Proyi Report

Issue: No. 1 Thursday, May 7, 2020 REPORT: Proyi Consultancy Subscribe to us to get monthly information and inspiration on food industry in China Dairy Market in China Meet the author of the Dairy Market in China Report

Source: chinadaily.com.cn Simone Ciuffi Simone Ciuffi is our Proyi Consultancy’s data analyst, who based in Shanghai, China. He has professional knowledge Summary and experience as a food consultant. Besides his expertise in Food Industry, China presents itself as one of the largest dairy markets worldwide, and there is every he also has the academic background in Sustainable Tourism, Rural reason to believe that it will increase its importance in the following years. In China, Development. dairy consumption is constantly growing but the domestic dairy production does not >> Get in contact with author yet guarantee sufficient supply of products. Therefore, foreign imports are already widely distributed in China market and they include an increasingly variety of products. Besides milk, milk powder and infant formulas, Chinese consumers are also becoming familiar to yogurt and cheese. The popularity of >> Start reading on Page 2 foreign brands and new dairy foods is linked to the influence of western food habits and the possibility for a largest number of Chinese to choose a more expensive and higher quality product. Australia and New Zealand are the main importers of dairy products into China, but EU countries have recently increased their market share. Opportunities arise for foreign dairy food operators to market their products in China, but they must take into account a) consumer segmentation, b) current food trends, c) food registration procedures, d) sales channels and e) marketing strategies. About the Company

Proyi Consultancy was founded by Emmy Zhang and her team in 2015, it Index provides four services including: Diary Consumption in China ...... 2 Specific Occasions ……………………………………….3 Consultancy (technical, project Demand vs Supply ………………………………………..2 Different Flavors …………………………………….…….3 management, international trade and business development); Training (food Import Size Market………………. ………………………2 How to Import in China …………………………………..3 law, environmental policy); Sourcing Suppliers ……………………………….…………………..2 Registration and Claims ………………………………….3 and Talent pool. Proyi is expanding fast Food Trends ……………………………………….………3 Sales Channels ………………………………………..…..3 and have two offices in NL and CN. Plant-based Dairy ………………………………………..3 Marketing ………………………………………….……….3 Target Audience…………… ……………………………..3 Products …………………………………………………….3 >> Visit the company site

1 Report: Dairy Market in China On the Side Dairy Consumption in China lactose intolerant, plant-based milks are also becoming Goat Dairy Products quite popular as an alternative to regular milk, with a China is the second largest dairy market in the world market size growth of 17% between 2015 and 20172. after US, having the demand for dairy tripling over the last 20 years. But China has not always been a great Some kinds of cheese happen consumer of dairy products, which have started to be to be easier to digest for integrated in the diet only from the ‘80s. Since then, lactose intolerant people, more and more Chinese people have been craving for making it a suitable product for milk, yogurt and even cheese, and this has occurred for a growing market audience, a number of reasons. who is today more familiar with western foods like pizza. Firstly, and this point has great significance in China, the government has been the biggest promoter of dairy Demand vs Supply consumption among its citizens. Dairy consumption In China, dairy production does not yet keep the pace of was included in the party’s 13th five-year plan of 2016, the demand growth rate. Looking at the time frame and in the same year the Chinese Nutrition Society has 2013-2017, it can be observed that the dairy production updated dietary guidelines, recommending that each resulted in a CAGR of 2.1%, while the dairy Chinese adult should consume 300 grams of dairy per day. The health community have been publishing further dietary recommendations and promoting trainings to raise the interest of consumers in dairy. Since there is a high diffusion of lactose intolerance in Dairy products in China are mostly Chinese population, the government is promoting milk related to cow milk, but sheep, goat consumption for infants, which is an efficient way to and buffalo milks are also produced reduce future population’s intolerance. and sold in China. In particular, goat milk is increasing its popularity as an What contributes to the raising demand of dairy alternative milk for infant formula products is also the higher purchasing power of products. This 2020, goat infant formula Chinese middle class, especially in 1st tier and 2nd tier market is estimated to reach rmb 10 cities. The higher expositions they have to international consumption scored 2.7%3. Forecasts for 2019 billion, while it was rmb 5 billion in 2015 trends and foreigner habits is favoring an interest expected an increase of 2.3% for China’s milk and only 300 million in 20088. toward western lifestyles, including food products. production, against the consumption for dairy products Chinese consumers are getting interest 4 Being influenced by both western lifestyle and which was predicted to reach 2.5% . in goat milk for three main reasons9: government recommendations, Chinese consumers are Some possible causes for this gap can be found in paying great attention to their wellbeing, and desire to 1. Its protein composition is more certain costs (e.g. feed and land) that the domestic dairy similar to breast milk compared to consume healthy and nutritious food. In this respect, production has to cope with. Small dairy farms are dairy products are appealing because they provide an cow milk, and it contains higher closing their operations and the production is shifting to levels of calcium. important amount of protein, calcium, vitamins and large-scale farms, but this change is happening at low minerals, besides favoring essential nutritional pace. In addition, Chinese companies are still 2. Fat contained in goat milk is easier functions. recovering from the climate of distrust that followed to digest and present more Infant formula is one of the past scandals related to milk and infant formula quality, nutritional benefits, such as highest requested products, resulting in consumers’ lack of confidence on domestic preventing infantile constipation, considering that only 25% of dairy products. favoring the growth of intestinal probiotics, supporting Chinese mothers breastfeed their And despite the success and expansion of national infants. Yogurt market is also cardiovascular health and improving dairy brands, in the coming years consumption growth calcium absorption. growing, with 40% of Chinese is likely to keep exceeding domestic supply. This residents declaring consuming signifies a great opportunity for foreigner dairy 3. It contains fewer potentially 1 yogurt on a daily basis . Being a producers who did not yet entered China market. allergenic proteins and it present a large part of Chinese population low risk of lactose intolerance, which is relevant for Chinese consumers. Report: Dairy Market in China Some international brands are already selling goat infant formula, for example the brand Kabrita from the Dutch could be falling up to 90%, creating a surplus of stock Import Size Market Hepnoke Group or Karicare from the in Europe. China could then intercept the need of New Zealand Nutricia. Considering the In 2018, China has imported 2.74 million tons of dairy European companies for an alternative market. products, indicating an increase of 7.8% YOY, for an increasingly competition in the infant import value of USD 10.65 billion, up to 14,8% YOY5. Suppliers formula market, the goat milk niche could offer additional opportunities to Milk powder was the most imported product, The leading supplier to China is New Zealand, which foreigner manufacturers and importers. representing the 70% of the overall dairy import value in contribute with 52% of the overall dairy imports. EU 2018. The milk powder includes infant formula, raw milk countries are increasing their participation, with powder, whole milk powder (WMP) and skim milk Germany being the European largest supplier with 12% powder (SMP). of imports. In the following table the ten main suppliers for some of the most relevant dairy products are shown: Infant formula milk powder is highly imported because Milk, Whole Milk Powder (WMP), Whey, Infant milk of consumer’s distrust about the safety of Chinese formula, Skim Milk Powder (SMP), cream, cheese and products, but consumer perception is expected to yogurt. change by time and each year more Chinese citizens are opting for domestic dairy. However, it is predicted that the share of consumers choosing imported infant formula will still be around 50% by 20236. Besides powder milk, other products are also increasing Table 1. Main 10 suppliers for imported dairy products in 2019 (Tons)10 their market share in China. European cheese exports to China from January-November 2019 have been 24% higher than in 2018, while European butter exports have reached a growth of 36% compared to 20187. Demand of whey has instead shown a negative trend in 2019. Whey is highly used in pig feed and China pig farms have suffered lot of losses because of the African swine fever virus. In general, there are important growth opportunities for European food operators in China market, and this is even more significant after the new tariffs introduced by US, being the European dairy products one of the most affected by it. Considering the effect of the levy on food and drinks exports, it was mentioned that US imports

2 Report: Dairy Market in China Food Trends Chinese consumers are showing a rising interest in health-related and functional foods, including dairy products. The dairy industry has been developing a wide range of foods with functional claims, the most common ones being yogurt and other dairy drinks with digestive health claims. Within dairy products, other growing categories are related to protein or fibre claims. Reference Plant-based dairy, in particular soy-based, have been successfully marketed in China, where the population is already familiar with soybean and therefore more open to this kind of products. As already mentioned, the lactose of the Dairy Market intolerance of many Chinese has also contributed to the success of plant-based dairy. New opportunities can also in China Report be found by using diverse types of plants other than soybeans. Diversifying products depending on target audience offer great opportunities to better market dairy products. Elderly and children are the most favorable targets for dairy in China, and companies should be able to offer specific products for that age groups. Elderly expect foods for healthy aging, supporting bone health and presenting low fat contents, while brain and bone health claims are the most suitable for children. The dairy industry is developing products that can be suitable for specific occasions, such as sport, study or meals. This category is still not much explored, but it seems interesting in relation to the high consumption of dairy drinks and consumer’s attention to their wellbeing. Another opportunity for product development can be identified in the research of different flavor that the industry is exploring in China market. Milk and yogurt have been offered with a wide range of flavor (eg. Durian, Aloe Vera, 1. https://china.mintel.com/baogao- salted egg yolk, etc.), which have met the curiosity and the appreciation of Chinese consumers. yinliao-suannai 2. https://food.chemlinked.com/news/ How to Import in China food-news/plant-based-milk- Registration and Claims alternatives-market-china The process of importing dairy food products to China requires several steps that are regulated by Chinese food 3. https:// legislation. Depending on the role of the company, if it’s a foreign food manufacturer, an exporter, or both, different www.researchandmarkets.com/ registrations and licenses are needed. Beside the general Chinese food legislation, dairy products are subjected to reports/4911563/research-report-of- specific regulations and require special registrations, especially when including health and functional claims. import-of-dairy-products Regulations regarding infant formula, for instance, have been updated in 2018, integrating some more rigid 4. https://www.dairyglobal.net/f2r/? parameters for the registration of imported formula. returnurl=%2fMarket- Product labeling is regulated by other legislations providing guidance on how to develop proper labels that can be trends%2fArticles%2f2019%2f10% applicable in China market. If the product contains health functions, claims regarding that function must be in line 2fDemand-for-dairy-increasing-in- with the labeling regulations related to health foods. For packaging, food operators must consider China food China-478998E%2f contact regulations. 5. https:// Sales Channels www.researchandmarkets.com/ reports/4911563/research-report-of- Once the product has successfully completed all the required steps and it has been declared at Chinese customs, import-of-dairy-products the next step is to distribute it through the most suitable sales channels. A local importer, a distributor or a trading company would distribute the product to the retailers of a city, a province or even the whole country. Besides 6. https://www.interest.co.nz/rural- traditional sales channels, China has a well-structured and efficient e-commerce network. news/103825/guy-trafford-reviews- fast-changing-situation-around- E-commerce is an essential tool for foreign brands that are willing to enter into China market. E-commerce platforms chinas-dairy-demand-and-new results the first method of sale for yogurt and UHT milk, selling a large number of domestically produced dairy but also proving to be a reliable supplier for imported products. One of the most successful examples is Tmall 7. https://www.european-views.com/ Supermarket, an online retail supermarket mainly selling daily necessities, fresh products and snacks. It is managed 2020/01/europe-well-placed-to- by Tmall, owned by Alibaba group, which has its own legists system and commodity guarantee, ensuring an efficient benefit-from-soaring-chinese-dairy- environment for foreigner brands that want to sell their products at a low cost and also receive consumer behavior demand/ data. 8. https://global.chinadaily.com.cn/a/ In order to sell products through Tmall or any other Chinese e-commerce platform, foreign companies are expected 202001/02/ to have a related legal entity in China, besides being able to import the products in China. If companies wish to first WS5e0d38cfa310cf3e35581ed3.htm experiment within China market, an alternative would be the cross-border E-commerce, which is subjected to fewer l taxes and legal requirements. Chinese authorities have compiled a ‘positive list’ of products that can be imported 9. https:// and distributed through the cross-border e-commerce. Cheese, yogurt and whey are included in the list, while liquid www.agroberichtenbuitenland.nl/ and powder milk are not listed, with the exception of infant formula milk powder registered at the Chinese authority. landeninformatie/china/achtergrond/ Marketing goat-dairy Dairy products can target different consumer groups - based on age, social category, gender, etc. - and the way 10.https://www.clal.it/en/? consumers search and buy products vary between these groups. Foreigner food operators that have developed section=stat_cina dairy products targeting a specific audience should then choose the most suitable way to market, promote, and distribute their products. Chinese social media deserve attention because they can easily reach a large number of consumers. In order to increase brand awareness, foreigner companies may think about advertising on Chinese social media, which will favorably bring interaction with consumers. Products As stated above, the range of dairy products sold in China is now considerably wide and foreign companies are contributing to stimulate consumers’ interest towards new foods. The following table offers a representation of the imported products variety available in Tmall, which is one of the main B2C e-commerce players. It is not a comprehensive list, but it serves as an indication for foreign food operators.:

3 Products

MILK

Company Country Product image Product description

TheLand New Zealand Full-fat pure milk focus on Children’s growth with added vitamins

Anchor New Zealand Children milk with added vitamins

Devondale Australia Skimmed milk

Australia’s own Australia Children grow milk with high calcium

Flevomel Belgium Organic full fat milk high calcium

Muh Aria Germany Strawberry milk

Veco Zuivel Netherlands Organic pure milk child growth

WNS New Zealand WDOM 1.0% low-fat lactose-free milk 4.0g protein high calcium

4 Products

YOGURT

Company Country Product image Product description

Weidendorf Germany Room temperature yellow peach ﬂavored yogurt

Emmi Switzerland Low-fat blueberry ﬂavored yogurt

Me Milk Spain Yogurt snack for kids with added minerals and vitamins

Pascual Spain Spain imported Pascual Pascal fruit ﬂavored yogurt