China ripe for innovation in food and beverage sector

Published on
July 9, 2018

The invitations keep coming. The latest missive into SeafoodSource’s inbox -“Spicy shrimp range launched, seeking investment” – came from the “Shi Ke La Xian” brand, which is owned by a Jinan-based firm seeking franchisees to open stores around the country. 

Shi Ke La Xian is yet more proof that China’s food and beverage sector is currently in a state of frenzied growth, with seafood franchises a big part of that story. 

Seafood exporters have more choices as a result. Last month, Norwegian salmon exporter Bakkafrost announced it was teaming up with China’s Japanese-style dining chain Akasakatei, a brand operated by Shanghai Chi Ban Ting Food and Beverage Co. Akasakatei’s success in the mass market and its plans for expansion nationwide will create all kinds of opportunities for Bakkafrost. 

Meanwhile, the United States-based Acorn Group has started selling Icelandic seafood in China, citing growing consumption and a willingness among locals to pay premium prices for imported product due to worries over food safety. Yet, given that Acorn will be using Chinese third-party online platforms, it’s not clear where the logistical innovations promised in the company’s press release will occur. Distribution in China is not always efficient or reliable; there are gaps in standards between Shanghai and second- and third-tier cities such as Wuhan or Chengdu. That’s why many importers form alliances with local partners who handle all of the logistics and marketing.

Imported product commands premium prices in China, and international brands are seen as better at supply-chain management and traceability. In those truisms, perhaps there is a missed opportunity in Acorn’s model, which could be riding the current evolution in Chinese food and beverage sector to go direct to the consumer, either alone or with a local partner. 

These advantages should encourage exporters to take a more direct route – for example, retailing Icelandic seafood through a chain of Icelandic seafood restaurants or snack bars. Even a niche market in China is still a huge market – there remains plenty of room to invest in the F&B end of China’s seafood sector. There’s certainly room for new ideas in distribution and supply chains.

The ongoing evolution of China’s consumer/F&B market is making space for this kind of move. As part of its well-publicized effort to increase consumption as a percentage of its GDP, China is creating more leisure opportunities, such as theme parks and festivals, into which tourism-related yuan are flowing. China is the world’s top source of tourists and tourist spending, but it only earned USD 680 billion (EUR 579 billion) in revenue from tourism in 2017, or two-thirds of the USD 1.03 trillion (EUR 877.3 billion) raked in by the U.S. – which led in the global tourism revenue ranking, thanks to a huge domestic as well as inbound tourism industry. China has stated its aim to redress this figure by building up spending at home.  

An example of how this impacts seafood is the crayfish craze. Chinese diners have been spending CNY 168 (USD 25.29, EUR 21.53) per person on domestically produced crayfish dinners. Numerous government-supported crayfish festivals have popped up around key cultivation belts the east coast and central part of the country. As a result, Chinese exports of this crustacean have plummeted domestically. And big money has gotten involved. Leading state-owned financial firm Citic Securities published a report in 2017 on the F&B sector that claimed that 18,000 crayfish restaurants opened across China in 2016, up 33 percent year-on-year. 

State and local investment in China is flowing into all areas of the F&B sector. Private equity and venture capital firms are pouring vast pools of money – much of it from legacy industrial sectors – into targets promising more attractive returns. That’s why Hony Capital, which manages money for some of China’s wealthiest industrialists, bought the United Kingdom-based Pizza Express chain, which is now quickly expanding across China. And that’s why Belgium-headquartered Verlinvest has put USD 300 million (EUR 2xx million) into a joint venture with China Resources, a state-owned conglomerate. Verlinvest wants to invest in Chinese food and beverage companies, as it believes it can help them with distribution, branding, and technology.  

It’s not necessarily just imported products that stand to gain in China’s F&B revolution. China’s seafood market is distorted by huge prices being paid for so-called premium products, but there’s huge potential in supplying mid-priced product in innovative new environments that cater to the China’s rapidly expanding middle class, where the bulk of the growth in consumption is being seen. 

Abalone is a case in point. China accounted for 85 percent of abalone output in 2017, according to data presented at the recent International Abalone Forum at Xiamen University. That’s well ahead of smaller producers like Australia, South Africa, Chile, and New Zealand. But the bulk of the product is sold at lower prices in domestic wet markets and to local canners. That leaves lots of room for new value-added ideas. Meanwhile, dozens of new oyster bars have opened in most Chinese cities over the past year, commanding ultra-premium prices for imported oysters – prices that are paid by curious wealthy customers who go for the environment and the experience. Both in abalone and oysters – and far beyond, good marketing brains and ideas and sales formats are needed. 

There are local examples to study; indeed, there’s a new wave of Chinese food brands is seeking to replicate earlier successes seen in the current wave of F&B innovation. Among them is “Zhou Hei Ya,” which has become an instantly recognizable name by turning braised duck into a premium snack food sold in packaged form online and in stores around China. Now Zhou Hei Ya, which has also launched crayfish products, has teamed up with Chinese venture capital firm Tiantu Capital to launch a CNY 3 billion (USD 451.6 million, EUR 384.6 million) fund targeted at China’s consumer sector. Tiantu has sunk its claws deep into the sector, having also invested CNY 290 million (USD 43.7 million, EUR 37.2 million) into Freshmarket, an online food ordering platform. Zhou Hei Ya, meanwhile, showed net profits of more than USD 100 million (EUR 85.2 million) last year, growing sharply by clever use of online marketing targeted at young consumers.

The traditional giants of China’s convenience foods business, names like Tingyi and Want Want (both purveyors of instant noodles, which in another era dominated China’s snack market), have struggled as smart, well-researched F&B start-ups have tapped into changing Chinese consumer tastes with promises of healthy food and transparent food production processes. No surprise that new grocery chains Super Species and Alibaba’s Hema Xiansheng – and now electronic retailing conglomerate Suning– allow customers to choose their food from the floor and then watch it as it’s prepared behind glass-wall kitchens. Staff at Hema are trained to smile and be helpful – a relatively new concept in China’s F&B sector.

All of this shows Chinese consumers are open to new ideas when it comes to the food they eat and how they eat it. Seafood exporters have the product, but there’s an opportunity bigger than simply supplying it to a Chinese middleman who pockets the bigger share of the margin. There’s plenty of space in the market for new ideas. Now is the time to do it, as China urbanizes in the coming decade. 

The double-digit economic growth of the past decades has passed and the current growth will wind down as the economy matures. Growth in average disposable income (6.6 percent) fell behind GDP growth (6.8 percent) in the first quarter of this year, another sign of a steadily maturing (but still relatively fast-growing) economy. Rising incomes, urbanization, and a better-traveled Chinese populace that is getting more open-minded regarding new concepts are all reasons why investors are itching to invest in consumption-related stories.

The time to act is now. 

Photo courtesy of Yonghui Superstores Co.

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