Market Information
Asia Pacific

The Dairy Market in the Yangzi Delta

Canadian Consulate in Shanghai
Suite 604, Four Shanghai Centre
1376 Nanjing Xi Lu
Shanghai, China
200040
Tel: (86-21)6279-8400
Fax: (8621) 6279-7456
E-mail:
Internet: www.shanghai.gc.ca

MARKET OVERVIEW

Historically, dairy products have not played a significant role in Chinese culture or cuisine. Lactose intolerance, no historical precedent of use, and an undeveloped dairy industry combined together to restrict market growth. Today, the demand for dairy products has changed. Over the last decade, consumption of dairy products has increased and the industry is changing to meet the new demands.

Although the industry has and will continue to grow, the current market remains small. The average Chinese person consumes 7.2kgs of dairy products a year. Given a global average of 100kgs, or 205kgs of developed countries, there is room for market expansion and growth.

The China Milk Industry Association has predicted a per capita dairy consumption of 9kgs by 2005. Given the size of the Chinese population, this increase is significant. Since 1998, per capita expenditure has increased in all areas of the Yangzi delta, with Shanghai consuming more than the double of its neighbours.

The main factors attributing to the growth are increased disposable income; recognition of heath benefits; increased urban population; ownership of a fridge and greater influence from the outside world. All these factors are expected to continue to increase, reflecting well for the dairy industry. Another key driving force is the retail and distribution system in China. (Please see the Canadian Consulate General Report entitled 'The Retail Market in Shanghai' for further information). The evolving system provides adequate storage facilities, better distribution methods, and contact with the end-user.

The Chinese government has placed dairy as one of their top agricultural priorities. Programs are aimed at all aspects of the industry from end-users to animal husbandry. The government has recognised the health benefits associated with milk and has committed itself to its promotion. The Chinese Ministry of Agriculture (MOA) has recently launched a school milk program. By providing daily, subsidised priced milk to schoolchildren, the program increases the intake of proteins and embeds dairy consumption in the diet of young people. To date, the program has been activated in select areas, including Shanghai. It is estimated that 65% of the children in Shanghai will be placed in the program.

At present, Chinese dairy production is meeting demand. As consumption increases, this will need to change. Imports will be needed to close the gap between supply and demand.

In 2002, China imported CND 425 million of dairy products from around the world. The Canadian share is relatively small, and restricted to a few products. In 2002, Canada exported CND 8.9 million to China, with CND 1.7 million to Shanghai. Exports to China have grown at 3% since 2000, whereas exports to Shanghai have grown at 70% in the same period. Whey exports account for 85% of the Canadian exports, followed by milk or cream (with added sugar or sweetening matter) at 15% and Yoghurt with 3%. Cheese and butter exports represent less than 1% of the trade.

As a result of China's WTO accession, tariffs on dairy products have and will continue to decrease. Individual tariff rates exist for different product types. This change in tariff rates will allow for lower dairy prices vis à vis local brands and create an increasingly favourable trading environment. In addition to the tariff, a value-added tax (VAT) is applied to imported goods. Depending on the product, the VAT ranges from 13% to 17%.

It is important to note that the dairy industry is highly segmented. Each segment has their own characteristics and must be approached differently. The following brief characteristics relate to each segment:

• Milk: Liquid milk is showing the highest growth rate and activity among the different dairy products. At the moment, all liquid milk is produced in China. Alternatives, as UHT and milk powder are also available on store shelves. The latter two are either produced locally in foreign funded ventures or imported.
• Cheese & Butter: The market for Cheese and butter products is small. Cheese products sold in the market are aimed at western style restaurants, hotels and the foreign population. At the moment, it would take a significant change in Chinese consumer's consumption patterns for cheese and butter to become popular as in Canada. Imported cheeses are mainly from New Zealand, Australia, and Europe.
• Yoghurt & Ice Cream: Ice cream and yoghurt represent over 90% of the total market value for dairy products in China. Each are produced in China by either a domestic company or a foreign funded enterprise. Imports of ice cream are aimed at high-end consumers, through either direct channels as Haagen Daas outlets, five-star restaurants or hotels.
• Whey Powder: Whey powder is Canada's strongest area of exports. At the moment, China does not possess the necessary technology to produce high quality whey powder. As a result, they are a net importer from abroad. Whey powder is used for both human and animal consumption to enhance the nutritional value of food.

OPPORTUNITIES

• Dairy Products: Given the size and growth rate, opportunities may exist in all realms of the dairy product industry.
• Genetics (Husbandry): Increased opportunity may exist for Canadian genetics, primarily in embryos and semen. The average Chinese cow produces 3500kgs of milk a year, 37% less than the world average. Given the restriction on land, the emphasis will be placed on the increasing high-quality herds and not herd numbers.
• Technology Transfer and Services: The Chinese market is in its developing stage, and could benefit from Canadian technology and services. The realm of farm management, herd improvement, animal feed, collection systems and processing techniques are examples of areas to explore. The key is to increase the quantity and the quality of the milk produced.

KEY PARTICIPANTS

In terms of milk production, domestic producers dominate the Shanghai market. Shanghai Dairy Bright captures 74.7 per cent of the local market. Vertically integrated, the company controls everything from production to dissemination of their products. They have also captured significant share in the yoghurt, ice cream, butter and cheese market.

It is important to note that different product categories have different industry players and leaders. Nestlé is the market leader for milk powder, whereas Shanghai Dairy Bright and Walls dominate the ice cream industry.

The majority of global dairy players have entered the industry. As the majority of their production facilities are located in China, they have successfully penetrated the local distribution network and are able to sell at local prices. In 2001, the Chinese National Statistics Bureau reported that foreign funded dairy producers provided one-third of the dairy market. At the moment, the Canadian participation in value-added dairy products is not significant. However, Canadian companies and organisations have invested significant time and resources into the cattle breeding and processing side of the industry.

CONSUMER PREFERENCES

As any global market, consumer preferences need to be closely examined before formulating a market entry strategy. Key issues for the dairy market include public perception, price, taste, quality and brand. Consumers are apt to try new products and providing the imported product has the right features, are willing to purchase the brand.

• Public Perception: Consumer education is needed to influence public perception of dairy products. Historically, dairy products have been viewed as a supplement for the young, weak and elderly. The Chinese government has embarked on a consumer education campaign to promote the heath benefits of dairy products and to diversify the Chinese diet. Although the perception has begun to change, more education is still needed.
• Price: In general, Chinese consumers are price conscious. In comparison to other food products, dairy products are relatively expensive. A litre of 3.5% milk costs around RMB 7.40 (CND ~ 1.20). For the same price, a consumer can buy half dozen eggs and bread. Prices are higher in Shanghai, as the city is not a huge producer of dairy products. Products are imported from other areas in China or the world.
• Taste: Creating products that target the Chinese palette are key to success. In general, there is an un-developed taste for dairy products. Significant market research is required to determine and match local consumer preferences. For example, one of the popular yoghurt flavours on the market is Aloe Vera. The Chinese eat Aloe Vera in a variety of dishes, and believe it has lasting health benefits.
• Quality: Quality control remains an issue for the domestic dairy industry. There exists a fear of poor quality milk or fake products appearing on the market. Consumers will continually choose products they trust and have a track record in the market.
• Brand: Developing and marketing a brand is important. Shanghai Dairy Bright is consistently chosen due to name recognition, wide-range of products and its deep penetration in the market. An aggressive and consistent marketing campaign is crucial. This campaign should concentrate on promoting the brand and developing a loyal consumer base. As the market develops and competition increases, successful branding will make the difference between success and failure. Marketing will be key to obtain and ensure sales.

KEY CONTACTS

Canadian Government Contacts in China

Canadian Consulate General in Shanghai
#604-1376 Nanjing West Road
Shanghai, 200040
Contact: Mr. Henry Deng, Commercial Officer
Tel: (86-21) 6279-8400 Commercial Assistant
Fax: (86-21) 6279-7456
E-mail: henry.deng@dfait-maeci.gc.ca
Internet: http://www.shanghai.gc.ca

Canadian Consulate General in Shanghai
#604-1376 Nanjing West Road
Shanghai, 200040
Contact: Ms. Shirlie Wu, Commercial Assistant
Tel: (86-21) 6279-8400 Commercial Assistant
Fax: (86-21) 6279-7456
E-mail: shirlie.wu@dfait-maeci.gc.ca
Internet: www.shanghai.gc.ca

Canadian Government Contacts in Canada

Agriculture and Agri-Food Canada
2 200 Walkley
Ottawa, Ontario
K1A 0C5
Contact: Pierre Doyle, Assistant Director Dairy
tel: (613) 759-6264
fax: (613) 759-6313
E. Mail: doylep@agr.gc.ca
Internet: www.dairyinfo.agr.ca

Shanghai-China Government Contacts

Shanghai Customs of The People's Republic of China - Responsible for the regulations and inspections on import and export documents and certificates

Address: 13 Zhong Shan Dong Yi Lu
Shanghai 200002
Tel: 86-21-63232410
Fax: 86-21-63232095
Internet: www.shcus.gov.cn

Shanghai Entry-Exit Inspection and Quarantine of People's Republic of China - Responsible for the inspection of imported and exported goods

Address: 1208 Minsheng Road, Pudong
Shanghai 200135
Tel: 86-21-68563030
Fax: 86-21-68565939

Shanghai Import Food Enterprise Association - Provides assistance for the application and approval of labels for imported foods

Address: Room 1702, Hero Building
2669 Xie Tu Road
Shanghai 200030
Tel: 86-21-64398189
Fax: 86-21-64398191

Bibliography

Print

Shanghai Statistical Yearbook 2002, Shanghai Municipal Statistics Bureau, China Statistics Press

China Statistical Yearbook 2002, National Bureau of Statistics of China, China Statistics Press

The Dairy Market in the Yangzi Delta Region, Canadian Consulate General Shanghai, Department of Foreign Affairs and International Trade, September 2000 (available by contacting the Shanghai consulate)

2002 FMCG Guide, Business Information of Shanghai, January 2003

Electronic

World Trade Statistics, Global Trade Information Services Inc. Nov 2002 Internet Version 4.2a

China's Dairy Market Sees Fierce Competition, July 19 2002, Department on International Co-operation, State Information Centre http://ce.cei.gov.cn/enew/new_g1/fd00gge0.htm Last accessed: March 24, 2003

Dairy Product Consumption Surges in China, October 19, 2002, China's People Daily, http://english.peopledaily.com.cn/200210/19/
eng20021019_105327.shtml Last accessed: March 25, 2003

Other

Canada Dairy/ Feed Mission to China, September 4-19, 2002, Shanghai Dairy Bright seminar and roundtable

Useful Information

The Canadian consulate has prepared and published a series of market reports on the different food sectors in Shanghai and the Yangzi Delta region. Please contact us directly for a complete list of available reports or visit our website at shanghai.gc.ca/ag_food.