China Food and Drink Report Q2 2008

If the press coverage that China's food safety standards are receiving globally is having an effect on the confidence of its trading partners, the scares seem to be having a fairly minimal impact on domestic food consumption growth. In BMI's newly-published Q208 China Food & Drink Report we examine the growth rates being experienced by China's meat industry - an industry that is typically one of the first to suffer in the face of food safety scares and consumer confidence issues in developed markets. The report also focuses on the different strategies domestic and international investors are employing to exploit the meat industry's potential, as well as the wider ways in which food safety scandals are affecting China's reputation.

The last three months have seen two investments of note in China's meat industry. In January, local processor Zhongpin revealed that it was to invest US$13.2mn in boosting its prepared meats production capacity. Although a fairly low level investment in an industry worth an estimated US$33bn annually, the involvement of local producers in added-value meat production is a fairly new trend and is indicative of the increased attention that this segment is receiving from consumers. Economic growth, increasingly busy lifestyles and a general desire to trade up in line with improving disposable incomes have all contributed to growth in the processed meat sub-sector and local producers are loath to let multinational investors reap the rewards for themselves.

Conversely in early February, US food giant Tyson Foods, the world's largest meat producer, revealed that it was to support its Chinese processed poultry enterprise with the establishment of a fresh poultry joint venture in the country. Tyson is to sell branded fresh poultry, looking to exploit its renowned brand name in order to build consumer trust at a time when skepticism about food origin is growing.

Interestingly, Tyson will be looking to leverage many of the same trends as Zhongpin - higher incomes, the aspirational nature of China's expanding middle classes, etc. - yet it will be operating in a much removed product area. Existing consumer familiarity with poultry means that category sales in China are growing by around only 2% annually, compared to annual growth of around 6% in the broader meat category.

This investment activity in China, the strategy employed by Tyson in particular, highlights the challenge of operating in this high-growth, immensely opportune, but still high-risk market. China falls in a midtable sixth place in BMI's Food & Drink Business Environment Ratings, which assess a market's investment potential relative to its regional peers. A vast population, abundant natural resources, sound short-term economic structure and growing urban spending are all trends that investors will look to exploit, and yet these must be balanced again a challenging food and drink regulatory environment, still weak distribution infrastructure and still acute rural poverty.