8 Nov 2017
Finding a Niche in China’s Food Market
Interview with Jack Lam, CEO, Valley Holdings Ltd
“To make the best out of the Chinese market, one must go into the market and try to understand its culture, understand its customer demand, and be prepared and determined to take root and stay on there,” said Hong Kong businessman, Jack Lam, in an interview with HKTDC Research. His company, Valley Holdings, has operated on the mainland for the last 20 years, providing valuable information for industry players wishing to enter the Chinese food market.
From Food Ingredient Agent to Complex Condiments Manufacturer
Hong Kong’s Valley Holdings entered the mainland market in 1998. In the early days, it mainly engaged in trading food ingredients, flavouring essences, food raw materials and additives, acting as an agent for well-known foreign products selling to mainland food, pharmaceuticals and health food factories.
In 2003 the company set up its own manufacturing facility to develop and produce complex flavouring essences, spices and additives. The company started the packaged food agency business in late 2003, acting as an agent for Häagen-Dazs ice cream mooncakes. It tapped the market by offering group buying to enterprises and gradually extended to such channels as star-grade hotels, cinemas, airlines and railways. The company later signed up the Wanchai Ferry and Nutella brands, helping them to establish and expand B2B sales channels in the mainland market.
To date, Valley Holdings has established an extensive sales network in the catering sector, covering over 500 hotels, more than 300 cinemas, over 1,000 restaurants, as well as airlines and railways. It supplies products ranging from packaged food, food raw materials, condiments, to food processing equipment.
Since 2000, the mainland catering industry has been growing in leaps and bounds. A great number of chain-operated catering groups have mushroomed, opening new outlets at a fast speed. As a result, the availability of trained chefs lags behind that of the growth rate of eateries, while demand in the catering industry for standardised and ready-to-use complex condiments has climbed. Recognising this market potential, Valley Holdings created its condiments brand Huose Shengxiang (活色生香) targeting the catering sector.
Lam said: “To clients in the catering sector, using complex condiments has a number of advantages. First, the use of a standardised formula ensures that the taste and quality of food products are consistent. Second, the formula is ready-to-us, so they can be used directly, and the individual packaging can reduce waste and lower the cost.
“In contrast, non-complex flavouring essences cannot be used directly and it is not easy to master the quantity in the course of preparation, thus waste is inevitable and food quality may vary according to different users.”
Mainland Food Market: Changing Consumer Preference
Based on his experiences, Lam has a number of observations on the mainland food market.
Regional Disparity in Taste; Guangdong, Hong Kong and SE Asian Cuisines Well Received
Today, Valley Holdings’ sales network of covers the whole country, with the south China market, led by Guangdong and Fujian, accounting for about 60% of sales, while other regional markets accounting for the remaining 40%.
Lam explained that where taste preferences are concerned, different regions do vary considerably. He said: “Take condiments for example; people in the southern market prefer a lighter taste but like long-lasting aroma that will linger on. People in the northern market place more emphasis on the impact of aroma and like to smell the strong aroma as soon as they open the package, yet they do not care too much about the lingering aroma.”
Lam added that although regional disparity in taste preferences exists, prospects for sales of Guangdong, Hong Kong and Southeast Asian flavoured condiments in the northern market are promising. Sales growth is strong and the market is receptive to products at higher price points.
Rapid Growth of Catering Market Boosts Condiments Market and Impacts Packaged Food Trends
Chain-operated catering is undergoing exponential growth. Apart from the rapid expansion of existing catering chain brands, two business formats are also seeing fast growth – takeaway and cross-sector catering.
Lam pointed out that as the takeaway market gathers momentum, it is attracting more and more investors. He said: “To my knowledge, one takeaway catering chain opened 30 branches within three months. Such growth rate is unimaginable in the traditional catering market.”
Moreover, the catering industry has gradually begun to seek joint development with other sectors. For instance, IKEA and Muji have crossed over to the catering sector, while an increasing number of convenience stores have launched fast and simple food ordered and prepared on the spot. Such cross-sector collaboration helps the mainland catering market to grow rapidly. Catering sector growth has in turn driven the expansion in the condiments market while impacting the packaged food development trend.
More Interaction between Packaged Food and Restaurant Food: Packaged Cooked Food Becomes a Hit
In recent years, packaged food development has been trending towards cooked food, resulting in closer interaction between packaged and restaurant food. Examples include potato chips with Brazilian BBQ flavour, Greek yoghurt and cucumber flavour, Indian curry chicken flavour, and Korean honey and butter flavour; tom yum kung biscuits; Mexican BBQ sauce; and lobster cheese sauce.
It is evident that more and more new products in the style of cooked food are flooding the market. Lam reckoned that this reflects the demand from the new generation of consumers. He said: “In the internet era, the new generation of consumers is more exposed to ethnic flavours from all over the world. They have a strong desire to try different new flavours, either by way of restaurant food or leisure food. When a certain new flavour begins to gain popularity, it is possible that restaurant food promotes packaged food, and it is also possible that packaged food promotes restaurant food.”
Novel, Quality, Healthy and Functional Foods Have Bright Prospects
According to Lam, there are two channels through which he obtains information on taste preference trends. First, trade fairs, especially food raw materials fairs, as food raw materials, flavouring essences and spices reflect changes in taste preference trends in the coming years. Lam said: “There are food raw materials shows in Asia-Pacific, Japan, Europe and the US.”
The second is information from new product databases around the world. Lam said: “We have subscribed to the Mintel system and can search in real time for information on new products in different areas, such as new food products taste preference trends.”
Where condiments are concerned, clients are keen on trying new products, in particular different novel flavours. In the catering sector, the cost of sauces only accounts for a small share and clients are therefore not price sensitive, especially towards new flavours, healthy products (e.g. low sodium) and high quality items (e.g. lobster cheese sauce, XO sauce).
As for packaged food, Lam reckoned that healthy food and functional food have greater room for growth. As consumption continues to escalate, mainland consumers are increasingly willing to pay a premium for keeping healthy and tend to buy more healthy food than before. This can be seen from the sales performance of food additives handled by Valley Holdings, where the sales of high-protein, high-fibre, low-sugar, liver-protection and anti-ageing additives are promising.
Focus on Priority Sectors and Customer Demand Amidst Market Segmentation
Lam noted some of the potential pitfalls when prioritising business efforts in targeting the mainland food market, saying: “It is not easy to engage in the food industry as food is a branch of science. Some brands adopt the OEM business model and invest the majority of resources into brand building, packaging and marketing, while overlooking their R&D and quality control ability. This could easily create loopholes in management and trigger food safety issues, which would in turn undermine the goodwill of the brand.”
Lam pointed out that since 2015 the segmentation trend in the mainland food market is obvious, resulting in an influx of new brands and new products. In view of the vast size of the mainland market, industry players that can identify their positioning and focus on developing their priority sectors are better able to secure a share of the pie.
Lam said: “Valley Holdings will continue to take advantage of our catering channels, keep abreast of our chain-operated catering clients, understand their demands, and provide them with the most suitable products.” Lam added that the company would even custom-make complex food condiments for its clients to ensure a unique flavour.
Lam also remarked that prospects for Valley Holdings’ trading business remain bright. As mainland consumers have a strong desire for trying new foods and the market is huge, the market potential for import trade is great.
In choosing the right products, Lam said the following factors have to be taken into consideration. First, as Valley Holdings continues to take advantage of its existing catering channels, it is important that the products in question have good potential for sale via catering channels. Second, the product category must not be in direct conflict with Valley Holdings’ existing products. Third, the product price-performance ratio must be assessed to see if there is a reasonable profit margin. Finally, the findings of market assessment by management, internal testing and SWOT analysis would be taken into account to determine whether the product is right for the mainland market.
Positioning of Hong Kong Companies
Lam pointed out that in order to get the best out of the mainland market, one must go into the market, try to understand its culture, understand its customer demands, and be prepared and determined to take root and stay on there. He said: “Hong Kong people must adopt the ‘Under the Lion Rock’ spirit to adapt to different environments, different people and different value systems, as well as work really hard. If one only stays in the mainland for two to three days a week and is not willing to live there, how can one get to know the cultural differences and establish good customer relations?
“The mainland is developing in leaps and bounds. Hong Kong’s traditional advantage as a trade intermediary is fading away. Nowadays information resources are becoming transparent and mainlanders have already bypassed Hong Kong and approached foreign clients directly. Also, they are cash rich and when they see products that they like, they just buy the whole factory. Hong Kong traders must think carefully how to take the path ahead.”
To Hong Kong companies with factories on the mainland mainly engaged in taking OEM orders from European and US clients, it is recommended that they investigate opportunities arising from the mainland’s Belt and Road Initiative to explore new markets in the Eurasian continent.
As regards Hong Kong brands, Lam reckoned that they still have certain advantages. The ‘Made in Hong Kong’ brand is still attractive to mainland consumers and policies under CEPA can help Hong Kong establish closer economic and trade relations with the mainland.
In order to make a Hong Kong brand well known in the mainland, industry players must first try to understand the domestic market. They must also gain good knowledge of the promotional methods in the mainland, and should not limit their promotion drive to advertising in the mass media but adopt more interesting and appealing new marketing methods and channels, as well as make better use of event marketing and online marketing.