The beginning of a new year is always a great time to take a step back and reflect. At ADN we like to use this opportunity while everyone else is making dumplings, watching the new year gala on TV and letting off fireworks to kick back with a bottle of baijiu in hand and consider what the coming lunar year has in store for food & drink brands in China. Specifically, if we were a brand looking at the China market, how would it compare to other potential target export markets and what would a brand need to be aware of before making a decision to either enter or double down on the China market?
The ADN Year of the Ox China SWOT analysis seeks to answer these questions and provide an honest appraisal of the strengths, weaknesses, opportunities and threats for food & drink brands of doing business in China over the next 12 months.
Below we’ve listed our thoughts and provided the briefest of explanations of why we think this is the case. More detailed analysis of these points and predictions can be found in our report on China’s Imported Food & Drink Market and COVID-19, which is based on interviews with dozens of importers and distributors in China and available here.
Strengths
- Huge size and growth of the market
The huge size and fast growth of the China market is well known, long established and looks likely to remain the case for a number of years. This is being driven by three macro trends, namely: the increasing numbers of middle class consumers; rising incomes of those consumers; and urbanisation.
- Government policy to promote consumption
For several years already the government has seen unlocking consumer consumption as the engine to spur China’s growth forward, re-orientate from an export- and investment-led economy and avoid the ‘middle income trap’. All the signs are that both national and local governments will continue to create and refine policies to encourage consumption.
- Consumers generally still have positive impression of imported products
Although not as strong as in previous years and increasingly less the case in other sectors (e.g. mobile phones and electronics), consumers generally look favourably on imported products for higher safety and quality, as well as often having a provenance that local brands cannot match.
- Consumers also willing to pay a premium for quality
This applies either to brands whose name carries a certain cachet, or can otherwise demonstrate their quality and craftsmanship.
- No requirement for specific packaging runs with Chinese language
China requires nutritional stickers in Chinese, but does not require the packaging itself to be in Chinese or altered in any way (as long as its compliant), which can save brands significant sums on packaging runs.
Weaknesses
- A highly competitive market where most of your global competitors in your niche are likely already selling
With brands from across the world all targeting the approximately 300 million or so middle class Chinese consumers, competition for their attention and wallets is fierce. Premium import supermarkets often carry over forty SKUs of bottled water – and that’s just water!
- A rapidly changing regulatory environment
Although the Chinese system isn’t a complete black box, it’s not unusual for key laws affecting your business to change with minimal or even zero notice. For example, recently anti-COVID regulations paused imports of frozen food overnight and have increased the costs on importers through new safety checks.
- No mutual standards recognition
Very few national standards are recognised in China and foreign brands often face intimidatingly large bills and a long wait in order to receive certification. Organic certification perhaps affects the most companies, with less than 250 foreign brands being allowed to sell as organic in China.
- Different marketing channels
It’s well known that most popular Western-based social media platforms are blocked in China and Chinese instead use various popular local apps instead. This means that most brands’ existing marketing content is not visible to consumers in China.
- Budget must be earmarked for local marketing and promotion
The fact that foreign brands must build a fanbase from scratch on unfamiliar platforms in a language probably not spoken within the company creates extra costs and – probably – the need to work with outside company to do this effectively.
Opportunities
- COVID recovery in China significantly better than elsewhere
China was the only major economy to grow in 2020 and looks to remain the only one to avoid recession in 2021. Its impressive COVID recovery means that life is more or less back to normal. Growth predictions in most categories have not been reduced, and often strengthened.
- Chinese market increasingly following international trends
China’s internet connected and often foreign-educated avant-garde young consumers very much keep on top of global trends – as well as setting trends of their own. Currently the glaring exception to this is environmentalism. However, with the government’s new ambitious and highly publicised climate targets, this is expected to change in the coming years.
- E-commerce now widely available opening up lower tiered city markets
E-commerce delivery times are commonly down to ‘same day’ and sometimes ‘same hour’ in China’s megacities. But it’s the extension of rapid e-commerce delivery capabilities across the country that is more interesting as consumers in lower (third, fourth, fifth) tiered cities are now driving the e-commerce revolution. And these consumers are the most enamoured with foreign brands.
- Highly integrated digital ecosystem further opens up online opportunity
Led by Alibaba and Tencent, China’s tech giants preside over a digital ecosystem where search, social media, entertainment and payments all come under one roof. This creates a seamless purchasing experience for consumers.
- Specific on-trend categories experiencing increased demand
A poll of buyers we work with identified healthy eating, instant/convenience food and items used for home cooking (fresh food and ingredients) as the top three major growth segments for the Year of the Ox.
Threats
- Bad faith TM applications
Although laws have been brought in to curb the problem, bad faith trademark applications continue to be a scourge for companies looking to enter the market. Please, please register your brand name as soon as possible if you’re considering entering the China market at any time in the coming years.
- Up and coming local brands
The preference for foreign brands is no longer a given and in recent years we have seen various Chinese brands in different segments that understand the zeitgeist among Chinese consumers and position their products in a way that perfectly appeals to their target audience. We expect competition from local brands to become increasingly fierce in the years ahead as we have already seen in the tech and cosmetics segments.
- International politics getting in the way
The deterioration of any country’s bilateral relations with China can have serious impacts on their brand’s potential in the China market. While consumers generally don’t care about geopolitics, tariffs and other measures can make products from that country less attractive to buyers. See Australia as a recent case in point.
- Tightening purse strings
Despite China’s strong recovery from the pandemic and continued growth in wages, many people in China are feeling the pinch. When you’re used to sizeable salary increases every year and suddenly perhaps having your salary frozen, that feels like a decrease. It’s never been more important for brands, even premium ones, to demonstrate they provide value for money.