Manufacturers must target Chinese mass market

China has become big business for food manufacturers. Major firms such as Coca-Cola and Nestlé now record sales of over $1billion in the China packaged food market, which is now estimated to be worth over €30 billion.

However most have failed to achieve annual revenues of more than $100 million. According to Jacques Penhirin, a principal in the Greater China office of management consultancy McKinsey & Company​, most foreign companies are neglecting 90 per cent of the market - more than 700m people - by target the wealthiest minority.

Writing in the UK's Financial Times,​ Penhirin argues that if they hope to become large-scale businesses in China, foreign companies will have to address the low and middle-income segments. In other words, they must change the way they approach the market while reducing costs.

One method would be for manufacturers to launch down-market brands at lower prices, as is often the case in the west. The problem of course is building a brand from scratch, and this can be expensive.

Another method would be to stretch their premium brands vertically. This involves a change in product formulae, packaging and pricing to reach a wider range of customers. The downside is brand dilution, where a premium brand loses lustre because a larger number of consumers are using it.

And to compete with low-cost Chinese companies, multinational consumer goods companies must find ways to reduce their costs enough to offer variations that are priced 30 to 50 per cent lower than their premium products, while still turning a profit.

Margins may not be as attractive, but the move will allow companies to grow faster in China, reaping increases in revenue and profit.

Of course, there are still plenty of dangers at the moment for any firm entering the Chinese market. For a start, the country's thriving industry in product piracy is increasingly spreading to food. This is not a new phenomenon - counterfeiting has long been a problem for beer and soft drink brands, with repeated cases of fake beer bottles exploding and causing serious injuries.

But added to this has been a marked upsurge in flagrant trademark piracy. This has affected many brands including Coca-Cola, Starbucks and even a number of leading cheese brands. Copycat or look alike products such as locally produced Haagen-Dazs ice cream are now flooding the market.

This is something that the leading manufacturers are all too aware of. Earlier this year, a scandal in China broke over the consumption of fake baby milk. At least 12 babies died, and the country's prime minister was forced to order an investigation.

Nestle is one of the biggest international food manufacturers in China and has a clear market lead throughout Asia in the growing baby food segment. Its baby products are generally regarded as premium brands, a position that the company is obviously keen to protect.

But if food companies can get their strategies right, then the rewards are huge. According to analyst Euromonitor, the packaged food market in China was worth nearly RMB293 billion (€29bn) in 2002, with sales rising steadily at a compound annual growth rate (CAGR) of 7.5 per cent in current value terms between 1998 and 2002.

This increase can be attributed to several factors. First of all, there has been an increase in per capita income levels, and the consequent increase in disposable incomes has brought about a shift in favour of branded and packaged food. Secondly, with changing lifestyles and growing urbanisation, there has been a wider acceptance of newer products like ready meals, pasta and frozen food in the larger cities, which has driven sales.

Foreign companies, says Penhirin, are therefore right to continue to target China's affluent consumer segments, since margins remain good and the market continues to grow. But in order to capture the true potential of China, they must turn their attention to the low and mid-income consumers.