Analysis

The soft promise of the Orient

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An increase in disposable income and the growing acceptance of functional beverages has helped drive growth in China's soft drinks market at an impressive rate. As Jonathan Thomas reports, it is a market set to assume increasing strategic importance even in the short term.

In volume terms, the Chinese soft drinks market experienced a rise of almost 69% between 1999 and 2002. Total consumption now stands at almost 15.4 billion litres, equivalent to a per capita rate of almost 12 litres. As can be seen from Figure 1, bottled water has overtaken carbonates within the last 3 years to become the largest sector in volume terms, with sales of 8.1 billion litres in 2002.

click to enlarge
click image to enlarge

The market has virtually doubled from its 1999 level, while the carbonates sector has grown by a more modest 32.9%. Per capita consumption of bottled water currently stands at 6.3 litres, ahead of 4.4 litres for carbonates and just 1.2 litres for fruit drinks. In all instances, China trails countries such as the US and those in the EU by some margin, which provides an indication of its scope for further development.

The market was worth almost CNY50.2 billion (US$6 billion) in 2002 in value terms (Table 1). Sales have risen by over 58% since 1999, with growth strongest in the fruit juices and drinks sector, which has risen by over 88% within the last three years, an indication of the high prices many of these drinks command. The bottled water sector experienced a rise in value terms of 68.1%, while sales of carbonates grew by over 41% during the same period.

In 2002, carbonates accounted for over 46% of total value sales, although it is significant to note that the share of the market taken by this sector has fallen from over 51% in 1999. During the same period, the share taken by bottled water has risen to over 30%. In contrast with market volume, carbonates is the largest sector in value terms, accounting for around 46% of sales, ahead of bottled water (30.5%). All three sectors of the market are benefiting from increasing levels of disposable income amongst Chinese consumers - especially in the major cities - but sales of bottled water and fruit juice have received an added boost from growing health awareness. Future growth is anticipated for the market as a whole, one reason being the increasing acceptance of functional soft drinks amongst Chinese consumers.

Cola is the preferred form of carbonated soft drink in China, although lemon and orange flavours are also popular. To date, sales of energy drinks have been modest, partly because of the high R&D costs associated with launching such products. However, with growing interest in functional products, this sector is expected to increase its share of the market in future.

Purified drinking water accounts for over two-thirds (70%) of the bottled water sector. The younger age groups represent a key target audience for bottled water manufacturers, since they are attracted to the portability and convenience of the products. Much of the mineral water sold in China is of the still variety, since sparkling products have failed to capture the public imagination so far. It should also be noted that China has a burgeoning market for water sold via coolers and dispensers, as is the case in a number of other countries worldwide.

Fashionable fruit drinks
Consumption of fruit juice and drinks is heaviest in the major cities, especially in the coastal region, with many inland areas less well developed. Fruit drinks account for an 80% volume share of the total market, many of which have managed to cultivate a fashionable image, thereby broadening their appeal. Pure juices tend to command high prices, beyond the reach of many Chinese people, and are mainly sold through hotels and restaurants. Popular flavours include orange and apple, which account for almost three-quarters of the market.

Many multinational operators are now active in China. Between them, Coca-Cola and PepsiCo dominate the carbonates market, with Coca-Cola accounting for over half (53%) of retail sales and PepsiCo just over a quarter (26%). Together, the two companies also account for around 80% of the cola sector. Both companies have made substantial investments in China - a process that seems set to continue - and brands such as Coca-Cola, Pepsi, 7-Up, Sprite and Fanta feature in China. Coca-Cola operates almost 30 bottling plants in the country, and has announced plans for the construction of a further six, at a total cost of US$150m. The company enjoys a particularly strong presence in the northern part of the country.

Expert Analysis

The Market for Soft Drinks in China

Detailed analysis of the Chinese soft drinks market, includes the latest on-trade vs off trade sales statistics, comprehensive sector sales breakdowns and company and brand share data. Find out more here.

 

Pepsi, meanwhile, has recently announced plans to construct its 16th bottling plant in China, which will be set up as a joint venture and located in the Shandong province. The only other company of note in this sector is the local soft drinks firm Jianlibao, which accounts for around 8% of the retail market. It manufactures fruit-flavoured carbonates, cola, sports drinks and water fortified with vitamin C, and has recently launched the 'Fifth Season' umbrella brand, which will be used to market over 30 products covering all of the main soft drink segments. This formed part of a restructuring programme undertaken in 2002, which also involved selling a 75% stake in the business to a Chinese investment corporation.

Domestic production
In contrast, the market for fruit juices and drinks is largely made up of domestic manufacturers. The market leader is Hui Yuan Beverage & Food Group, which accounts for a fifth of the market and restructured itself towards the end of 2002, selling its distribution subsidiaries. Hui Yuan's closest rivals are Tong Yi, which owns the successful Xian Cheng Duo brand of orange drink, and Coconut Palm Group, the country's leading supplier of canned fruit juice. Both Coca-Cola and PepsiCo are active in this segment, owning brands such as Qoo and Tropicana respectively, as well as Kirin Beverages of Japan.

Danone has been consolidating its position in the Asia-Pacific bottled water industry of late, and leads the Chinese market with a value share of 43%. In 2000 the company acquired the Robust and Wahaha brands and now has a controlling stake in two other leading suppliers. Recently, Robust has been expanding its distribution of bulk water.

In third place with 14% of the market is Nongfushanquan, a leading domestic brand in the high-grade segment. The water market's other major suppliers are Kangshifu, which accounts for a further 7% of sales, and Nestlé, which has been strengthening its position recently. In Beijing, it now operates over 200 water distribution shops.

Significant growth
As with many other sectors of the food and drink industry, the soft drinks market in China is forecast to witness continued growth in the near future. This is expected to be particularly significant in cities such as Beijing and Shanghai, which will continue to account for the majority of sales, since this is where the more affluent consumers are located. However, China's younger age groups are demonstrating increasing interest in fashionable brands, as well as a growing awareness of health. This trend will result in further growth of the bottled water sector, which will remain the largest in volume terms.

Jonathan Thomas is Senior Market Analyst, Leatherhead Food International.
Reports from Leatherhead Food International, are available at /store/search_store.asp


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