Texas Pecan Growers Conference

Presentation on Chinese Market

July 14, 2009

Prepared by: SMH International

China Market Overview

China Tree Nuts Market Overview

China Pecan Market

Import Procedures & Requirement

Marketing Suggestions

Part II

Part III

Part IV

Part V

Part VI

Contents

This presentation is to introduce the Chinese market and tree nuts market, pecan specifically to pecan growers in Texas.

About SMH Part I

Part I

About SMH

About SMH - Introduction

SMH International (SMH) is a marketing, consulting, PR and events agency

Established in 1993 with over 15 years of professional experience

Provide in-market assistance to foreign organizations and companies in China

Help numerous foreign companies & organizations establish themselves and expand their markets throughout Mainland China and HK

About SMH – Our Client

SMH is currently contracted by several major foreign associations and companies

Under the guidance of SMH, these companies have experienced significant growth in the Chinese market and their products are now available in many retail outlets and restaurants.

About SMH – Activities I

Marketing & Promotions

SMH has cultivated close connections with many Chinese companies and organizations in order to assist clients in promoting their products.

In-store Promotio

nsEvents PlanningWe are very detailed in our work, and therefore help our clients in creating successful events that raise brand and product awareness in their related markets in China.

Chef Training

Media Reception

About SMH – Activities II

Trade Show & MissionWe have strong experience in trade shows, allowing clients to make an impact when utilizing either tradeshow or mission options.

PR WorkWe provide various media campaign options, all of which have been successful for clients due to our relationships with local media in China.

Trade Mission

Trade Show

Media Campaign

Part II

China Market Overview

China Market Overview - Economy China Market Overview - Economy

Macroeconomic Consumption Retail & HRI

•GDP grew by 6.1% to RMB 6.57 trillion (USD 0.97 trillion) in the first quarter of 2009, slowed down a bit compared to 9% in 2008, but still a stable growth

•CPI went down by 0.6%

•Disposable income: RMB 4,834 (USD 711), a growth of 11.2% in the first quarter of 2009

•Sales of consumer commodities: rose 15.9% to RMB 2.94 trillion (USD 0.43 trillion)

•Retail sales: USD 1,334 billion in 2008

•HRI sales: USD 225 billion in 2008

•Expo 2010 is to foster HRI development, 400 new hotels to be built,300 star-rated

Overall: China is experiencing stable growth in recent years, and suffers less from the global economic recession.

China Market Overview – Market TrendChina Market Overview – Market Trend

Positive Trend for Imported Foods

15% annual growth in China for the past 5 years. China is one of the largest food importers in the world. By 2018, total sales are projected to reach RMB 480 (USD70 billion).

Western LifestyleThere is an increasing percentage of younger middle class population who enjoy western lifestyle including cuisines etc. E.g. there are more than 20,000 western style restaurants in 30 provinces in China.

Food SafetyAfter the melamine scandal, the safety and quality of food products become public concerns.

Health BenefitWith improvement of living standards, Chinese consumers are more aware of the health benefit from daily diet.

China Market Overview – Trading

0

200

400

600

800

1000

1200

1400

2001 2002 2003 2004 2005 2006 2007 2008

SNACK FOODS

WINE AND BEER

RED MEATS,PREP/PRESFRESH FRUIT

TREE NUTS

PROCESSED FRUIT &VEGDAIRY PRODUCTS

RED MEATS,FR/CH/FRPOULTRY MEAT

Strong Demand for High- Value ProductsStrong Demand for High- Value Products

U.S. Exports of Consumer-Oriented Products to China2001 - 2008 ($Million)

Part III

China Tree Nuts Market

China Tree Nuts Market – Popular Products

Walnut

Popular Tree Nut

Products in China

Almond

• The most popular The most popular tree nut product in tree nut product in ChinaChina

• Regarded as most Regarded as most nutritionalnutritional

• The origin of all The origin of all types of almonds types of almonds in the worldin the world

• Long history leads Long history leads to high consumptionto high consumption

Pistachio

• Shorter history but Shorter history but great developmentgreat development

• Welcomed as snack Welcomed as snack foodsfoods

Hazelnut

• One of the top four One of the top four nuts productsnuts products

• Liked both as snacks Liked both as snacks and ingredientsand ingredients

China Tree Nuts Market – Domestic Consumption

Consumption Volume of Tree Nuts in China (2003 – 2007, MT)

China Tree Nuts Market – Importation

The increasing consumption demand has led to the growth in tree nuts The increasing consumption demand has led to the growth in tree nuts importation.importation.

Import of Tree Nuts in Mainland China 2008

China Tree Nuts Market – Importation

US Export of Tree Nuts to Mainland China 2008

The importation trend of tree nuts from US is similar to that from the world, The importation trend of tree nuts from US is similar to that from the world, with pistachios ranking first in volume. with pistachios ranking first in volume.

China Tree Nuts Market – Market Analysis

Analysis of Tree Nuts Market in

China

Consumption

Importation

Develo

pmen

t

Increasing demand for tree nuts products Taken as snacks or ingredients Largest consumption: Walnut, regarded as nutritional and beneficial to brains

Traditional products mainly rely on domestic production A net importer of pistachio Overall: a

considerable growth due to falling price and great demand

Expanding market Favorite for novel products to be exported to China Favorite for products with nutritional benefits

Chinese consumers have a preference for in-shell tree nuts as snacks. Therefore, those in-shell but easy-to-break products will see great potential in China.

ShellShell PricePriceFlavorFlavor

China Tree Nuts Market – Consumer Behavior

Natural flavor is preferred by middle to high class consumers who are more aware of quality. For taste, south and east China enjoy sweet ones while salty is welcomed in the north.

Regardless of the increasing income, Chinese consumers are still price sensitive. To select from similar products, they will choose a cheaper one.

Part IV

China Pecan Market

China Pecan Market – Chinese Name

PecanBy meaning:

山核桃

By pronunciation:

碧根果

Bi Geng Guo

China Pecan Market - Overview

Pecan was introduced to China in 2002, before that there were no products available on the market.

Currently 7 varieties have been exported from US to China and the most popular one is Western Schley.

Varieties with bigger size and larger amount of meat are highly recognized by Chinese importers and manufacturers.

In-shell pecans are more popular than shelled ones due to its lower price and consumer preference. But demand for shelled pecans is largely unleashed for high-end market like being used in Haagen Daz ice-cream etc.

Feedbacks from traders show that there is increasing demand for value-added pecans like roasted or seasoned ones from US which could be sold to retailers directly.

China Pecan Market – US Export

US Export of Pecans to Mainland China in 2008

From 2004, there is gradually growth in the export of US pecans to China. From 2004, there is gradually growth in the export of US pecans to China. Due to various promotional activities like trade shows and trade missions, Due to various promotional activities like trade shows and trade missions, 2008 saw a tremendous increase in export volume. 2008 saw a tremendous increase in export volume.

China Pecan Market – US Export

US Export of Pecans to Hong Kong in 2008

With almost zero tariff, Hong Kong is a major base for tree nuts import in Asia

Therefore, the volume of US pecans exported to Hong Kong is much larger than that to Mainland China

After being exported to Hong Kong, pecans will then be distributed to southern or even northern China through grey channel

Therefore Hong Kong is usually selected as the gateway to China for US suppliers.

China Pecan Market – US & Competitors

8%

77%

15%

US Pecans

• US produces over 80% of total pecans in the world. • With the status as dominant supplier, US has occupied 77% of the market share in China.

Mexico Pecans Australia Pecans

• With good product quality, Mexico and Australia are able to compete with US and take 15% and 8% market share respectively.

The domestic production of pecans in China is still at infancy, it would take four or five years for large quantity of harvest for commercial sales.

China Pecans

China Pecan Market – Application in Bakery

From 2003 to 2007, CAGR (Compound Annual Growth Rate) of bakery industry reached 25.7%, far above the figure of GDP at 10.9%. And in 2008, the strong performance continued with total product sales accomplishing a remarkable year-on-year growth of 43%.

Unpackaged/artisan bread in China: - Sold mostly in supermarkets and bakery stores

- Chinese consider it fresh, healthy and good quality

Many bakeries are trying to create healthier products to cater to the consumers, by adding more additives such as walnuts, pecan, raisins, oats, etc.

Further research shows the number of Western-style bakery shops is growing. Western

pastries are even beginning to compete with traditional Chinese varieties and taking a larger share of the middle-class urban consumer segment.

While high-fiber products have seen relatively gradual growth globally, 2006 valuegrowth rates for Asia-Pacific was around 9% and an astonishing recorded rate of20% for China

China Pecan Market – Retail Market

Since access into Chinese market, US pecans have gradually become a popular snack foods on the retail market.

Supermarket & Convenience Store: a. Import (Raw) – Manufacture – Package – Retail Channel b. Import (Value-added) (– Package ) – Retail Channel Packaging: Plastic or paper bags Domestic famous brands: Orchard Farmer, A Ming, Baiweilin, Tenwo etc.

Department Store & Snack Chain Store

- Snack chain store is a new popular format in China, e.g. “Laiyifeng” opens over 1,000 outlets within 10 years

- Sold in bulk size

China Pecan Market – Opportunity & Challenge

Challenge

Opportunity

Improvement of living standards Increasing awareness of product quality, value and nutritional benefit Growing demand for tree nuts Almost no domestic production, rely on import Development of bakery industry

Price sensitivity Competitions from other tree nuts products Limited knowledge about specific nutrition and benefits of pecans Limited knowledge about the versatile application of pecans

Part V

Import Procedure & Requirement

Step One

Import Procedure & Requirement - Procedure

Sign a contract with Chinese buyers

Step Two

Entrust a domestic import company to import the products

Prepare documents according to laws and regulations

Step Three

Step FourStep Five

Application for inspection of imported commodities

Step Six

Customs formalities (declaration, tariff payment, inspection etc.)

Step Seven

Distribution in China

Completion of foreign exchange formalities

Retail HRI

Bakery

Import Procedure & Requirement - Document

Certificate of Origin

Phytosanitary Certificate (issued by APHIS)

Document for pecan import

Necessary documents for pecan import according to the requirement from Chinese laws and regulations

Commercial Invoice

Packing List Bill of Lading

Label(for pre-packaged

products)

Name/Brand Quantitative listing of ingredients Net contents and drained weight Name and address of manufacturer and distributor Production date/Minimum durability date and/or

Best before date Special storage conditions (if applicable) Warnings in relation to consumption or storage (if

applicable)

Import Procedure & Requirement - Labeling

China has issued a new regulation on the labeling requirement of food products. Therefore for imported pre-packaged foods, labels must be prepared both in Chinese and English. The information to be stated clearly in the labels includes:

There is no specific requirement on the labels of bulk products

Transaction Price

(Contract)

Transaction Price

(Contract)

Access Price

Access Price

Dutiable Value: CIF

Dutiable Value: CIF

Cost of Packaging,

Freight, Insurance etc.

Cost of Packaging,

Freight, Insurance etc.

Value-added Tax: 13% Tariff: In-shell Pecan: 25% Shelled Pecan: 20%

It is the most-favored-nation (M.F.N) bound rate enjoyed by US, therefore certificate of origin is necessary to enjoy this rate.

Import Procedure & Requirement - Taxation

Part VI

Marketing Suggestions

Marketing Suggestion

Title

A B

DC

Price

Middle to lower price for introduction of the products.

- In 2008, price of almonds decreased which

contributed to the growth of US export to China. (327%)

Channel

Pecans are most welcomed as snack foods, retail channel is the main target market.

Bakery sector is another key market for pecans as ingredients.

Education Currently the most

important thing for promoting pecans is to differentiate it from walnuts and hickory

Education on the nutrition knowledge of pecan is to be strengthened.

Ensure the quality of pecans exported to China as there is a stricter control on food

Quality

Marketing Suggestion – Trade Shows

SIAL China (May 2010)

China's largest and leading international exhibition for the food and beverage trade.

SIAL China (May 2010)

China's largest and leading international exhibition for the food and beverage trade.

FHC China (November 2010)

One of the biggest food and drink shows, focusing on Retail and HRI sector

FHC China (November 2010)

One of the biggest food and drink shows, focusing on Retail and HRI sectorBakery China

(May 2010)

International Trade Fair for the Bakery and Confectionery Trades in China

Bakery China (May 2010)

International Trade Fair for the Bakery and Confectionery Trades in China

FIC (March 2010)

FIC is the largest food ingredients exhibition in China and one of the largest in Asia to hear advice from exports on: market trends, price and supply issues, quality assurance standards, and environment regulations.

FIC (March 2010)

FIC is the largest food ingredients exhibition in China and one of the largest in Asia to hear advice from exports on: market trends, price and supply issues, quality assurance standards, and environment regulations.

Marketing Suggestion – Trade Missions

Pecan Trade Mission to China

Lead Texas pecan growers to visit China:- Retail Check: visit local retail stores and bakery stores to collect first hand information- One-on-one meetings with key importers, manufacturers, bakery operators etc to seek business opportunities- Product showcase

- Target cities: Shanghai, Beijing, Guangzhou (Chengdu)

Reverse Trade Mission to Texas

Organize Chinese buyers to visit Texas:- One-on-one meetings with growers or exporters to enhance mutual understanding for business cooperation- Plant tour: visit local growers’ plant to see the growing, processing of Texas pecans for the buyers to better understand the quality and value of Texas pecans

- Seminar: lecture given by professionals in pecan industry to educate Chinese buyers on the features of US pecans to raise their awareness

Marketing Suggestion – Media Campaign

As mentioned, one challenge facing US pecans in China is consumers’ limited knowledge about nutritional benefits of pecans and misunderstanding about pecans and hickory.

One effect way to address the constraint is through media campaign, currently there are some professional magazines in China focusing on food industry. Advertisings and advertorials could be conducted.

In addition, Interactive Program like guess competition on pecan knowledge through media is also a good way to convey necessary information to target consumers.

Marketing Suggestion – Bakery Training

Bakery Training Programs To promote pecan application in bakery

sector, bakery training programs could reach more pastry chefs and educate them on the versatile application of pecans in bakery products

The objective of the activity is through these pastry chefs to introduce pecans in bakery stores, hotels and restaurants which will lead to the increase of pecan sales in china.

• Recipe development: use US pecans as ingredients• Invite guest chefs from Texas• Lecture on US pecans• On-site demonstration of cuisine preparation with US pecans• Practice by pastry chefs from local bakery stores and HRI