Practical Guide to the Food and Beverage Market in China

Health, convenience, and innovation are currently the trends driving the food and beverage (F&B) market in China. After almost three years of COVID-19 pandemic, Chinese consumers are now more than ever before aware of the importance of health and food safety. This represents new investment opportunities in the Food and Beverage sector.

According to Statista, revenue in the food market will amount to US$1,386 billion in 2023. The market is expected to grow annually by 9.34% (CAGR 2023-2027). Approximately 34.6% of total revenue will be generated through online sales by 2023.

In the food market, volume is expected to amount to 427.30 billion kg by 2027. The Food market is expected to show a volume growth of 8.5% in 2024. The average volume per person is expected to amount to 223.50 kg in 2023.

China’s consumption upgrade trend is not a new one with consumers in high tier cities buying premium and luxury products. Chinese in lower tier cities are choosing more branded products. While the COVID-19 pandemic dampened spending to some extent, the trend is still present and increasing.

The F&B industry is experiencing a similar pattern. Affluent and informed Chinese consumers have begun to prioritize better health and a better quality of life. As a result, products aligned with healthier lifestyles have seen increased demand.

This is evident across the beverage industry. The packaged drinking water is the biggest beverage segment in China’s soft beverage market. While purified drinking water has a majority share of this segment, natural water and mineral water have increased the fastest in recent years because of growing health consciousness. Likewise, less or no sugar teas, cleansing juices and nutritional drinks have all experienced higher demand.

A recent survey revealed that 86% of consumers from tier 1 and 2 cites considered food safety before buying produce. Fresh food such as vegetables, eggs, meat, and fruits, is one category that is high in demand as it is considered natural and free from chemicals. In line with this, another area that is seeing growth is that of natural healthy packaged food such as salads.

Besides health and safety, Chinese consumers are showing a preference for the consumption of premium brands. Relating to alcoholic beverages, consumers are now placing more value on experience and enjoyment and hence prepared to pay more for products that fulfil this need.

Companies that offer a variety of premium products which focus on the “authentic, natural, healthy and quality" themes will enjoy a significant advantage in the Chinese F&B industry.

Just as the consumption upgrade trend, online shopping is not a new development. The mandatory COVID-19 lockdowns accelerated the pace of its adoption amongst consumers. E-commerce is now a vital part of consumer shopping behavior in China, with 34.6% of total revenue generated through online sales.

The e-grocery (fresh produce and fast-moving consumer goods) rate however has lagged at 10% penetration, and this is likely due to the short shelf-life nature of fresh food which puts demand on logistics, as well as offline channels such as convenience stores that cater to on-demand items. Improved infrastructure and distribution channels plus brands shifting online are expected to accelerate e-grocery penetration rates to 33% in 2025.

The digitally-savvy younger consumers enjoy the convenience of buying groceries online. And it is not just consumers in tier 1 and 2 cities that are doing so, shoppers in tier 3-5 cities are also embracing this trend and are expected to contribute to more than half of the increment in the e-grocery market size between 2019 -2025.

Another area hit hard by the COVID-19 lockdowns was the food service sector. However, experts estimate that the China Food Service Market will reach US$ 914.09 billion by 2027. China has the fastest-growing foodservice market in Asia.

China per capita income has been growing year on year, so eating out is becoming a common norm. The market demand for food services is increasing since its citizens are looking for a more convenient life, which implies that the future will also have a broader food service market.

Since 2020, the foodservice segment experienced a constant decrease due to the pandemic. But the steady recovery and lifting of restrictions gave Chinese diners the confidence to return to restaurants with proper precautionary measures.

During the health and economic crisis, the purchase of local products became significant for Chinese consumers. Despite financial difficulties in numerous families, the quality of food products remained undisputed and preferred. During the lockdown, home delivery had seen tremendous growth; however, as dine-out reopened, the situation returned to balance.

The Chinese foodservice industry is highly fragmented, with numerous players. Few multinationals hold a prominent market share, such as Starbucks Corp., Papa John's International Inc., Domino's Pizza Inc., Restaurant Brands International Inc., Tim Hortons, Jollibee Foods Corp., Ajisen (China) Holdings Limited, YUM! Brands Inc., China Quanjude (Group) Co. Ltd., Yoshinoya Holdings Co., Ltd.

Global players are expected to hold a prominent share, as there is an increased inclination toward pizza and other fast food.

Innovative products in demand

With competition in the F&B industry in China increasing fast, companies are looking to innovation to attract consumers. New products, new packages, new channels, and new ways of marketing are part of the latest market strategies.

In the beverage segment, companies are continuously creating new products to cater to younger consumers. Likewise, China’s local condiment producers launched various customized and functional products to meet the different cuisine demands of consumers. For example, in soy sauce, there are customized ones for clay pot, Hainanese chicken and steamed fish. The retail prices of these could be more than double those of ordinary products.

Innovative packaging is another factor driving sales in China. Technology is also playing a huge role in helping innovation and the popularity of live streaming has helped many new product launches attract the attention of younger consumers.

Online live broadcasting and direct to customer (DTC) online sales channels have become popular and efficient ways to reach consumers for brand building, marketing and sales, especially for emerging brands.

Based on 2019 World Bank data, China’s final consumption as a proportion of its gross domestic product stood at 56%, a low number compared to the 81.8% in the US. According to a recent Morgan Stanley report, Chinese consumer spending is set to more than double in 10 years, with an emphasis on services rather than goods. By 2030, China’s private consumption is set to reach US$12.7 trillion, about the same amount that American consumers currently spend.

In terms of F&B categories, analysts consider that premium alcoholic drinks, yogurt and fresh dairy, innovative compound condiments, packaged drinks, and health supplements will experience above average growth rates.

Data from China’s National Bureau of Statistics showed the cumulative retail value of grain, oil and food products produced in China were worth US$130 billion in the first half of 2022, up 9.9% year-on-year.

Experts admit that the current sanitary situation in China makes consumer trends unpredictable at the moment, despite China’s official data showing low infection figures and few deaths. Observers believe the lifting of the strict controls on movement could in fact boost the economy, regardless of the resulting increase in infections.

Chim Lee, a China/Asia analyst for the UK-based Economist Intelligence Unit (EIU), predicts the end of China’s Zero-COVID policy will have a mixed but – ultimately – net-positive impact on packaged food sales. Lee notes that, relative to other retail categories, food sales were a bright spot in 2022, as the packaged food industry benefited from people stockpiling food in anticipation of lockdowns and other restrictions on mobility.

Research group GlobalData noted that the overall value sales of packaged food in China crossed the US$1 trillion milestone in 2022, with an increase projected in 2023. GlobalData says meat, dairy, soy, bakery and cereals are set to be the largest categories in 2023, contributing well over half of overall packaged food sales in China by value.

Citing a recent survey conducted among several securities brokerages, analysts from Stockstar found that a total of 30 food stocks traded on Chinese bourses achieved growth in net profits in 2022. It singled out Guangxi-based Yanjin Shop Food, which mainly manufactures and sells snack foods containing nuts, tropical fruits, and marine products for its year-on-year profit growth (up 102.3%).

The service also highlighted three other companies: Sichuan-based Teway Food Group, which mainly manufactures hot pot ingredients (for the home-based cooking of tabletop hot pot recipes), seasonings and condiments; Shandong-based Delisi Food, which mainly processes and sells meat products; and Shanghai-based dairy-maker Milkground (each exceeding 70% year-on-year profit growth).

Even as China pursued its Zero-COVID policy and implemented sporadic lockdowns, the country’s packaged food industry still attracted investment in the last 12 months.

Multinational cheese maker Bel snapped up 70% of Chinese cheese maker Shandong Junjun Cheese Co. Bubs Australia entered into a venture for infant-formula production in China, while Thai Union Group set out plans to invest in China’s pet food market. Major south-east Asian dairy group Vinamilk invested in its domestic production in part to help support exports to China.

Research by GlobalData suggests there was a dip in deal-making in China last year, but some observers believe that the country’s packaged food sector may be headed into a period of consolidation, as the shift away from Zero-COVID could cause issues along the supply chain and upend consumer demand patterns.

There may be a disruption in the short term to the supply chain with workers becoming sick on production lines. In general, the overall situation may benefit the larger players who have better funding to weather a disjointed consumer market over the next one to two quarters and with a better distribution ability.

In the meantime, the green food sector in China also experienced significant growth. China is the largest manufacturing country globally and currently faces severe environmental problems. China needs to identify a new mode of economic growth to contribute towards environmental protection.

Green food is defined as food that is sourced from high-quality environments and produced using specific techniques with strict production quality process control, rendering these products safe for human consumption.

Innovations in technology have sparked China’s plant-based food renaissance. In China, the plant-based meat industry is projected to be a $13 billion industry by 2023. And with long-term plans to reduce meat consumption by 50% by 2023, China is becoming a key target for businesses looking to either expand or enter into the plant-based food industry.

Business within the food & beverage industry, may want to pay close attention to the fast developments that are taking place in China’s plant-based food industry. That’s because both plant-based and regular brands are starting to offer customers plant-based alternatives.

Studies have shown that transitioning to a plant-based diet can reduce carbon footprint by up to 73%. In China, there are efforts to curb the rise in obesity rates amongst the population.

Moreover, China’s growing middle class have the expendable income to make more health-conscious purchasing decisions.

In the past decade, Chinese consumers have been increasingly focusing on the safety and quality of food products, especially after a few highly publicized cases of adulterated products. Since March 1, 2023, the only regulation in China that specifically addresses the general requirements for the manufacture and sales of food-related products (including food-contact materials and articles) came into effect.

China’s State Administration for Market Regulation (SAMR) released the Interim Measures for the Supervision and Administration of the Quality and Safety of Food-Related Products (“Interim Measures”,) developed from a draft version that was published on July 31, 2020, for comment.

Compared with the overarching Food Safety Law (FSL), the Interim Measures refine some requirements targeted at food-related products but, overall, are not significantly different from the existing laws and regulations or current practice.

Although the Chinese government has developed more stringent regulatory measures, serious incidents have been recorded in the past, including unsanitary conditions in factories and contamination of food products by pathogenic microorganisms, pesticides, and heavy metals. The most famous case was the contaminated baby formula, which resulted in the death of six infants and over 50.000 hospitalizations.

For this reason, the Interim Measures list a series of food-related products that are prohibited, such as products that use raw materials and additives not conforming to food safety standards, as well as other substances that may endanger human health, or use additives beyond the scope or limitation.

Products with the content and migration of pathogenic microorganisms, pesticide residues, veterinary drug residues, biotoxins, heavy metals, and other harmful substances exceeding the limitation under food safety standards and adulterated, or fake products are also prohibited.

The list includes products that have been ordered by the government to be prohibited/phased out from the market, products that forge the origin or forge or falsely use another's factory name, address, etc. and any other products that do not conform to laws, regulations, and food safety standards.

In recent years, China has tightened the management of plastic pollution and has banned the production of certain plastic items, such as ultra-thin plastic shopping bags with a thickness of less than 0.025 mm (see K&H’s 2022 Year-in-Review on China’s food packaging regulations).

The industry will need to pay closer attention to the development of China’s industrial policies that will affect the supply of food-contact plastic products, since more restrictive policies are expected in the future.

Basic Quality control requirements in the whole production process of food-related products are included as well. These requirements are principles and do not exceed what is expected for production quality management of food-related products.

Food products must have “identification information” (name, production date, shelf life, type, category, precautions, and warnings) which does not necessarily refer to “labeling” information. In this respect, the Chinese GB food packaging standards are more specific.

For example, GB 4806.1-2016, the General Safety Standard, regards the information on the label, the instruction manual, or the declaration of compliance all as product identification information, and therefore allows the identification information to be provided on the label, in the instruction manual, or in accompanying documentation.

Fines will be imposed on food manufacturers and operators who violate these rules.

Companies must obtain a Food Production License to engage in food production in China. The General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) is responsible for the nationwide administration of food production licensing, while local Quality and Technical Supervision Bureaus (QTSBs) are responsible for administrating the scheme within their respective administrative regions.

In terms of requirements, the enterprise must possess the means for processing the specified type and volume of food products and must maintain the cleanliness of facilities. All staff involved in food service must undergo China Food and Drug Administration (CFDA)-approved safety training and a system must be in place for ensuring food product safety, including the prevention of cross-contamination. These requirements also apply to the Food Distribution and Catering Licenses.

Applicants for a Food Production License should additionally set up a health inspection and inspection records system or other health management systems for their personnel, establish a goods purchasing and pre-delivery inspection records system, and other food safety management systems for basic food ingredient inspections and manufacturing processes.

Site inspection by two to four inspectors will be conducted at the food production venue, and a product sample inspection will be required. Food Production Licenses are valid for three years and applications for renewal should be submitted six months prior to expiry.

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