China is the worlds’ largest producer of nutritional supplements and it is difficult for imported products to compete on price alone. Companies looking to produce nutritional supplements may look to establish production facilities in China to supply the Chinese or export markets.
It is reported that there are more than 3,000 domestic manufacturers of nutritional supplements in China, with 559 foreign brands and over 10,000 health food products on the market.
Getting your product into market
The sale of health food in China is via many layers of distribution. Usually distribution companies in tier-one cities will gain distribution rights from foreign companies, and then select provincial sub-distributors to penetrate local markets via their established relationships.
Like in other FMCG businesses in China, channels are very specialist and multiple partners may be required, this is especially true in new or specialist sectors such as children’s products, and sports and fitness. Even within the channels, outlets which may seem homogenous, such as supermarkets, may contain subtle differences. Of the obvious sectors; local stores, hypermarkets and high-end specialty stores, the latter is most recommended for introducing a new or premium product.
Building a brand in China not only requires high quality products but also financial support. For supermarkets, a minimum margin of between 30 and 40 percent is required, to much more with an increasing trend for purchasing direct from producers. Listing, promotion, and festival fees are shared by distributors and sub-distributors and thus need to be contributed to or built into pricing during discussions with the producers.
Regulations
Many functional health foods are registered as general foods to reduce the cost and time taken to register them as a product.
Health food products in China can be registered in one of five categories.
- General food: food which makes no claims of health benefits on its label or packaging.
- Functional food: food which makes claims of heath benefits on its label (functional claim's).
- Novel food: food which features ingredients or production techniques which have not historically formed part of the diet of the Chinese people.
- Special dietary food: food which is used to fulfil the specific dietary requirements of consumers. Special dietary food cannot make functional claims with regards to the product itself, but claims can be made with regards to the ingredients of the product in question.
- Other food: this category is for imported food where there are no applicable Chinese food safety laws. This is essentially a catch-all provision. The Chinese authorities call this category “food without Chinese food safety standards”.
For a health food product to be sold in China, it must be registered with, and have its label approved by, the SFDA. However, it is apparent that many foreign and local firms have chosen to register functional health foods as general food in order to reduce the time and expense of product registration and labelling.
Opportunities
The greatest opportunities for New Zealand health food products in China are colostrum, fish-liver oils, and premium honey products.
The regulation of health food and the issue of food safety in general will play key roles in shaping the market of the future. A raft of new policies have recently come into effect, increasing compliance and registration costs. Stricter standards regarding the claims health foods can make and stronger regulation of production sites are likely to force many smaller players out of the market. Indeed, several large health food players have stated that they are looking for acquisitions.
This presents a unique opportunity for New Zealand health food companies who are looking for local partners with the intention of expanding their operations and market share. The acquisition of stakes in New Zealand businesses could provide local Chinese companies with a source of raw materials, or high-quality, finished products which they would be able to market as being foreign.
A New Zealand company would gain additional capital and a partner with expertise in the China health food market and a distribution network for their products.
Challenges
Due China’s size, in both geographic and demographic terms, many companies are tempted to expand too far and too fast into China. For the businesses which have pursued this path, failure inevitably follows.
As is the case with many growing industries, the market has seen an influx of products, brands and companies. This has resulted in Chinese consumers being exposed to a huge range of products, both domestic and imported, with many local products of poor-quality, and in some extreme cases, harmful to the consumer.
In order to successfully build brand recognition and value, New Zealand companies need to take active steps to educate their target market and raise consumer awareness of the benefits of their products. This will be easier to accomplish for some products than others.
