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Navigating the trends and regulatory terrain of the food & beverage market in China

Navigating the trends and regulatory terrain of the food & beverage market in China.

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In recent years, the impact of the COVID-19 pandemic on our daily lives and the value of health has become increasingly apparent. Coupled with driving forces like convenience and innovation, these trends have become paramount in shaping the landscape of China’s food and beverage industry. Today, Chinese consumers exhibit a more noticeable awareness of Health and Food Safety, a shift that underscores evolving preferences.

Despite its impressive growth, the Chinese market has substantial untapped potential. As the competitive landscape within the Food and Beverage industry undergoes rapid evolution to meet the preferences of the discerning consumer, along with new marketing and distribution channels of F&B products, the road is met with unprecedented challenges.

Navigating the fast-paced landscape of China’s food and beverage industry demands more than just awareness—it requires practical strategies tailored to the evolving preferences of the diverse consumer base. In the face of intense competition and the emergence of new marketing and distribution channels, businesses need hands-on expertise to thrive. Acclime’s team of consultants, equipped with up-to-date research, has delved into the intricacies of this dynamic market, providing actionable insights and tailored strategies for businesses aiming to succeed.

Insights into China’s food & beverage market

Market size

China is the world’s largest food importer and consumer, with a prominent demand for imported food and beverage products. The 2023 China Food Import Report reveals a compelling narrative of sustained growth in this sector. Over the past decade, China’s food imports have exhibited a remarkable compound annual growth rate (CAGR) of 12.3%, spanning from 2013 to 2023, as reported by authoritative sources[1]. In 2023 alone, the nation’s total food imports surpassed USD 139 billion, solidifying its position as a formidable player in the global market.

This upward trajectory in China’s food and beverage imports signifies the market’s sheer scale and emphasises the dynamic nature of consumer preferences and economic factors influencing this growth.

Trends

Increasing choice for healthier options

The ongoing trend of consumption upgrades in China persists, characterised by consumers in high-tier cities favouring premium and luxury goods and services. In comparison, those in lower-tier cities opt for branded products. Despite some dampening due to the COVID-19 pandemic, the inclination towards elevated consumption is rising. The F&B industry reflects a similar shift, as affluent and well-informed Chinese consumers increasingly prioritise better health and an improved quality of life. This has led to a surge in demand for products aligned with healthier lifestyles.

  1. Refreshing trends in non-alcoholic beverages: Acclime’s findings reveal a pronounced trend in the beverage industry, with a surge in the consumption of packaged drinking water. Notably, natural mineral water has experienced substantial growth, reflecting a heightened health consciousness among Chinese consumers who seek clean and natural hydration alternatives. Similarly, beverages with reduced or no sugar, cleansing juices, and nutritional drinks have witnessed heightened demand.
  2. Growth opportunities in health-conscious segments: Based on Acclime’s analysis, specific segments within the food and beverage categories are expected to have above-average growth. These include yoghurt, fresh dairy, innovative compound condiments, and health supplements. Plant-based products like protein, meat, snacks, and yoghurt are steadily increasing as more consumers adopt vegetarian, vegan, and “flexitarian” lifestyles, thanks to social media. Consumers embracing these lifestyles seek more accessible and convenient food options aligning with their dietary preferences.
  3. Urban wellness priorities: A survey reveals the significance of food safety for consumers in tier 1 and tier 2 cities, with a staggering 86% prioritising this factor in their purchasing decisions. Fresh and natural food items, such as vegetables, eggs, meat, and fruits, are highly coveted for their perceived natural and chemical-free qualities. This data is a compass for businesses targeting urban consumers seeking healthier alternatives.

Premium pleasures: branding for satisfaction

In addition to health considerations, Acclime’s research highlights a growing emphasis on consumer satisfaction derived from premium brands. As China’s middle class expands and wealthier consumers witness a surge in income, a notable shift is occurring in spending habits. Instead of favouring quantity, discerning consumers redirect their focus to premium products, opting for fewer but higher-quality goods. This shift reflects increased financial capability and a growing desire for elevated enjoyment and satisfaction, particularly within China’s premium food and beverage market.

  1. Premium seafood: an accessible indulgence: Within this evolving trend, the premium seafood market is experiencing substantial growth, making luxury seafood products more accessible to consumers. For instance, according to the Norwegian Seafood Council, the value of Norwegian salmon exports to China reached 735 million USD in July 2023, marking an export value increase of 13%[2]. Most seafood advertisements in China use words like imported or fresh. These advertisements highlight the foreign origin of seafood products, as Chinese people tend to trust them more.
  2.  The rise of premium alcohol: While baijiu remains the top-selling spirit in China, wealthier consumers are gravitating towards more luxurious alcohol brands. Premium alcoholic beverages, seen as status symbols, have gained considerable traction. The CEO of Vinexposium, Rodolphe Lameyse, says that Chinese consumers are joining the global trend of “drinking less but better”. IWSR’s data reveals a clear premiumisation trend across multiple categories in China, including beer, sparkling wines, and whiskies[3].

The rise of online shopping

Online sales have become an integral aspect of consumer shopping behaviour in China, with habits solidified during the pandemic, enhanced infrastructure, improved distribution channels, and a notable shift in brand loyalty towards the online sphere.

  1. E-commerce dominance: Online sales have entrenched themselves as a fundamental aspect of consumer shopping behaviour in China, a trend solidified during the pandemic. Bolstered by improved infrastructure and distribution channels, e-commerce is on the verge of becoming the cornerstone of retail. This collective momentum is expected to propel e-grocery penetration rates to an estimated 33% by 2024[4]. the collective momentum of digital shopping is reshaping the consumer landscape.
  1. Social media and live-streaming dynamics: In addition to traditional e-commerce platforms, social media and live-streaming have emerged as powerful tools in the digital shopping ecosystem. Chinese consumers are not just making purchases online; they actively engage with brands through social media and live-streaming platforms. For example, some companies use influencers to attract customers, finding influencers that relate to their brand’s values. These interact with consumers, raise awareness, and help build brands. These interactive experiences create a unique blend of entertainment and shopping, fostering a new era of consumer-brand interactions. As a result, businesses are increasingly turning to these platforms to enhance their online presence and engage with consumers in exciting ways.

Innovative products in demand

The importance of innovation in the Food and Beverage (F&B) sector is escalating, driven by the introduction of new products, innovative packaging, diverse channels, and creative marketing approaches to captivate consumers. In beverage drinks, companies consistently unveil fresh product launches tailored to appeal to younger demographics.

  1. Tailored culinary experiences: Local condiment players in China are at the forefront of introducing customised and functional products, catering to the diverse culinary preferences of consumers. A prime example is the evolution of soy sauce, with customised variants for specific dishes like clay pot, Hainanese chicken, and steamed fish. These specialised products command premium prices, showcasing consumers’ willingness to invest in tailored culinary experiences.
  1. Packaging as a marketing powerhouse: Innovative packaging emerges as a driving force behind increased sales in the F&B sector. Notably, a prominent Chinese beverage manufacturer has witnessed substantial volume growth for its packaged drinking water products, attributing success to imaginative packaging. Technological advancements, including the rise of live streaming in China, catalyse successful product launches. The visual appeal of “Instagrammable” foods and experiences resonates particularly well with younger consumers, influencing purchasing decisions and contributing to the overall success of innovative F&B products.

Navigating regulations in China

Decoding the regulatory landscape

China’s food and beverage industry operates within a regulatory framework characterised by stringent standards, ensuring product safety and adherence to local laws. Critical agencies primarily manage regulatory oversight, including the China Food and Drug Administration (CFDA) and the General Administration of Customs. Businesses venturing into this market must comprehensively understand the intricate regulatory requirements, from product registration to labelling mandates and stringent hygiene standards.

A pivotal component of market entry involves compliance with the General Administration of Customs (GACC) regulations. GACC registration for import is a prerequisite for businesses looking to bring their products into the Chinese market. This process comprehensively evaluates the imported goods to ensure they meet the required standards and adhere to regulatory protocols.

GACC registration procedure for producers:

  • Producers must provide proof of approval from local authorities, including food safety certificates, raw material details, adherence to processing standards, specified storage conditions, and evidence of quality management. New regulations also allow random testing of imported food by Chinese authorities. It’s essential to comply with product labelling in the Chinese language.
  • Importers must submit equivalent documentation and confirm their ability to process and store products properly. GACC retains the right to cancel registrations for food contamination or significant changes in exporting country regulations. Registration may be reinstated after a safety reassessment.

GACC registration procedure for exporters

  • Under Decree No. 249, foreign exporters of food and cosmetics must register a basic file with GACC through an online portal. This file captures the exporter’s basic details, including name, address, exported product groups, confirmation of truthful information provision, and contact details of the responsible person. Once completed, the exporter receives an officially designated number to include in export documents. Any changes to provided information should be communicated to GACC within 60 days.

Staying informed for sustained success:

  • Beyond initial entry requirements, businesses must stay vigilant about updates and regulation changes. The regulatory landscape is dynamic, and keeping abreast of any modifications is crucial for sustained success. This commitment to ongoing regulatory awareness enables businesses to proactively adjust their strategies, ensuring continued compliance and operational success in the intricate regulatory environment of China’s food and beverage industry.

Tariffs and customs unveiled

In the complex tapestry of China’s tax landscape, understanding and complying with value-added tax (VAT), consumption tax, and customs duties are needed for businesses engaged in international trade. Acclime stands as a valuable ally in this intricate journey, offering expertise and support to ensure seamless navigation through the complexities of these tax structures. Our team provides tailored solutions, leveraging in-depth knowledge of China’s tax regulations and staying ahead of updates.

Value-added tax (VAT):

    • Import VAT: Paid by entities or individuals importing goods. Deductible from output VAT when selling imported products. Consider a beverage company importing fruit concentrates for juice production. The import VAT, calculated on the composite assessable price, including duty-paid price, import duty, and consumption tax, impacts the overall cost structure.
    • Export VAT Refunds: Businesses can obtain VAT exemptions and rebates through the Exemption, Credit, and Refund (ECR) or the Exemption and Refund (ER) method. The ECR method can apply to a confectionery manufacturer exporting chocolates. This allows the company to offset output VAT on domestically sold chocolates against input VAT on exported materials.

Consumption tax (CT) for imported goods:

    • The Consumption tax (CT) is imposed on harmful, luxury, and high-end products. Rates vary based on the product type. Calculations can be done using ad valorem, quantity-based, or compound tax methods. CT applies to specific products, such as alcoholic beverages. Imagine a wine importer bringing premium wines into China. The consumption tax, calculated using the ad valorem method, is based on the taxable sales amount, reflecting the value of the imported wines.

Customs duties:

    • Import duties: Computed on ad valorem or quantity basis, including Most-Favoured-Nation (MFN) rates. Picture a food processor importing speciality spices. The import duty, computed on an ad valorem basis, would be determined by the duty-paying value (DPV) of the imported spices, impacting the final cost of production.
    • Export duties: Imposed on select resource products and semi-manufactured goods, based on DPV. If a fruit exporter ships premium fruits to China, the export duties, calculated on the DPV, are based on the transaction price between the domestic seller and the buyer.

Understanding these tax and duty structures is crucial for foreign companies engaging in import-export activities with China.

Strategies for market entry

Direct export:

  • Direct export is a viable and dynamic strategy for companies seeking to enter the vast and lucrative Chinese market. Often considered a short-term strategy, direct exporting involves directly selling goods, services, or technology from the exporting country to the final consumer in China. In this scenario, the entity facilitating the export is termed the exporter, based in the country of origin, while the entity in China receiving the goods is commonly known as the importer.
  • Some advantages of direct exporting into the Chinese market include the potential for greater profits, as this strategy eliminates intermediary costs and commissions. Direct exporters benefit from faster feedback on product performance in the Chinese marketplace, allowing for swift adaptations. On the flip side, some disadvantages of direct exporting involve its substantial responsibilities to businesses, including managing all logistics aspects such as licenses, standards, certification, and customs requirements. Communication challenges may arise, with potentially slower response times than local agents and technical support for products may be required, necessitating specialised expertise. Despite these challenges, the advantages of market understanding and flexibility position direct exporting as a strategic choice for businesses navigating the complexities of the Chinese market.

Finding a local partner or distributor:

  • Finding a local partner or distributor is also a great way to enter the Chinese market. A distributor buys your products and then sells them to customers through a third party or directly. Their income comes from the difference between their buying and selling price.
  • Opting for distributors as a means of entering the Chinese market has both benefits and drawbacks. On the positive side, distributors take on more risk, providing a sense of security for suppliers. This shared risk model gives distributors more substantial incentives to sell products actively. It’s also cost-effective, as suppliers don’t need a physical presence in the territory, and financial oversight is more straightforward by monitoring a limited number of distributor accounts. However, challenges include losing control over distributor activities, which can impact brand image, and relying on an exclusive distributor, which concentrates credit risk on one entity, increasing vulnerability to their financial stability and potential risks for the supplier. Achieving a balance between these pros and cons is crucial for businesses navigating China’s market through distributor partnerships.

Setting up an entity:

  1. Wholly foreign-owned enterprise (WFOE):

A Wholly foreign-owned enterprise (WFOE) in China is essentially a limited liability company (LLC) exclusively funded by foreign investors (wholly foreign-owned). This means that the WFOE is entirely owned (100 per cent) by foreign shareholders, granted that the industry is not restricted or subject to specific department requirements. Registering a WFOE has become the favoured entry method for many foreign investors aiming to enter the Chinese market.

There are three main types of WFOEs:

  1. Standard/Consulting WFOE: Licensed for consulting services within the service industry.
  2. Trading WFOE: Licensed for trading, wholesaling, retailing, and franchising activities in China. Additional registration at Customs is required for importing/exporting goods.
  3. Manufacturing WFOE: Licensed for manufacturing products. While the registration process is similar to other WFOEs, an environmental impact assessment must be completed before applying for the business license.

During registration, choosing a business scope is crucial and is decided at the outset. This decision, approved by the Bureau of Industry and Commerce, outlines the business activities the company can engage in. Setting up a local entity involves various decisions, including geographic location, invested capital, additional licenses, and corporate structure. Acclime, with its team of experts, is available to assist you in navigating through these decisions.

  1. Joint venture (JV):

Establishing a joint venture (JV) is another option for market entry. Similar to a WFOE, a JV is a LLC governed by the same rules and regulations in China. However, a JV involves multiple shareholders, including foreign individuals, foreign entities, or locally registered entities like a WFOE or a Chinese-owned company.

JVs entail joint management, which may pose challenges for companies lacking extensive international experience. Selecting the right local partner, such as local distributors, is crucial for setting up a JV. Conducting thorough due diligence and background research on the proposed JV partner is essential, particularly in restricted industries with limited foreign shareholder ownership. Building a relationship and trust are foundational steps in such collaborations.

Unlike a JV, a self-owned entity allows international companies to have legitimate control over the subsidiary. This control extends to marketing strategy, branding, trademark, selection of business partners, and other business activities.

Embracing opportunities in China

Economic promise and market potential 

Based on 2019 data from the World Bank, China’s final consumption relative to its gross domestic product stood at 56%, a notably lower figure compared to the 81.8% observed in the United States. A recent Morgan Stanley report suggests that Chinese consumer spending will double within the next decade, focusing significantly on services rather than physical goods. By 2030, it is projected that China’s private consumption will amount to USD12.7 trillion, a figure comparable to the current spending patterns of American consumers.

Within the Food and Beverage (F&B) sector, we anticipate above-average growth rates in premium alcoholic drinks, yogurt, fresh dairy, innovative compound condiments, packaged drinks, and health supplements[5][6]. In this context, investment opportunities are perceived in brands that construct a compelling premium narrative, companies providing health-conscious options employing innovative marketing channels, and e-commerce platforms and e-grocery facilitators.

Acclime assists in navigating the dynamic food and beverage landscape in China. Our on-site team in China delivers comprehensive services encompassing various aspects, from regulatory compliance to innovative solution implementation. Whether it is understanding the intricacies of food regulations or local business nuances, creating a market entry strategy, or ensuring compliance, Acclime is dedicated to supporting your endeavours. Our experts are committed to delivering tailored solutions to help your business stay compliant and competitive. Contact the Acclime team in China to embark on your successful venture.

Sources:

[1] https://www.statista.com/outlook/dmo/app/food-drink/china#revenue

[2] https://en.seafood.no/news-and-media/news-archive/norwegian-seafood-exports-totalled-nok-12.4-billion-in-july/

[3] https://www.theiwsr.com/how-has-chinese-consumer-sentiment-shifted-since-the-end-of-lockdown-restrictions/

[4] Euromonitor, Credit Suisse estimates, FMCG – Fast moving consumer goods.

[5] Euromonitor, Credit Suisse estimates, FMCG – Fast moving consumer goods.

[6] NBS, Jefferies estimates