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China Food and Drink Report Q1 2011
Business Monitor International, Nov 2010, Pages: 89
Business Monitor International's China Food and Drink Report provides industry professionals and strategists, corporate analysts, food and drink associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on China's food and drink industry.
In line with our bearish outlook through 2011, BMI is forecasting 7.5% real GDP growth for China, down from 8.8% in 2010, as the authorities are likely to focus increasingly on cooling inflation and placing less emphasis on growth. While the economy has shown remarkable resilience in recent months, we continue to expect a significant slowdown in economic growth in the short term, with net exports and investment spending the main drags. Consumer price inflation (CPI) pressures continue to mount in spite of the cooling in growth, with latest figures showing CPI to have risen 3.6% year-on-year (y-o-y) in September from 3.5% in August. As economic growth slows and the housing bubble shows signs of peaking, the last thing Chinese policymakers want is a growing CPI problem. However, the latest inflation figures suggest that price pressures are likely to become increasingly problematic for the People's Bank of China (PBoC), and will continue to weigh on consumer confidence.
Headline Industry Data
- 2010 per food consumption = +6.96%; forecast to 2015 = +40.6%
- 2010 beer volume sales = +14.0%; forecast to 2015 = +71.5%
- 2010 soft drink sales = +11.5%; forecast to 2015 = +65.2%
- 2010 mass grocery retail sales = +11.2%; forecast to 2015 = +63.7%
Key Company Trends
Domestic Retailers Reporting Strong Result – Despite a strong multinational presence in the Chinese MGR sector, domestic operators continue to dominate in many regions and have been reporting strong financials in recent months. In August, Chinese retailer Wumart announced that strong sales from new and existing stores helped it to post a 20.2% year-on-year (y-o-y) growth in profit to CNY280.4mn (US$41.3mn) during H110 (ended June 30 2010). Sales stood at CNY6.03bn (US$888.2mn), up from CNY5.11bn (US$752.6mn), while comparable-store sales grew 8.5%. This was followed by leading domestic grocery retail operator Lianhua Supermarket Holdings’s September announcement of stellar results for its recent half year, posting double-digit growth of 18.5% in top line revenue to CNY13.1bn (US$1.93bn) for the six months to June 2010. Turnover from its hypermarket division (which accounts for over 55% of the group's turnover) increased by 9.3% to CNY7.26bn (US$1.07bn) for the first half of 2010.
Foreign Retailers Want a Piece of the Pie – In September British MGR operator Tesco, which has been present in the Chinese market since 2004, announced that it will invest GBP2bn (US$3.1bn) in developing shopping malls and hypermarkets in China as it looks to gain ground on the country's leading MGR players. Tesco has a stated aim of opening 80 stores in the country by 2016, having already sold 41 UK-based stores in a sale-and-leaseback deal, generating over GBP950mn (US$1.43bn) to fund its expansion move into China. The retailer has adopted a strategy of developing 23 Lifespace-branded shopping malls complete with movie theatres, restaurants and its Tesco hypermarkets, giving itself greater control over the smaller retailers that surround its hypermarkets and removing the threat of not having its leases renewed, allowing it to fend off competition from smaller rivals.
Key Risks to Outlook
Housing Bubble Forming? – BMI remains wary of a Chinese secondary slowdown and possible risks of a property bubble burst in 2011 that could dampen demand for consumer goods. In addition, rising inflationary figures could weigh on Chinese consumption as shoppers tighten their purse strings and restrict spending on consumer goods. Over the medium term, we are looking at a slight erosion of China's export competitiveness as a stronger yuan and increasing wage pressures take effect.
Food Safety Issues Just Won’t Go Away – Health and hygiene scares continue to be a major concern in China’s food industry, with the government implementing crackdowns on chemical additives in food products. The melamine contamination scandal of 2008 had a major negative impact on the country’s dairy sector, as well as its international reputation for the safety of its foods.
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