Comment - Soft Drinks & Water - Quenching China’s Thirst
This month, Richard Corbett heads east and considers the potential - and the pitfalls - that China has for the soft drinks and water producers of the West.
The old adage goes, if the population of China were to walk past you in single file, the line would never end. Now, that is a lot of people - 1.33bn, by the last count - and a lot of thirsts that need to be quenched. According to The Coca-Cola Co, these consumers are getting thirstier and that represents "huge potential". The company is certainly putting its money where its mouth is. So are PepsiCo, which has also announced big investment plans for China recently. There is a lot of optimism about and, as the old Chinese proverb goes, "with time and patience the mulberry leaf becomes a silk gown".
According to beverage market researcher Canadean, Chinese per capita levels for soft drinks have reached around 40 litres, a figure that has more than trebled since the turn of the century. Look around the region and one can see why the numbers look so attractive; in neighbouring Hong Kong and Taiwan, consumers drink well over 100 litres of soft drinks each. Translate these levels to China, and the excitement of Western operators can be forgiven. There is undoubtedly plenty of slack in the Chinese market to exploit.
In the West, we may all be weighed down with austerity but the Chinese economic juggernaut continues to roll, albeit at a slower pace this year. Back in February, China even overtook Japan as the world's second-biggest economy. The Chinese are getting more affluent and its people are spending part of their rising disposable income on commercial refreshment. It is not just the urban Chinese that are prospering; last year was the first time since 1998 that rural-based consumers' disposable incomes grew faster than their urban counterparts. There is, then, a massive audience to service in China.
Doing business in China is far from straightforward, however, and there are many hidden pitfalls to negotiate that do not exist in most Western markets - just ask Danone. In China, one has to play by the house rules, and they are not always the most conventional. There are also many cultural issues to observe; obvious things like being late for a meeting is deemed very rude or not so obvious things like not giving gifts – it is often interpreted as bribery and is against official business culture according to ‘Today Translations’. Leaving an empty plate may seem polite in many cultures but, in China, it suggests to your host that you feel you have not been given enough food. The Chinese also have distinctive taste and habits that can vary significantly from Western norms. Just because the Chinese are drinking more does not mean that you can just turn up and watch the money roll in. "The gem cannot be polished without friction."
For a text book example of how to do business in China, consider how the KFC chain has flourished. The fast food business has enjoyed considerable success by 'going native' with its management staff and by blending its classic American offerings with more traditional local dishes familiar with their clientele. The company looked at things from the Chinese consumer’s perspective and has reaped the rewards. It has been a lucrative formula, although it did not all go to plan at the beginning. When the company initially launched its strapline, ‘Finger Lickin' Good’, it translated as ‘eat your fingers off’.
The pressure is on for the big global soft drink players to get it right in China as sales growth in many of the big Western markets has slowed to a trickle or has dried up all together. If you look at the spiritual home of soft drinks, the US, soft drink per capita stands at the same level as back in 2004. Maintaining global volume growth may be an important objective, but the name of the game is value and it should be remembered that, according to Canadean, the average litre of CSD trades for US$1.72 in the US and just $0.90 in China. Maintaining value growth is more of an uphill struggle than keeping volume growth rates up.
A buoyant Chinese soft drinks market will go some way to helping companies scale that mountain, but the Western big boys need to be on top of their game to understand the market they are operating in. China is undoubtedly a complex trading environment, and to thrive you have to cut your cloth a different way. Now is definitely the time to invest in China; one generation plants the trees and another gets the shade.
This month, Ray Rowlands of Drinksinfo Ltd revisits the energy drinks category to see what has been going on in the evolution of what has been the soft drinks industry's star performer in recent years...
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