China sets pace in brand innovation

In the Jinqiao Carrefour in eastern Shanghai, Coca-Cola and Pepsi – kingpins of the soft drinks industry the world over – are literally backed to the wall.

While Coca-Cola still has the biggest share of China’s $49bn soft drinks market, pride of place on a large display is given over to fast-growing local brews.

These include Wahaha’s vitamin-packed smoothies, Nongfu Spring’s exotic fruit blends, Wang Lao Ji’s herbal teas and scores of others like them.

None of these names would have resonance elsewhere. There is nothing more local than food and drink, as Roland Decorvet, Nestlé’s chairman and chief executive for China, points out. “Milk drinks are big here, and the most popular flavour is peanut. Second is walnut. Try to launch that in any other country and you won’t sell much.”

Just as US food and drink companies for decades ignored the rest of the world on the basis that their own market was big enough, so Chinese companies can afford to be similarly focused.

China’s soft drinks market is forecast to grow from $49bn last year to $86bn by 2015, according to Euromonitor, the data agency.

Moreover, per capita consumption of 46 litres is just a bit more than half the global average of 80 litres – and far short of the US’s 340 litres. Hence the marketing push by local companies to build brands, innovate and increase distribution.

“The local guys are innovating more and the foreign guys are having to play catch-up,” says Ted Hurley, associate director of fast-moving consumer goods at Nielsen, the information and analytics company.

He reels off a list of other local names: Mengniu, Yili and Bright Food in the dairy industry; Cofco, a state-owned agribusiness with food interests from grains to wine; and Uni-President of Taiwan.

“All have top-five-selling brands,” he says.

There are more prosaic examples. Toothpaste commands the same sweep of shelf space as in the west, with the same array of choice. There are tubes costing a few renminbi and international brands priced at up to Rmb18 ($2.77). In the middle of the shelving, with no fancy packaging or extreme promises, is Yunnan Baiyao toothpaste, priced at a punchy Rmb26.

Yet despite its price, Yunnan – a traditional Chinese medicine company that segued into toothpaste a few years ago – has steadily been taking share from the likes of Colgate and Procter & Gamble, says Mr Hurley.

“Yunnan has made the biggest market share gains in the past two or three years because it’s a local brand going premium – way more premium than anything else,” he says.

Analysts attribute the success of these brands to several factors. They say they have a stronger handle on consumer trends – although, ironically, several of these are global and include healthier diets and a desire for novelty.

In an effort to feed this, consumer companies constantly innovate. China is set to be the second-biggest testing ground for innovation in the world this year, Nielsen reckons.

Zong Qinghou, Wahaha chief, bemoans the ceaseless pressure to launch new tastes. “I am constantly having to launch new products,” he says, noting the average product lifespan is three years. It takes that long to bring new ones to market.

Arto Hampartsoumian, China chief executive of advertising agency Bartle Bogle Hegarty, says that the race to innovate between Chinese companies and their western competitors is risky. “Offering more choice doesn’t mean you can make more money … there is a risk of self-cannibalisation.”

All this creativity does not always lead to culinary delights or sustainable sales. Euromonitor cites Wahaha’s Pi Er Cha Shuang, a beer-flavoured carbonated tea. Customers, lured by the novelty, rushed to buy it – but few made repeat purchases.

Stumbles like this are not expected to prevent innovation. For one, local companies have big wallets – and their stock market listings and access to venture capital means there are plenty of sources to fund it.

While the brands slug it out in China, the battle is set to go global, as many local companies harbour international ambitions. Bright Food has sought to buy several overseas companies, while Wahaha wants to double its revenues, now Rmb55bn, to Rmb100bn in the next three to five years.

By Louise Lucas and Patti Waldmeir with Financial Times

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