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Food and Drinks


in China

Updated December 2009


Complimentary Summary Version

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Published by Schmittzehe & Partners, June 2009

Objective & Methodology:


Schmittzehe & Partners, an exclusively China-focused boutique management
consultancy, undertook extensive, broad research on the food and beverage industry in
China in 2008. Thus the data in this report mainly refers to 2007 figures unless stated
otherwise. In the interests of comparability and consistency, for market sizing and
growth we used figures from Access Asia /National Bureau of Statistics China. Other
data is available, such as Euromonitor, and indeed caution should be used with regard
to all data as for some segments, variations in values can be particularly large,
especially with Dairy, Bakery, Dried and Baby Foods. Our definition of the ‘Food and
Beverage Market’ excludes tobacco, alcohol, salt and sugar. Our definition for
‘Packaged Foods’ is ‘Food and Beverage Market’ less fresh foods.
These summary reports, as well as its full version, cover the findings of the above
research. These reports were written by Schmittzehe & Partners Shanghai-based
company analyst Sean Coyle with the collaboration and significant input of colleagues
David Guo and Benjamin Schmittzehe. For a fuller understanding of the subject, to
order the full report or for more in-depth analysis, please contact Schmittzehe &
Partners at: enquiries@SandPconsulting.com.

Disclaimer:
Schmittzehe & Partners strives to ensure the accuracy of all information contained in
this report. However, due to the fact that not all data can be verified, and that the
majority of the information is based on secondary sources or individual primary
sources, it is possible that errors or omissions may occur. Schmittzehe & Partners does
not accept responsibility for such errors or omissions. Details supplied by Schmittzehe
& Partners in this document should only be used as an aid to assist the making of
business and investment decision, not as the sole basis for such decisions.

Copyright:
All rights reserved to Schmittzehe & Partners, 2009.

For all questions:


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Email: enquiries@SandPconsulting.com
Telephone: +44 208 995 0886
Website: www.SandPconsulting.com

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Contents:

Page

1. Overview, Trends and Tastes 4

2. Fresh Food 6

3. Frozen Food 7

4. Chilled Processed Foods 8

5. Canned Food 9

6. Dried Food 10

7. Bakery 11

8. Dairy 12

9. Ice Cream 13

10.Baby Foods 14

11.Confectionary 15

12.Sweet and Savoury Snacks 16

13. Sauces, Dressings and 17


Condiments

14.Non-alcoholic Beverages 18

15.Concluding Remarks 19

16.About Schmittzehe and Partners 20

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Food and Beverage

Total food and non-alcoholic beverage sales in 2007 were RMB1,082bn, up from
RMB449bn in 2001. That is a year on year growth of 14.8%, which is more than twice
the Asia-pacific average for that period.

Growing presence of supermarkets improving market access for packaged


foods
Much of the packaged food sold is done so through supermarkets and discounters,
which account for 35% of all packaged food sales. The distribution of packaged food
relies to a great extent on the existence of organized retail networks; hence cities with
more developed distribution chains see better sales of such goods.

Rising incomes creating more demand for packaged foods


As middle class income growth continues to outstrip lower income growth, China’s food
consumption is also becoming more divergent. However, incomes are rising
everywhere, and as they do consumers continue to ‘trade-up’, spending more money
on packaged, value added goods.

Health consciousness is growing


Health is becoming a growing issue for consumers. Growing health awareness due to
advertising, government programs and numerous health scares about the food supply
has meant consumers pay strict attention to the reputed healthiness of a brand or
producer. This also explains somewhat the keen uptake of shopping in supermarkets,
as food sold there is seen to be more standardized and safer. Increased health
consciousness has also bolstered the demand for healthy foods, particularly
fortified foods.

Infrastructure improvement helping market access


Improving infrastructure means that more varieties of food are reaching inland 2nd , 3rd
tier cities and beyond. The improving infrastructure is simultaneously raising incomes
while also providing more goods to spend that income on. This combined with a decline
in self-sufficiency in rural areas, as more leave agriculture to work in industry, means
that while eastern markets are maturing, new markets are being opened inland.

The increase in food sales has been mainly benefiting organized retailers, with small
independents losing out on much of the growth. That said, regional markets are still
very fragmented. There is no efficient national distribution network in China, so many
national producers have to have regional production facilities and often rely on their
own distribution network. A poor cold-chain infrastructure also means frozen and
chilled foods and a lot of dairy cannot reach much of China. Many segments have a
huge number of local producers, meaning that a national market leader may only have
5-10% of the market. Another cause of this fragmentation is the importance of local
business relationships as opposed to quality and price.

Even segments with relatively high consolidation remain very competitive, due to the
prevalence of price-based competition. A majority of Chinese consumers, even ones
who have money to spare, tend to have very little brand loyalty and will substitute
products quite easily.

Tastes differ by region


In the more developed regions, i.e. the eastern seaboard, consumers are becoming
more particular in their tastes, demanding more differentiated products tailored to
their local pallet. The growing importance of regional variation in demand is felt by
many foreign companies, who in response are opening up R&D facilities in China.

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The east coast with their higher incomes tend to spend more on indulgent foods
such as confectionery, as well as being more demanding of quality and healthiness
and more adventurous in the foods they try -tea flavouring is a popular additive at
the moment. Due to these factors, the east tends to be where most international
companies launch their new products in China. PepsiCo for example have their only
non-US research centre in Shanghai.

In the south west, growth of packaged food sales are strong, but the higher value
added products are out of the reach of most, so staple crops are the biggest
selling, while in the cities dairy products have been especially strong, including
yogurt.

In the south, products with multiple flavours and or long shelf-life tend to perform
strongest. Local producers tend to be the most trusted when it comes to freshness,
which is particularly important in bakery and dairy. However there is a shift in
consumer tastes in baked goods towards packaged biscuits, benefiting
international brands such as Oreos. Advertising is also of growing importance in
rural areas as consumers begin to move away from making purchasing decisions
solely on price. Consumers are very receptive to television advertising.

In central China, like in the west, consumers are quite poor so staple packaged
products are the most popular. Flavour is also particularly important in the region,
with traditional spicy and sour flavours usually winning out against anything else.
Packaging too, runs in accordance with tradition, bright and simple colours are
popular while red, violet, black and white are very unpopular. The value added
products tend to be dominated by national and international companies, while local
firms are mainly focused on the budget range. Despite this, brand loyalty is very
strong in key products such as condiments, were local producers sell more than
international brands.

Northwest China has the lowest consumption of packaged foods, as it has the
lowest consumer incomes. A majority of the packaged foods are sold in the main
cities like Urumqi. Baby foods have also seen strong growth, but it is still the lowest
in China.

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Fresh Food

Definition:
Chilled deli meats and fish as well as more staple foodstuffs such as pulses,
vegetables, starchy roots, fruits, nuts, eggs and sugar and sweeteners

Overview:
The proportionally large amount of per capita consumption of fresh food represents
a lack of refrigeration in many homes. Many buy meat and vegetables to cook and
eat on the day of purchase.

Fresh meat is the biggest seller in the segment, with 48.78% of sales. Fresh and
dry vegetables are also of considerable size with 33.56% of sales. Fresh fruit and
fresh seafood are much smaller at 11.1% and 6.56% respectively.

Main Producers:
Company Produce Website
Chaoda Modern Fresh Food www.chaoda.com
Agriculture
China Green Fresh and Processed (frozen, canned, www.greenfood.org.c
pickled) Foods n
N.B. Illustrative examples only. Most fresh food in China is sold through wet
markets. The above companies sell to supermarkets and wholesalers as well as wet
markets.

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Frozen Food
Definition:
Red meat, poultry, fish/sea food, vegetables, potatoes, bakery products, desserts,
ready meals

Overview:
The segment is 17.45% of total packaged food sales, being worth RMB81.80bn in
2007. The CAGR for 2001-7 was 17.2%.

Some estimate that by 2017, the entire packaged food market will be fuelled 75%
by second and third tier cities, and to properly exploit these areas, a dependable
and efficient cold chain supply is sorely needed. Indeed there is huge waste due to
the lack of adequate storage and distribution. According to Cargonews, USD10bn is
wasted annually in the distribution of farm produce with 30% of all fruits and
vegetables being discarded.
Main Producers:
Company Produce Website
China Yurun Food Group Meat products, particularly pork. www.yurun.com.h
Company k
Daying Duck Company Frozen duck www.dy-duck.com
Henan Shuanghui Industry Frozen and Chilled foods www.shuanghui.n
Group et
Zhengzhou Sanquan Foods Frozen dumplings, frozen glutinous rice www.sanquan.co
Company Ltd. balls, frozen noodles etc. m

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Chilled Processed Foods


Definition:
All chilled processed foods, as opposed to fresh or frozen

Overview:
The market for chilled food is worth 3.69% of all food and beverage retail, or
RMB17.3bn in 2007. The CAGR was 16.8% for 2001-7, and is actually the highest in
the world.

However, compared to the growth of other segments in the Chinese food and
beverage market, growth is not above average. The segment suffers from the
same distributional problems as the frozen food sector, or possibly even worse as
the temperature band in which chilled food needs to be kept is narrower. The
market leader is chilled fish. This is primarily due to the fact that chilled fish in
China is actually quite a mature market, predating modern refrigeration, so the
market itself is not restrained by the same issues as the rest of chilled foods.
Main Producers:
Company Produce Website
China Yurun Food Group Meat products, particularly pork. www.yurun.com.hk
Company
DaChan Food Chicken meat products www.dachanfoodasia.co
m/
Henan Shuanghui Industry Frozen and Chilled foods www.shuanghui.net
Group
Hormel Deli meat, Ethnic foods, Pantry http://www.hormel.com/
foods, SPAM
Pacific Andes Group Frozen and Chilled Seafood www.pacificandes.com/
Canned Food
Definition:
Canned or preserved food, like meat, fish, vegetables, ready meals, soup, pasta
and fruit

Overview:
The market represents 7.16% of all packaged food, worth RMB33.54bn in 2007.
The segment enjoyed the highest CAGR of all segments with 21.4%, 2001-7.

Part of the reason that canned food has been growing so fast, especially in
comparison to frozen food and chilled food, is that it does not need to be
refrigerated. Growing supermarket expansion inland, while also extending the cold
chain, also helps distribute canned food. However in poorer areas consumers are
unlikely to have the means to refrigerate at home, so the first foods to be bought
will be in fresh or canned form. Canned fruit is the clear leader in the segment,
while canned meat as a proportion of the segment has declined slightly in recent
years.
Main Producers:
Company Produce Website
Hailong Foodstuff Company Seafood and vegetables www.hailongfoods.com
Shanghai Maling Food Canned Fruits, Vegetables and www.rcmaling.com

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Company Seafood

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Dried Food
Definition:
Rice, Dessert Mixes, Ready Meals, Dehydrated Soup, Instant Soup, Dried Pasta,
Plain Noodles, Instant Noodles.

Overview:
Dried food is worth 0.96% of the total packaged foods market, or RMB4.51bn in
2007. The market has the lowest CAGR at 12.6%.

One of the reasons for the low growth of the market is that it is an inferior good to
canned and frozen food, that is as income rises spending on dried food decreases.
The largest consumer group is likely to be those who are too busy to prepare fresh
meals. China is the world’s largest instant noodles market, with USD5 spent per
capita per year. Dried noodles are not viewed as particularly healthy, given that
deep frying is part of the manufacturing process. However more healthy variants
are coming on the market and are spurring much of the growth.
Main Producers:
Company Produce Website
Nissin Food Products Co Ltd Instant noodles www.nissinfoods.com
Tingyi Holding Corp. (Master Kong Instant noodles, beverages, www.tingyi.com
brand) bakery
Uni-President Food Co Instant noodles, drinks, dairy www.uni-president.com

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11

Bakery
Definition:
Baked goods, biscuits and cereals

Overview:
In 2007, the market segment represented 2.88% of total packaged food, hence
worth RMB13.48bn. Despite its small market share, the segment has a CAGR of
18.0%, making it the second fastest growing segment in China, and making China
the second fastest growing bakery and cereals market in the world.

The small market size is because bread in China is not a staple of the Chinese diet,
where in the south consumers are more accustomed to eating rice, and in the
north they are more accustomed to steamed buns and noodles.

Biscuit have been the fastest growing part of this segment, making China the third
largest market in the world next to the US and India. 70% of the consumers are
female, with sandwich biscuits and chocolate coated biscuits being most popular.
Small packs coming in 100-200g sell best. Sweet biscuits are by far the most
popular with a 60% market share and savoury with a decent 39% market share as
of 2005. Cereal bars in the same period were a mere 1%.
Main Producers:
Company Produce Website
Cereal Partners Worldwide (Nestle and General Breakfast Cereals www.cerealpartners.co.uk
Mills)
Kraft Foods Inc. Food www.kraftfoods.com
Conglomerate
Lotte Confectionary Confectionary www.lotte.co.kr/english
Orion Food Co. Confectionary ir.orionworld.com
The Garden Company Ltd. Baked Foods www.garden.com.hk/

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12

Dairy
Definition:
Drinking milk products (milk, flavoured milk, soy milk, powdered milk), Cheese,
Yogurt, and some other dairy products.

Overview:
It represents 6% of the total packaged food, worth RMB28.29bn in 2007. With a
CAGR of 19.1% over 2001-7, the segment is the second fastest growing in the food
and beverages market (joint with bakery foods and condiments) and it is growing
much faster than the global average. Sales in 2007 were over two and a half times
as much as in 2001, meaning that China is now the third biggest producer of milk
in the world, next only to the U.S and India. Most of the sales in dairy were made
through supermarkets, ringing-up 57.1% of all dairy sales, a vast increase from
almost nothing a decade ago.
Daily dairy consumption is overwhelmingly made up of liquid milk, accounting for
97.8% of consumption, while powdered milk only makes up 2.2%. Yogurt has quite
a large target market, 10-50 year olds, and it is seen as an 'introductory' product
for many Chinese to dairy products. Meanwhile the cheese market is quite narrow,
aiming at 20-30 year olds, but the demand is increasing impressively with 2005
sales being 3.6 times that of 2001, and imports of cheese increasing 56% year on
year to 7,241 tons in 2005. Butter is aimed at 20-40 year olds.
Main Producers:
Company Produce Website
China Mengniu Dairy Co.. Milk and Ice-cream www.mengniuir.com
Inner Mongolia Yili Group Co Milk, Yoghurt and Cheese www.yili.com
Shanghai Bright Dairy Milk and Yoghurt www.brightdairy.com/

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13

Ice Cream
Definition:
All retail ice cream.

Overview:
The data set we used did not include Ice Cream as a segment, and so it is difficult
to compare with other segments in this report. According to some sources,
including Euromonitor, the total value of the ice cream market in China was worth
RMB31.bn in 2006, with a 2001-2006 CAGR of 6.61% - this would make it a large,
but comparatively slower growth market. When segmented by price, low-end ice
creams are less than RMB1, mid-range is RMB1-2, and high-end is anything above
RMB2. 70-80% of sales in 2006 came from the mid-range.

While ice-cream consumption is set to grow, profit margins are quite low as there is
fierce competition particularly in innovation. The higher end of the market, where
margins are higher, is dominated by foreign firms such as Nestle and Walls.
However domestic dairy brands such as Yili and Mengniu also compete. There are
also a number of smaller, regional brands which have quite strong customer
loyalty, from which they may be able to grow in the future. Innovation, too, is a
strong feature of the market, with new products taking up 20-30% of the market
every year, so Chinese consumers are clearly still shopping around.

Main Producers:
Company Produce Website
China Mengniu Dairy Co.. Milk and Ice-cream www.mengniuir.com
Inner Mongolia Yili Group Co Milk, Yoghurt and www.yili.com
Cheese
National Dairy Brands (Meadow Dairy www.meadowgold.com
Gold)
Nestle Food Conglomerate www.nestle.com
Unilever Conglomerate www.unilever.com

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Baby Foods
Definition:
All baby food, which is dried foods, wet foods and formula milk

Overview:
The baby food segment is the second largest in the food and beverage market. The
CAGR was average for China, at 16.9%, but is still very high, especially when
considering the size of the market, which makes it one of the most dynamic.
Children are traditionally very important within the household in China, so in
addition to effects of the one child policy, parents are generally willing to spend a
lot of their incomes on their babies. This then coupled with increasing pressure for
parents to work longer hours or even away from their home town, and increasing
income levels, has pushed China into becoming one of the top three consumers of
baby food in the world. While in China past health scandals may have caused an
increase in demand for high quality foreign brands (which are often up to three
times as expensive) and even wet nurses, a majority of Chinese parents cannot
afford to trade up. Thus despite the impact of the Sanlu scandal, cheaper Chinese
baby formula will still be bought by their target market as they cannot afford any
alternative. The baby cereal market is small by comparison to other foods. It was
worth about USD580million in 2008. When it comes to the promotion of baby
foods, there is a need to convince the entire family of the baby of the value of the
product, not just a parent. This is because of the typically strong role family;
grandparents in particular, play in daily life.

Main Producers:
Company Produce Website
Danone (Dumex) Dairy, Baby foods, water www.dumex.com.sg
Mead Johnson Nutrition Co Baby foods http://www.mjn.com/
Nestle SA Food Conglomerate www.nestle.com
Inner Mongolia Yili Group Co Milk, Yoghurt and Cheese www.yili.com

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Confectionary
Definition:
Chocolate confectionery, sugar confectionery including gum

Overview:
The growth of the domestic market (including cereal bars) is out-performing the
global market. It increased by 17.1% per year from 2001-2006, compared to global
growth of confectionery in 2006 of 3%. The sugar confectionery segment is the
largest, with 49% of confectionery market revenue, thus equal to around
RMB7.8bn. The market share of chocolate actually declined from 44% in 2001 to
42% in 2006, despite strong growth in sales. Purchases of Chocolate, mainly from
eastern regions of China, are often for gifts rather than personal consumption.
However, there are signs that chocolate is being purchased at times other than just
traditional seasons for exchanging gifts such as Chinese New Year. Chewing gum
sales in China was worth RMB4-5bn in 2006, accounting for approximately 29% to
36% of the market. A vast majority of the chewing gum market is made up of
chewing gum sold on taste, rather than chewing gum sold on function, i.e. brands
claiming to improve dental hygiene. However functional gum has been steadily
increasing as a share of the chewing gum market, from a base of just 5% in 2001,
to 40% in 2006.
Main Producers:
Company Produce Website
Lotte Confectionary Confectionary www.lotte.co.kr/english
Mars (incl. Wrigley) Food Conglomerate www.mars.com
Nestle SA Food Conglomerate www.nestle.com
Want Want Holdings Limited Rice Crackers, Dairy and Beverages http://www.want-
want.com/en/

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Sweet and Savoury Snacks


Definition:
Crisps/Chips, Extruded Snacks and Nuts

Overview:
The savoury snacks segment has a CAGR of 16.7% for 2001-7. This strong growth
is much for the same reasons as baked goods sales are growing, in that changing
urban lifestyles are resulting in larger disposable incomes and faster lifestyles with
less time to prepare food. Snacks tend to be divided into two categories: eastern-
style such as dried/preserved meats, nuts and seeds, and western-style such as
crisps, and popcorn. Eastern-style snacks are consumed more at social gatherings
whereas the western-style snacks are consumed more on individual impulse,
especially amongst younger consumers who are more focused on taste than
nutrition. Snack food, such as crisps, are more popular in China than chocolate,
primarily due to the lower prices and snack foods greater versatility when it comes
to savoury tastes which are generally more popular than sweet ones. The crisps
market, which is dominated by western companies such as PepsiCo, have
sophisticated marketing and innovation to cater for these tastes, such as Frito-
Lay's Peking Roast Duck or Spicy Crab flavours. The need for innovation also
extends to the texture, shape and packaging. Shapes, such as flat discs, round
balls, twists and cones, are more valued by young consumers, in addition to flavour
and colouring. Older consumers however are more focused on the taste quality and
texture. The Eastern style snacks are quite varied, but simple and low value-add
while the markets are quite fragmented with numerous small local producers.
Main Producers:
Company Produce Website
Kraft Foods Inc. Food Conglomerate www.kraftfoods.com
Oishi Group Drinks, noodles, snacks and www.oishigroup.com
restaurants
PepsiCo Inc. Food and Beverage Conglomerate www.pepsico.com
Tingyi Holding Corp. (Master Kong Instant noodles, beverages, bakery www.tingyi.com
brand)

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Sauces, Dressings and Condiments


Definition:
Soy sauces, herbs and spices, ketchup, mayonnaise, cold sauces, tomato pastes,
spreads, meat and seafood paste, honey.

Overview:
The segment was 4.58% of total packaged food sales, or RMB21.45bn, in 2007. The
CAGR was quite high, as high as dairy and bakery products, at 17.1% for 2001-7.
Not only is the market growing quickly, but it also of considerable size globally,
accounting for nearly a third of all volume sold worldwide in 2003.

Ketchup, ironically of Chinese origin, is enjoying strong growth, primarily due to


consumers’ growing exposure to it, amongst other western sauces, through fast
food restaurants like McDonalds or KFC. In terms of tomato value added products,
China has been rapidly increasing its output both for the domestic market and
international export. By 2007 for example, China became the world’s largest
exporter of bulk tomato paste products. Most condiment sales come from Chinese
sauces, with foreign sauces mainly a niche market. Typical Chinese sauces are soy
sauce, chilli sauce and oyster sauce, each kind with its own wide array of
differentiated kinds.

Main Producers:
Company Produce Website
Lee Kum Kee Co Ltd Sauces www.lkk.com
Masterfoods (Mei Shi Fu) Sauces www.masterfoods.com
Shantou Nanfang Jiale Foodstuff Sauces, Coconut Products n/a
Co.

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18

Non-alcoholic Beverages
Definition:
All retail soft drinks and hot drinks

Overviews:
The compound annual growth rate was 14.4% for 2001-7, which is relatively
average for the industry in China; however its large size coupled with such a
growth rate means it is of considerable importance. Soft drink sales, RMB96.56bn
in 2007, are by far the market majority, representing 92.44% of all beverage sales.
Its 2001-7 CAGR at 14.2% is slower than hot drinks sales which are running at
16.9% for 2001-7. Sales of carbonated drinks, the largest segment of the
beverages market, have slowed down in recent years, and much of the growth has
been derived from diversified and tailored products. Ready-to-drink tea is the
second largest segment, by volume, selling 3.5m tons in 2005. Fruit juice is the
fastest growing segment with strong innovation in flavours and growing health
awareness following higher incomes.

Main Producers:
Company Produce Website
China Huiyuan Juice Beverages www.huiyuan.com.cn/e
n
Hangzhou Wahaha Group Beverages en.wahaha.com.cn
Jianlibao Group Beverages www.jianlibao.com.cn
PepsiCo Inc. Food and Beverage www.pepsico.com
Conglomerate
The Coca-cola Company Beverages www.coca-cola.com
Tingyi Holding Corp. (Master Kong Instant noodles, beverages, www.tingyi.com
brand) bakery
Uni-President Food Co Instant noodles, beverages www.uni-president.com
dairy

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Concluding remarks
On the demand side, increasing household incomes are resulting in overall growth
in F&B in China. However the increasing purchasing power of consumers is creating
more mid-range markets with greater discerning tastes, meaning more
fragmentation in consumers’ tastes.

On the supply side, improving infrastructure and supermarket expansion is


improving market access around China and potentially creating freer markets. This
should result in increasing competition in all segments of packaged foods around
China, with both high-end brands diversifying down and low-end brands trading up
to cater to the middle ground, competing on price, quality and specificity. This is
not a foregone conclusion however, as regional business in China is extremely
relationship dependent, and local governments’ interests may be more allied with
local business leaders than that of the greater economy.

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