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China
Forecast
This section was originally published on October 3rd 2005
2005 Consumer expenditure Food, beverages & tobacco (US$ m) Food, beverages & tobacco (% of household spending) Food Meat consumption (kg per head) Milk consumption (litres per head) Fruit consumption (kg per head) Vegetable consumption (kg per head) Confectionery, sales volume ('000 tonnes) Beverages Coffee consumption (kg per head) Tea consumption (kg per head) Alcoholic drinks, sales volume (m litres) Soft drinks, sales volume (m litres) Tobacco Cigarettes, sales volume (bn units)
Source: Economist Intelligence Unit.

2006 248,160 28.0 64 15 52 280 911 0.03 0.42 23,175 30,750 1,821

2007 275,073 27.4 67 16 54 285 924 0.03 0.42 23,692 33,430 1,832

2008 298,638 26.9 69 16 55 291 938 0.04 0.43 24,238 36,135 1,828

2009 325,907 26.4 72 17 57 296 952 0.04 0.43 24,816 39,079 1,815

2010 352,810 25.9 75 18 58 302 966 0.04 0.44 25,418 42,227 1,802

222,343 28.4 61 15 51 274 898 0.03 0.41 22,679 28,143 1,807

Consumption per head of many types of food and beverages remains well below the levels of developed economies. In 2002 average annual consumption of meat per head in China was just 52.5 kg, less than one-half the US level of 126 kg. The average Chinese citizen consumed less than 0.3 litres of wine in 2003, compared with the global average of more than 7 litres per head. Steadily rising incomes in China over the forecast period will result in a narrowing of these consumption gaps, and thus a strengthening of demand for many food and beverage products. Urbanisation will drive consumption trends Having said this, more important than the overall increase in demand will be a shift in its composition, which will be the result of urbanisation and, to a lesser extent, the ageing of the population. The UN, which estimates that 35.8% of Chinas population lived in urban areas in 2000, expects this proportion to grow to 40.5% in 2005 and 45.1% in 2010. During the same period the proportion of the population aged over 65 will rise from 6.8% to 8.1%. Both of these trends have the potential to have an important impact on consumption patterns. By moving to towns and cities people are exposed to a wider choice of foods and beverages, and they also begin to earn the higher incomes needed to take advantage of the resultant opportunities for consumption. As noted by the Economic Research Service (ERS) of the US Department of Agriculture (USDA), rural residents consume about three times as much grain as do urban residents, but urban residents consume more of everything else. Urbanisation can therefore be expected to lead to a shift in consumption in China away from grain and towards foods such as red meats, vegetables and dairy products. In terms of beverages, urbanisation will encourage a shift from consumption of basic tea and local beers to flavoured tea, fruit juices, premium beers and wines. The ageing of the population is likely to produce changes that reinforce some of these shifts but offset others. According to research cited by the

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ERS, elderly people in Japan tend to consume more rice, fruit and vegetables, while younger people generally buy more meat and beer. The tobacco sector may benefit from some of these changes, as rising incomes increase consumption of higher-grade cigarettes and cigars. But growth in overall demand for tobacco products during the forecast period will be held down by growing awareness of the health consequences of smoking. Experts believe that as many as 50m Chinese alive today face premature death as a result of smoking, a situation that is beginning to worry the governmentand which is prompting it to try to prevent too many more people from taking up the habit. This message is likely to catch on more quickly in urban than in rural areas: surveys suggest that the proportion of people who smoke has already begun to fall in the biggest cities. China will not become dependent on agricultural imports The continuous fall in the size of the annual harvest from 1993 to 2003 resulted in a shortfall of grain, leading to higher prices and consequently a pick-up in production in 2004. This shortage was reflected in a sixteenfold increase in wheat imports to 7.3m tonnes in 2004. However, this level was well under 10% of Chinas wheat consumption, allowing the government to maintain a rate of self-sufficiency in production of more than 90%. Furthermore, imports are not expected to assume a sustained upward trend, as the government tends to react to grain shortages in one year by launching an all-out drive to encourage grain production in the next. The government uses direct subsidies to encourage the production of grain at the expense of other crops. Officials have also been seeking to expand the total area sown to crops, for example by closing illegal industrial development zones. This drive seems to have played a role in the pick-up in production in 2004, when grain output rose by 9% to 469.5m tonnes. Looking forward, USDA expects Chinas wheat imports to stabilise at around 8m tonnes a year. It expects Chinese imports of maize, which were minimal in 2004, eventually to reach 5m tonnes a year, although not until the 2013/14 (July-June) crop year. The governments anxiety about keeping the country close to self-sufficiency in food in an aggregate sense will not prevent sharp increases in imports of particular products, a trend that will be encouraged by the implementation of Chinas World Trade Organisation market-opening commitments. For example, a 2004 cut in tobacco import tariffs and a relaxation of restrictions on the sale within China of imported cigarettes saw a 34.3% increase in the value of cigarette imports to US$51.2m in that year. Ideally, however, foreign companies want to avoid import restrictions altogether by setting up manufacturing facilities in China. But a rush of new greenfield tobacco investments is unlikely, as the State Tobacco Monopoly Administration (STMA) has ruled out authorisation of joint-venture production facilities for the foreseeable future amid manufacturing overcapacity in the sector. The STMA is attempting to promote the restructuring of the local industry around 36 companies. Continued rationalisation will also be the prevailing pattern in the beer sector. The recent wave of enthusiasm among foreign breweries towards the Chinese market will, however, start to fade, as investors start to digest the cost of the purchases that have recently been concluded. Some of these acquisitions have been expensive indeed: a US brewing giant, Anheuser-Busch, paid 50 times Harbin Brewerys 2003 profits to gain control of that company in 2004.

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Market profile
This section was originally published on October 3rd 2005
2000a Consumer expenditure Food, beverages & tobacco (US$ m) Food, beverages & tobacco (% of household spending) Food Meat consumption (kg per head) Milk consumption (litres per head) Fruit consumption (kg per head) Vegetable consumption (kg per head) Confectionery, sales volume ('000 tonnes) Beverages Coffee consumption (kg per head) Tea consumption (kg per head) Alcoholic drinks, sales volume (m litres) Soft drinks, sales volume (m litres) Tobacco Cigarettes, sales volume (bn units)
a

2001a 175,526 31.7 51 11 46 239 755 0.02 0.37 20,293 16,584 1,702

2002a

2003b

2004b 205,822 28.9 58 14 50 267 886 0.03 0.41 22,289 25,389 1,798

2005c 222,343 28.4 61 15 51 274 898 0.03 0.41 22,679 28,143 1,807

166,409 32.1 50 10 43 225 709 0.02 0.37 19,791 14,049 1,667

180,392 189,693a 30.5 52 13 47 254 811 0.03 0.39 20,935 19,507 1,720 29.8 55 14 48 261 869a 0.03 0.40 21,785a 22,868a 1,760a

Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

Source: Economist Intelligence Unit.

Overview

China is one of the largest consumers of food, beverages and tobacco in the world, and also one of the largest producers. According to the Economic Research Service of the US Department of Agriculture (USDA), in addition to being the largest producer of pork in the world and the third-largest producer of beef, China is also the worlds second-largest producer of poultry. China also makes and consumes more beer and cigarettes than any other country. Rising urban incomes are adding some sophistication to this raw market size, with urban residents in particular spending a higher proportion of income buying processed, packaged and sometimes imported food and drinks from supermarkets and eating out in restaurants. The situation for foreign companies wishing to tap this growing demand varies according to sector. In general the food, beverages and tobacco markets all suffer from considerable fragmentation, which leaves producers with little pricing power. Particularly in the agricultural and tobacco markets, foreign companies also have to deal with burdensome government regulations.

Demand

Demand for food, beverages and tobacco in China is highly uneven. In towns and cities, rapid rises in incomes throughout the 1990s led to far-reaching changes in diet. According to the National Bureau of Statistics (NBS), urban per-head consumption of grain, fresh vegetables and pork all fell between 1990 and 2003, whereas consumption of poultry and eggs, fish and shrimp, vegetable oil and dairy products rose. Moreover, of the grain and vegetables that are still eaten, consumption is shifting towards more expensive, higher-quality varieties, such as japonica rice. Rising affluence in urban areas is also changing the form in which food and beverages are consumed. Between 1998 and 2003 sales of dairy products and canned fruit rose by more than 150% and 60% respectively. Consumers in urban areas still drink tea, but increasingly in the form of refrigerated tea drinks. Tea in its many forms is the most commonly consumed hot beverage in China, although

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there are indications that, as in Japan, consumption of coffee is set to grow rapidly as the economy opens up. Urban residents are also developing a taste for other kinds of beverages: a market research firm, AC Nielsen, found that fruit juice sales in China grew by more than 40% in the year to April 2004. Consumption of fruit wine is at a low level, but is expected to grow rapidly: consumption was 0.29 kg per head in 2003, according to the China Statistical Yearbook, up from 0.24 kg in 2002. Urban consumers also have more money to spend on higher quality, imported cigarettes. Consumption patterns in the countryside, by contrast, remain for the most part much more traditional. Grain, for example, remains the staple food of the average rural diet: according to the NBS, rural residents consumed an average of 222 kg of grain per person in 2003, well above the 80 kg per head purchased by their urban counterparts. More generally, rural residents tend to consume food that they themselves have grown, or to buy fresh food from traditional markets for meals to be eaten at home. Consumption of beverages tends to take the form of tea or locally produced beer, and low-price, domestic brands of cigarettes are popular. This pattern of consumption is largely determined by income. Rural residents are generally much poorer than people who live in towns and cities, limiting not just their ability to buy, for example, processed foods, but also their ability to store them: only 15.9 in every 100 rural households owned a refrigerator in 2003, and the ratio fell to 6.7 in every 100 rural households in the less developed western provinces.
Nominal GDP (US$ bn) Population (m) GDP per head (US$ at PPP) Private consumption per head (US$) Number of households (m)
a

2000a 1,080 1,267 3,960 408.8 338.2

2001a 1,159 1,276 4,329b 434.5 345.3

2002a 1,304 1,285 4,727b 459.8 351.4

2003a 1,471 1,292 5,240b 492.6 358.1b

2004a 1,701 1,300 5,852b 548.8 364.9b

2005b 1,911 1,307 6,513 598.1 371.9

Actual. b Economist Intelligence Unit estimates.

Source: Economist Intelligence Unit.

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Pricing

Item White bread, 1 kg (supermarket) Sugar, white, 1 kg (supermarket) Milk, pasteurised, 1 litre (supermarket) Instant coffee, 125 g (supermarket) Wine, common table, 750 ml (supermarket) Gin, Gilbey's or equivalent, 700 ml (supermarket) Cigarettes, Marlboro, pack of 20 (supermarket)

Price (US$) 1.69 0.51 0.89 4.29 10.75 13.30 1.80

% of monthly personal disposable income 3.57 1.07 1.89 9.06 22.73 28.12 3.80

Affordability rank 55 out of 57 52 out of 57 53 out of 56 54 out of 57 52 out of 55 50 out of 53 53 out of 56

Note. Affordability rank: for each country the price of an item as a percentage of monthly personal disposable income is calculated. Countries are ranked according to these percentages. The most affordable country will have the lowest percentage and be ranked first.

Supplyfood

Chinas agricultural sector mainly produces grain469.5m tonnes in 2004. The 2004 outturn represented a rebound from a very low level of output in 2003 after several years of falling production. Grain output had been as high as 512m tonnes in 1998, but oversupply led to falling prices, and hence to a contraction in the sown area from 113.8m ha in 1998 to 99.4m ha in 2003. Strong grain prices in 2004 led to a rebound in the sown area to 101.6m ha. Some of the land lost to grain over the past few years has been used for non-agricultural purposes, such as factories, but some has also been used for the cultivation of crops such as fruit and vegetables, which, being more labour-intensive, correspond better to Chinas comparative advantage in the agricultural sector. The area sown to vegetables rose from 13.3m ha in 1999 to 17.7m ha in 2004. In the same period annual fruit output rose from 62.4m tonnes to 152.4m tonnes. During the past few years there has also been a steady increase in Chinas production of livestock products. Output of meat, for example, rose from 58.2m tonnes in 1999 to 72.6m tonnes in 2004. The rise in beef production, from 5.05m tonnes to 6.8m tonnes over the five-year period, was particularly dramatic. The dairy industry has also been expanding rapidly. For example, milk production, which is concentrated in the north and west of the country, has more than doubled in recent years, rising from 7.5m tonnes in 1998 to 18.5m tonnes in 2003. These vast production volumes have made China almost self-sufficient in food. This is no accident: avoiding dependence on imports is a major policy objective of a government anxious about the countrys future food security. This has not changed much in recent years, despite the cautious opening of Chinas agricultural sector that accompanied the countrys accession to the World Trade Organisation (WTO) in December 2001. Indeed, in 2003 imports of cereals and cereal flour fell by 27% in volume terms. Strong grain prices in 2004 did lead to a quadrupling in the volume of cereals and cereal flour imported to 9.8m tonnes. China imported no maize last year, but purchases of wheat abroad shot up sixteenfold, to 7.3m tonnes (with a value of US$1.7bn). These imports were offset by exports of 4.7m tonnes of cereals and cereal flour, which were down by 78% year on year in volume terms but reduced Chinas net imports to just over 5m tonnes, equivalent to a little over 1% of local production. So far in 2005 falling Chinese grain prices have reduced Chinas import needs while allowing for an increase in exports, with the result that Chinas trade in cereals and cereal flour recorded a surplus of 2.7m tonnes in January-August. In previous years, however, USDA has blamed government policy for the low level of imports. For example, as part of WTO entry the government agreed to introduce a system of tariff-rate quotas (TRQs) for imports of key agricultural commodities. Traders believe that TRQ allocation has frequently limited

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imports. For example, it has been reported that importers have been allocated a quota that is not large enough to fill a container ship. Chinas food industry no longer consists mainly of the primary farming and forestry sectors. The country also has a large and growing food-processing industry. The number of industrial enterprises using farm products as raw materials rose from under 54,000 in 2000 to over 60,000 in 2002. The output of the foodprocessing industry reached just under Rmb2trn (US$240bn) in 2002 (latest available data), up from Rmb121.4bn (US$14.7bn) in 1998. Between 1998 and 2003 domestic production of edible oils rose from 6m tonnes a year to almost 16m tonnes, and output of sugar increased from 8m tonnes annually to nearly 11m tonnes. It is in the market for processed and packaged foods that foreign firms are most active in China. Multinational giants such as Unilever of the UK/Netherlands, Nestl of Switzerland, the UKs Cadbury and Danone of France are all active in the market. So are Taiwan companies such as Ting Hsin, Uni-President and Long Fong. Foreign food companies have played an expanding role in the increasingly deregulated food sector for some time now. However, success has been mixed, with the huge potential being offset by problems with distribution, regulation and market forces, which have led to a slowness in embracing some global brands. The increased presence of multinational retailers such as Carrefour of France has provided global food brands with a strong platform on which to build, but a high degree of fragmentation, in terms of both regional coverage and market tastes, still presents a challenge. Supplydrinks The output value of the beverage manufacturing sector rose from Rmb158bn in 1998 to Rmb200bn in 2003. In terms of soft drinks, the increase in supply has been driven by rising production of bottled water, flavoured and carbonated drinks, teabased beverages and fruit juices. Foreign firms have played an active role in all these sectors. For example, sales of Coca-Cola grew by 22% in volume terms in 2004. Danone is the largest supplier of bottled water in China, although its leadership is largely owing to the purchase of successful local brands, notably the market leader, Wahaha, and the second-largest bottled-water brand, Robust. In an illustration of the development of Chinas beverages market, Wahaha has been branching into the tea drinks and fruit juice markets. In April 2003 Danone launched a new vitamin-enriched energy drink in China, Maidong, sales of which reached 270m litres in 2004. In 2002 China overtook the US to become the largest producer of beer in the world. Output rose by 5.7% in 2003 and then by a further 15.2% in 2004, to stand at 29.1m tonnes in the latter year. The recent rise in production has been accompanied by renewed interest in China on the part of some foreign firms. Overseas brewers first entered the Chinese market in the early- to mid-1990s, but when they discovered that large consumption volumes did not easily translate into profits many subsequently left, a process that is still continuing: in September 2004 an Australian brewer, Lion Nathan, sold its Chinese operations. One of the reasons for the disappointment suffered by foreign brewers has been the highly fragmented nature of Chinas domestic brewing industry, which has resulted in intense competition and thus low prices. The re-entry strategy of foreign brewers has been based largely on trying to ensure the consolidation of the domestic industry. Lion Nathans China operations were purchased by China Resources Breweries (CRB), Chinas second-largest beer firm, which is a subsidiary of China Resources and is 49%-owned by a South African brewing giant, SABMiller. SABMiller tried to take over the fourth-largest Chinese beer manufacturer, Harbin Brewery, earlier in 2004, but lost out to a US brewing giant, Anheuser-Busch (AB).

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Even before its purchase of Harbin, AB had an interest in the Chinese market through its 27% stake in Tsingtao, Chinas top brewery. AB also owns a 97% stake in Budweiser Wuhan International Brewing Company, which produces the Budweiser brand of beer in China. Production capacity at the Wuhan plant was increased to 3.2m hectolitres in 2004, and the company plans a further expansion to 4m hectolitres. SABMiller and AB are the biggest foreign brewers in China, but they are not the only ones. In late June 2004 Belgian-based InBev, a result of the merger of Interbrew with a Brazilian company, Ambev, agreed to acquire 70% of Zhejiang Shiliang Brewery for US$53.2m. The deal gave InBev, the worlds largest brewer by volume, a market share of nearly 50% in Zhejiang. The beverage giant now has 18 breweries in six provinces in China. In July 2004 Carlsberg of Denmark, together with the Danish Industrialisation Fund for Developing Countries, agreed to buy 50% of the Lanzhou Huanghe Brewery, which owns three breweries in Chinas western Gansu province, and to build a new brewery in neighbouring Qinghai, which was commissioned in July 2005. In 2003 Carlsberg purchased two breweries with a market share of 50% in Chinas south-western province of Kunming, and the company also has interests in Xinjiang and Tibet. According to the US-based Wine Institute, the area sown to vineyards in China rose from 172,000 ha in 1997 (equivalent to 2.2% of the global total) to 359,000 ha in 2001 (4.5% of the world total, and sixth in the world). During the same period Chinas annual wine production surged from 3.2m hectolitres to 10.8m hectolitres. At the same time as expanding, the domestic wine industry is also maturing. In May 2002 it became illegal to put products other than grapes into wine. Pressure is reportedly building for the government to introduce legislation to regulate the wine industry in general. Impetus for higher standards is also coming from consumers, who are becoming more choosy about the quality of the wine they drink. In a reflection of this, wine imported in bulk has fallen in recent years to under 10% of total domestic consumption. Chinas WTO entry resulted in a reduction in the import tax on wine from 24.2% to 14% in 2004. China has several local winemakers, including Changyu, Dynasty, Great Wall and Dragon Seal. It is these local brands that dominate the market. According to a 2002 survey covering eight major cities in China, carried out by a Sino-Hong Kong wine distribution company in the southern city of Guangzhou, WineMart, each person purchased domestic wines 5.1 times a year, whereas imported brands were bought 2.4 times a year. The survey estimated that domestic wines had a market share of 69%. Several domestic producers have formed ties with foreign firms: Changyu, for example, has links with Frances Castel. In January 2005 the municipal government of Tianjin floated Dynasty Fine Wines Group on the Hong Kong stock exchange in a well-received offering, making Dynasty, a joint venture with the Rmy Cointreau Group of France, the first of Chinas top five wine companies to open itself up to international investment in this way. The overseas firms active in China are no doubt excited about the potential size of the market. Even in the countrys richest cities, average wine consumption is only around one bottle per head each year, compared with a level of more than 60 bottles per head in France. The most effective strategies for increasing consumption in China, however, may not be the same as those that work well in other countries. According to a well-known British wine critic, Jancis Robinson, to a European palate Chinese wines tend to taste a bit vapid. This may be a hindrance to exports, but is perhaps less of an obstacle to domestic sales. More expensive European wines are drunk in China, but this is often a reflection of wealth rather than taste. Despite the maturing market, it is still not uncommon to see red wine being mixed with soft drinks such as Coca-Cola.
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Supplytobacco

Chinas market for tobacco shares some of the features of the food and beverages market. First of all, there is its size. With around 300m smokers, China is the largest market for tobacco in the world. According to State Tobacco Monopoly Administration (STMA) figures, China produced 1,874bn cigarettes in 2004, up by 4.7% year on year. The market remains fragmented, but the STMA has intervened to restructure the industry, with the result that by the end of 2004 there were 57 tobacco enterprises, down from 84 in the previous year. Some estimates have suggested that China has over 2,000 brands, with the top four accounting for less than 20% of the market. Fragmentation in the tobacco market has resulted from the role of provincial tobacco monopoly administrations in controlling the local tobacco trade and managing local manufacturing enterprises. PTMAs have been only too keen to establish new factories in order to generate revenue and employment at the local level. However, the STMA said at the beginning of 2005 that it would not permit the establishment of new tobacco factories, owing to the excess manufacturing capacity that already existed in the industry. There was a mere 4.5% increase in sales in 2004, to 1,878bn cigarettes. Even with 57 companies, there is still a need for product differentiation. In an attempt to achieve this, and to react to rising urban incomes, some cigarette companies in China have been looking to sell higher-quality products. In 1994 the Changde Cigarette Factory, since designated as one of the core 36 firms that the STMA is developing, launched the Furongwang brand, priced at over Rmb300 (US$36) per carton. This compared with basic cigarettes produced by Changde, which at that time sold for just Rmb20 per carton. Sales were, perhaps naturally, slow. Two years later the company reassessed and reduced the price of the Furongwang to around Rmb200 per carton, making them cheaper than the highclass Chunghwa (China) brand, sold by Shanghai Tobacco Group, and Hongtashan, made by Yunnans Hongta Tobacco Group. The results were impressive: 60,000 cases of Furongwang were sold in 2000, making it Chinas second-largest highgrade cigarette brand. Chinas membership of the WTO is allowing foreign companies an opportunity to tap this growing spending power. As part of its WTO entry agreement, China cut tariffs on cigarettes from 65% to 25% on January 1st 2004, and reduced those on tobacco from 40% to 10%. However, China National Tobacco Import & Export Corporation (CNTIEC) retains the monopoly on the import of cigarettes. The Shanghai Gaoyang International Tobacco Company manufactures Mild Seven and Mild Seven Light under contract for Japan Tobacco. However, the STMAs ruling that no new tobacco firms can be set up in China also applies to joint ventures. In July 2004 British American Tobacco announced that it had received official permission to build a factory with an annual capacity of 100bn cigarettes in partnership with China Eastern Investments Corporation. However, the STMA later denied that it had approved the project. A US tobacco company, Philip Morris, has sought to test the STMAs stance with plans to set up a factory in Fujian province, but so far a formal announcement has not been made, and the STMA seems likely to adhere to its existing policy. Useful web links Tsingtao (beer): www.tsingtaobeer.com Changyu (wine): www.changyu.com.cn Huadong Winery: www.huadongwinery.com Hongtashan (tobacco): www.hongta.com Coca-Cola: www2.coca-cola.com/ourcompany/cfs/cfs_china.html

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