR: 15%
CAGR: 40%
▐ Increasing diversity of distribution channels
▐ Recent surge in prices for domestic products, driven by inflation, has made foreign food products more affordable
▐ Government's efforts to lower tariffs on imported food has also made them more accessible for Chinese consumers
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▐3. E-commerce for food
568
254
152
101
China
United States
India
Japan
China has the largest internet user population in the world, despite its penetration rate
is still far behind developed countries such as the US and Japan
Internet population base by country, 2012Million users
42%
81%
13%
79%
Internet penetration rate
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99
76
68
56
55
54
Brazil
Russia
Germany
Nigeria
United Kingdom
France
50%
53%
84%
33%
87%
83%
Source: International Telecommunications Union; MelchersRaffel analysis
Examples of online shopping sites for fresh food products and packaged food
Given the huge online population base, quite some B2C online food shopping sites
emerged in China reaching consumers in a wide geographical range
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http://www.womai.com/index-0-0.htm
http://www.yhd.com/ http://www.sfbest.com/
http://www.tootoo.cn/
Source: MelchersRaffel research
Key highlights:
Organic, Natural & High quality
Despite the current small channel size, online shopping channels for food are
expected to grow rapidly in the next 5 years in China, reaching RMB 40 bn by 2018
Overview of the Chinese online food market
Total online sales of fresh products in China
Bn RMB
11,5
40
CAGR: 37%
▐ In contrast to the mass market positioning of traditional offline supermarkets, on-line grocery stores usually target a specific customer group:
� Relatively young
� High-income consumers
� Willing to pay for convenience, high quality and safety standards
Current situation
(c. 4.7 bn EUR)
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Types of online food platforms
2013 2018E▐ Product mix:
� Focusing on fresh and premium products
� Large % of imported goods
▐ Unique selling point:
� Own logistic system to deliver directly from the farm to the consumers, cutting out the middlemen in order to increase freshness and increase food traceability
▐ Key challenge:
� High costs to develop nationwide cold chain logistics
Integrated; 68%
Vertical; 27%
Special food; 5%
Shanghipremium B2C food
Source: Industry expert interviews; MelchersRaffel analysis
What customers said about online grocery
In addition to food safety concerns, convenience and rich product variety are also
key motivations for Chinese consumers to buy food from online platforms
�Female
�Female
�Beijing MNCmanager
�Age: 44
▐ “The vegetables are really fresh.”
▐ “Supermarket food doesn't look that fresh, especially if you only get there in theevening. Or you can also get some cheaper vegetables in markets during day
time, but I really worry about the safety of the products sold there."
▐ “I stopped buying domestic milk brands two years ago. Due to safety concerns, I
would prefer to buy imported milk, although it's much more expensive than
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�Male
�Accounting professional
�Age: 35+
�Young officelady
�Age: 29
would prefer to buy imported milk, although it's much more expensive thandomestic milk.
▐ “Now I usually buy the imported milk from reputable online platforms. Quality isguaranteed and delivery service is free of charge at a certain purchase amount.”
▐ “I would buy packaged food online since they have more choices available. It
would be time-consuming for me to search for those niche, festive Japanese foodgift set in a traditional supermarket.”
▐ “I am also impressed by the efficiency of the delivery. It’s very convenient whenyou can order soft-drinks and snacks by clicking a few buttons online, especially
for party occasions like BBQ gathering for a big crowd.”
Source: Customer interviews; MelchersRaffel analysis
An online B2C food platform in China, Yihaodian, has seen skyrocketing sales growth
in the last years, reaching c. RMB 7 bn in 5 years time since its establishment
4 46805
2720
6800
Annual sales revenue of Yihaodian
Mn RMB
▐ Founded in: Jul 2008
▐ Founder: Gang Yu and Junling Liu
▐ Ownership changes:
� 2011: Walmart first acquired minority stake
� 2012: Walmart controlled 51% of ownership
▐ Competitive edge:
Brief introduction
1
CAGR: 429%
Introduction to a major online food shopping platform – yihaodian.com
(c. 790 mnEUR)
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2008 2009 2010 2011 2012
Mobile shopping functionality of yihaodian.com
▐ Competitive edge:
� Accurate response:
− Launched “On-time arrival” for Shanghai, Beijing, Guangzhou, Shenzhen, etc.
− At additional RMB 3 – 5 per order, customers can specify which 2-hour interval the goods shall be delivered
� Efficient operation:
− <1.5 minute is required to sort out the products from the warehouse per order (on average each order has c. 16.7 items)
1. Partial annual revenue for 2008, operated since Jul 2008
1
Source: MelchersRaffel research
Mobile sales revenue accounts
for 10% of total
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▐4. M&A in the Chinese food sector
Cross-border and domestic acquisitions commonly occurred in the Chinese food
sector in the past 3 years
Sub-sector of the target
company
Type of acquisition /
partnership
Recent deals example
Confectionery / snacks � Chi. acquired Chi. � In 2012 Jan, Shanghai Maling (canned food manufacturer) acquired Guanshengyuan (processed food such as candies, honey, noodles, etc.)
� Intl. acquired Chi � In 2011, Nestle acquired Hsu Fu Chi (Chinese manufacturer of various confectionaries and snacks)
Beer � Chi. acquired Chi � In 2011, China Resources Group – Snow beer acquired HuzhouBeer and Hangzhou West Lake Beer
Processed meat � Chi. acquired American � In 2013, Chinese Shuanghui (largest meat processor) acquired
Examples, not exhaustiveRecent M&A activities – all sectors
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Processed meat � Chi. acquired American � In 2013, Chinese Shuanghui (largest meat processor) acquired US Smithfield Foods
Breakfast food � Chi. acquired European � In 2012, Chinese Bright Food Group acquired UK breakfast brand, Weetabix
Dairy � Chi. acquired Chi. � In 2011, Sanyuan (agriculture and animal husbandry SOE) acquired Hunan Taizinai (dairy)
� Intl. acquired Chi. � In 2011, Nestle (Dairy, confectionery, etc.) acquired 60% share of Xiamen Yinlu Group (canned food, dairy, etc.)
� Chi. partnered with European
� In Nov 2013, Chinese dairy group, Yili formed partnership with Italy’s Sterilgarda Alimenti SpA to enhance its technological capabilities and for securing better milk sources
� Chi. acquired Australian � In January 2014 Bright Foods, Chinas second largest dairy company, announced its acquisition of the Australian dairy firm Mundella Foods
Selected examples for cross border M&A and long term partnerships in the dairy sector:
Chinese dairy companies seek and offer equity participation with foreign
partners to secure their milk supply
Date Acquirer Target Deal value Details of the deal
2010 Bright Dairy Synlait
370 mn RMB(45 mn EUR)
51% stake
- Bright Dairy, China's third-biggest dairy company by volume, bought a majority stake in New Zealand`s Synlait, which by then had a new milk powder processing plant under construction, allowing to double its output capacity in the following year
2012 Arla Foods Mengniu
1.9 bn RMB(226 mn EUR)
- Arla Foods, a world leader in dairy farming and related production processes purchased an indirect equity share in China´s largest dairy company Mengniu.
- The deal allows Arla Foods to participate in China´s vast
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2012 Arla Foods Mengniu(226 mn EUR)
6% stake
- The deal allows Arla Foods to participate in China´s vast and growing dairy sector and enables Mengniu to secure their milk supply and benefit from the latest sector related production techniques and know how
2014 Bright Dairy MundellaNot disclosed
yet
- Bright food announced in January 2014 to acquire the cheese and yoghurt maker through their Australian arm Manassen Foods. The Chinese company acquired a 75% stake of Australia's Manassen in 2011.
2012
Partnership
770 mn RMB(92 mn EUR)
- Synutra and Sodiaal signed a long term cooperation agreement in which Sodiaal supplies Synutra´s newly established milk powder processing plant in France with demineralized liquid whey and milk.
Synutra Sodiaal
Cro
ss-b
ord
er
Currency: 1Euro= 8.3 RMB
Examples of Sino-foreign partnerships in the dairy sector
By partnering with domestic companies, multinationals getting well positioned to
access consumers with their wide range of products
▐ In May 2013, Danone and the Chinese dairycompany Mengniu announced plans to set up adairy venture in China, a JV will invest in and
▐ In 2011, Nestle announced the acquisition of a60% stake in China's family-owned Yinlu
Jointly 2.4 bn RMB(0.28 bn EUR)
2.5 bn RMB(0.3 bn EUR)
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dairy venture in China, a JV will invest in andmanage a portfolio of chilled yogurt in thecountry
▐ Danone will hold a 20% stake in this partnership,which will operate 13 plants across China
▐ The tie-up will help Danone to boost sales inChina’s yogurt market, Mengniu held a 16.8%market share in the Chinese yogurt market in2012, Danone held a 1.6% share, according toEuromonitor. Through the partnership, Danonewill benefit from Mengniu’s extensive distributionchannels in China, and also gain access to theChinese dairy company’s production bases.
60% stake in China's family-owned YinluFoods Group, the shareholders will jointlyinvest $394 million to expand current and buildnew production facilities nationwide
▐ This deal will strengthen Nestle’s penetration inChina and demonstrates its long-terminvestment in the Chinese market andcommitment to the further development of localbrands
Currency: 1Euro= 8.3 RMB
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▐5. Strategic Implications from MelchersRaffel
Summary of Strategic Implications for European Food Companies
1. Food Market China shows
strong growth
2. International brand‘s
business is booming
� How to get access to the booming Chinese market?
� Is e-commerce the right sales
Strategic Questions:
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business is booming
3. Internet sales is
booming
� Is e-commerce the right sales channel for us?
� Which partner or acquisition target should be considered?
Strategic time window for a successful positioning of international brands in China is narrow.
� Founded: 1806 in Bremen, Germany
� Group Companies: more than 50 in the world – focusing on Europe, Southeast Asia, and Greater China
� Branches and representative offices in Asia: 25
� Other locations: South Africa, Ethiopia
� Employees in Europe: ca. 600 (ca. 500 in Germany)
� Employees worldwide: 1,700 (1,000 in Asia).
MelchersRaffel is the company for successful Euro-Asia endeavours
� Access to Know-how and network of 1,700 employees in technology, consumer and luxury markets in Europe and in 25 offices in Asia
� Experience from 150 years of successful business in China
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� Employees worldwide: 1,700 (1,000 in Asia).
� Experience in advising companies in the larger middle class. The employees of Raffel CD have both industrial and consulting experience in the international environment.
� For M&A activities (purchase and sale of companies and business units), Raffel CD combines the necessary M&A technique, strong strategy and market expertise. This allows the creation of outstanding value for the customer.
� Offices in Shanghai, Hongkong, Singapore and Munich, Germany
� Client Service:StrategyBusiness DevelopmentDesigning Business Models
M&A
Acquisition and Desinvestment of CompaniesStructuring Joint Ventures and Alliances
� Contact:www.melchersraffel.comE-mail: [email protected]
MelchersRaffel has offices and access to networks in all relevant Asian
countries
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