China Beverage News

2012-02-10T11:56:00.000-08:00

What's Happening...

The Coca-Cola Company Reports Full-Year and Fourth Quarter 2011 Results- China Highlights

2012-02-10T11:45:00.000-08:00

Source: The Coca Cola Company

The Coca-Cola Company, the world’s largest soft-drink maker, reported fourth-quarter profit on Tuesday

China volume grew 10% in the fourth quarter and 13% for the full year, making this nine of the last 10 years that our business there has delivered double-digit growth.

We saw strong growth across our entire sparkling portfolio, with Coca-Cola, Sprite and Fanta all delivering double-digit growth in both the fourth quarter and the full year, driven by a renewed focus on core brands, continued distribution gains and the expansion of cooler facings.

Importantly, we realized sparkling beverage volume and value share gains in both the quarter and the full year. Still beverages grew 8% in the quarter and 16% for the full year, driving share gains for the year in still beverages as Minute Maid Pulpy, Minute Maid Pulpy Super Milky value-added dairy and Ice Dew packaged water continued to perform well.

As our business and the industry in China continue to evolve, we are introducing a wider variety of packages to promote affordability and enhance the consumer experience with our brands, all with a focus to drive increased transactions and profitable growth and to continue building brand equity with consumers.

Our results this year confirm that we are executing the right strategies and have the right capabilities in place in China to deliver sustainable, double-digit growth over the long term.

Beer Makers Eye China's Kingway Assets

2012-02-10T11:41:00.000-08:00

Source: Wall Street Journal By Prudence Ho and Nisha Gopalan

HONG KONG—Anheuser-Busch InBev NV and Tsingtao Brewery are among several companies considering bids for the brewery operations of Chinese beer maker Kingway Brewery Holdings Ltd., people familiar with the situation said Friday.

All bids for the Guangdong province-focused assets are due by the end of February, the people said, and there will be a six- to eight-week due diligence period after that.

Kingway, which had a market capitalization of 4.28 billion Hong Kong dollars (US$550 million) as of Friday, plans to sell the Kingway brand and brewery assets, one person said.

Other potential bidders for the assets include Hong Kong-listed China Resources Enterprise Ltd., which makes the Snow beer brand, the people said. Anheuser-Busch, whose flagship brand is Budweiser, already has a stake in Harbin Brewery, which is focused on northeastern China.

"This is one of the few independent beer assets available to buyers in China, so there is a wide range of interest," said one person familiar with the deal.

Kingway beer is popular in Guangdong province, which borders Hong Kong and is one of the wealthiest provinces in China. Kingway is estimated to be the third-largest player in Guangdong, with approximately 15% market share, according to a Feb.3 Piper Jaffray report.

Increasing labor and raw-material costs are likely to put pressure on small breweries and regional players, prompting some to exit the market either by selling assets or brands, analysts have said.

China Resources Snow Breweries Ltd., a joint-venture between China Resources and SABMiller PLC, has been actively acquiring smaller brewers recently. CR Snow in August acquired the stakes it didn't already own in both Hangzhou Xihu Beer and Huzhou Brewery in Zhejiang province.

Foreign brands, too, are keen on China. In 2004, London-based SABMiller, the brewer of the Miller brand, unsuccessfully battled rival Anheuser-Busch for China's Harbin Brewery Group Ltd.

On Jan. 20, Kingway said it had established a committee to conduct a strategic review of the company, in particular to look at ways to improve profitability and create new income streams. As part of that process, Kingway said it would invite third-party entities to submit proposals and indicative offers for some of its brewery businesses and assets.

Kingway reported that half-year revenue rose 14% to HK$892 million, while earnings were down 84% to HK$1.5 million as costs rose.

The Kingway assets could widen the acquiring party's distribution network in China and help to lower fixed and input costs, analysts said.

San Miguel Brewery unit feels the heat in FY

2012-02-10T11:37:00.000-08:00

Source: Just-Drinks By Chris Mercer

Full-year net losses hit HKD68.6m (US$8.8m), versus HKD774m in 2010
Net sales up by 16% to HKD684m
Operating losses at HKD48.4m, down from HKD770.6m
Brewer faces fierce competition in southern China

Auditors have warned that San Miguel Brewery's Hong Kong and China business faces an uncertain future, after gains from a Budweiser distribution deal failed to offset market pressure in its full-year.

San Miguel Brewery Hong Kong's auditors issued an "emphasis of matter" on the brewing unit's full-year figures, raising concerns about its ability to continue in business. Debt exceeded the group's current assets at the end of December, the auditors said.

It is likely that the group will be propped up by its majority owner, Philippines-based San Miguel Corp. But, the auditors' note highlights the fierce competition that San Miguel Brewery Hong Kong has encountered in southern China as multinational brewers seek to grab more share of the country's expanding beer market.

For the 12 months to the end of December, San Miguel Brewery Hong Kong remained in the red, with net losses of HKD68.6m (US$8.8m), it said today (6 February). Losses were HKD774m in 2010, when the brewer was forced to lower the value of its assets following weaker-than-expected sales, particularly in southern China.

For 2011, the group pointed to several improvements in its business. Net sales increased by 16% for the 12 months, to HKD684m.

During the year, the group maintained its lead of Hong Kong's beer market, in volume terms, thanks to the signing of a deal with Anheuser-Busch InBev to distribute the Budweiser and Harbin brands. In Hong Kong, sales rose by 16% and 24%, in volume and value respectively. The territory's total beer market expanded by 2% in volume for the year.

However, in southern China, San Miguel Brewery continued to face an uphill struggle against international rivals. "The market conditions in South China continued to be challenging as competitors utilised aggressive trade offers, especially in the wholesaler channel, to grab market share," said the firm. It continued to report losses in China for the year, but did not give specific figures.

San Miguel Brewery said that it has streamlined its business in China to return to profits and better integrate sales and marketing across different regions. Net sales in the China division rose for the year, although overall volume sales fell, it added.

Diageo: Online Documentaries Sell Dreams, Not Whiskey

2012-02-10T11:25:00.000-08:00

Source: The China Obeserver By Joel Backaler

Diageo is a UK-based alcoholic beverages company with a collection of brands ranging from Smirnoff vodka to Johnnie Walker whiskey to Guinness beer. Diageo entered China in 1995 and established its official Greater China Hub (Mainland China, Taiwan, Hong Kong and Macau) in Shanghai by 2002. The whiskey market in particular is an area of focus for Diageo given the high rate of growth in this segment (from 2005 to 2010 whiskey sales in China grew by 125% – reaching 17.5 billion yuan in 2010 according to Euromonitor). Diageo aims to shape Johnnie Walker into a premier brand for Chinese consumers ages 25-35; however, it faces fierce competition from Pernod Ricard’s Chivas brand. To compete with Pernod Ricard and other foreign players Diageo has gone to such extremes as to open the “House of Johnnie Walker” in Shanghai – a four-story retail and entertainment outlet to expose wealthy consumers to the Johnnie Walker lifestyle.

Challenge:

Pernod Ricard already established itself in China by promoting “Chivas-and-Green-Tea” as a drink of choice for patrons at Chinese bars and karaoke clubs. In order to win more of China’s emerging whiskey drinkers, Diageo had to display Johnnie Walker as more than a beverage, it had to create an experience.

Solution:

Johnnie Walker partnered with acclaimed Chinese director Jia Zhangke to produce a series of brief documentaries titled the “Yulu Project”. The documentaries feature 12 individuals from different backgrounds, who all share one thing in common – they are willing to do whatever it takes to achieve their dream. One example is Zhou Yunpeng, a blind folk singer and poet who recounts the challenges he faces on his path to performing professionally. Xiao Peng (see video below) has a different dream, he seeks to create a successful company after returning to China from his studies overseas. Excluding a brief opening and ending scene of each documentary, there is no mention of drinking whiskey or of the Johnnie Walker brand. At the end of the video segment a Johnnie Walker logo appears followed by a link to the official campaign blog on Sina.com.

Result:

Through its “Yulu Project,” Johnnie Walker offered potential consumers an experience rather than an advertisement. Johnnie Walker marketers engaged Chinese netizens through inspirational documentaries that prompted their active participation on a branded Sina blog, microblog and over 40 other digital platforms in China. “We are excited about this campaign as it allows us to communicate with Chinese consumers in a heart to heart way and co-opt them into our brand values,” said Johnnie Walker’s Regional Brand Director. According to Diageo, the campaign generated 20 million video views over the course of eight weeks. Given the success of its first campaign, Diageo plans to run a second “Yulu” campaign later in 2012.

Moutai's status provides a headache

2012-02-10T11:17:00.000-08:00

Source: By Qiu Bo (China Daily)

MAOTAI, Guizhou - Kweichow Moutai Distillery Co, which makes baijiu, China's most famous white spirit, is a little miffed about its status as a luxury brand.

Or perhaps the company is upset that its Moutai brand isn't as beloved by Chinese millionaires as the fashion brands Louis Vuitton, Cartier and Hermes.

The company's source of animosity is the Hurun Best of the Best Awards 2012, issued by the Hurun Research Institute in January. In the press release, the institute ranks Moutai as the fourth most expensive luxury brand in the world.

The Hurun Report, a publication that studies China's upper class and its lifestyle, surveyed 503 Chinese whose individual wealth is more than 10 million yuan ($1.58 million).

The report also lists Moutai as the fourth-most valuable brand behind the LVHM SA unit Louis Vuitton, Hermes Group and BMW AG, but higher than Daimler AG's Mercedes-Benz and Chanel SA.

Moutai officials were quick to criticize the survey, partly because it doesn't want to be seen as a brand that is getting more and more expensive for the average consumer.

Nonetheless, the fact is that Moutai is experiencing a strange paradox at the moment. In December 2010, the company raised prices of most of its bottles to be released in 2011 by 20 percent. After the price hike, the average price for a bottle of Moutai jumped by 300 yuan for a 0.5-liter bottle to about 1,900 yuan.

Liquor evaluators are also attempting to put the prices of vintage bottles of Moutai (the spelling for the generic name of the white spirit) from various Chinese producers of baijiu on an even footing with some of the most sought-after bottles of French wine.

In a recent auction at Beijing Googut Auction Co, devoted only to aged Moutai, Liu Xiaowei, the chairman of the auction house, put the price of a 1982 vintage bottle of Moutai at between 10,000 yuan and 20,000 yuan.

Moutai is therefore in a quandary: How does it market itself as being affordable to consumers as China's rising affluence and growing demand for the product as an ideal gift inflates the price?

During this year's Spring Festival, salespeople for Beijing stores that carry Moutai were trying to sell the company's flagship beverage 53-degree Flying Moutai at more than 2,000 yuan per bottle.

What's more, a salesperson for the company, who would only give his surname Yang, said the company expects to raise its current ex-factory price of 53-degree to wholesalers from 620 yuan per bottle to more than 900 yuan.

The increasing enthusiasm has been a boon to Moutai. According to the stock information site Hexun.com, in January the company's share price stood at 190 yuan per share, resulting in a market capitalization of approximately 194 billion yuan.

On Jan 18, the company estimated that profit would grow by 65 percent. Its net profit in the first three quarters of 2011 was 6.93 billion yuan, 57 percent higher compared with the same period in 2010.

Moutai is also quickly expanding its production capacity. In 2003, the company's annual output was about 10,000 tons. In the past eight years, output has been growing steadily.

"Output in 2011 was 26,000 tons," said Wu Hua, a press officer with Moutai.

Last year, Yuan Renguo, Moutai's general manager and board chairman, told China Business News that the company's revenue should grow by 8 percent year-on-year in the next five to 10 years.

But drinkers are complaining that the liquor is becoming too expensive.

"Rising costs are a reason (to explain the price hike)," said Liu Wenke, an official with the economic development office of Maotai Town in Guizhou province.

Liu said the price of the locally produced, high-quality sorghum used in the production of Moutai has tripled since 2008, from 2.4 yuan per kilogram to 7.2 yuan.

There is also limited land in the town, which liquor experts say is the ideal area to produce baijiu because of the local mountain waters. That means every time Moutai expands its workshop areas and factories, a large amount of compensation has to be paid to families whose homes are demolished to make way for the expansion.

The company said that, in return for the demolition, it hires one member of each uprooted household.

"A new employee earns 60,000 to 70,000 yuan per annum," Liu said.

He said that in 2011 some 900 households were relocated; in 2012, the figure will be close to 400.

No coffee mourning over expensive drinks in Starbucks

2012-02-10T11:14:00.000-08:00

Source: By Gao Changxin and Wang Jingshu (China Daily)

Su Nan stood inside a Starbucks on Shanghai's bustling Huaihai Road and complained about the US coffee chain's recent price hike.

"It's already expensive. How am I going to live?" But the 26-year-old still joined a long line for a latte.

The world's biggest coffee chain raised the price of some products on Jan 31, due to what it said were rising operating costs. That brought Su's 16-ounce (about half a liter) "grande" cup to 30 yuan ($4.75) from 28 yuan.

Starbucks was already an expensive choice for regular Chinese customers such as Su, who earns about 7,000 yuan a month. One cup of cappuccino a day for a year would cost her 10,950 yuan - about one-eighth of her income.

Still, Su is better off than many others. China's per capita GDP last year was $5,184. It was $48,147 in the US.

Despite a huge gap in personal income, Starbucks has priced its products almost the same in China as in the US, if not higher, since it entered the Chinese market in 1999.

It also raised prices recently in the US Northeast and Sunbelt, by an average of about 1 percent. In New York, a 12-ounce latte now sells for $2.85 and plain brewed coffee was $1.65. The price of a 16-ounce, "grande" cup of coffee is unchanged at $2.20 plus 20 cents in local tax.

But Chinese consumers, who traditionally drink tea and have little taste for coffee, seem not to mind paying a relatively higher price. They have become one of the engines of growth for Starbucks.

The company has become so popular in China that it opened its 500th store in October, in Beijing, and plans to triple the number by 2015. Globally, Starbucks had 17,003 stores in 58 countries as of Oct 2.

In China, it's expanding not just in the big and rich areas but also in so-called second-tier cities, where consumers have much less disposable income. In December, Starbucks announced it had entered five more Chinese cities, including Langfang in Hebei province, which can hardly be rated as second-tier. Annual per-capita GDP is just above $3,000.

Positioning move

Operating costs in China are much lower than in the US. So why do Starbucks and other American companies price their food and beverages higher in China? Two professors from Long Island University in New York offer explanations.

"From the marketing perspective, the price-setting reflects how the brand positions itself in the market," said T. Steven Chang, chair and professor of marketing and international business. "Therefore, cost is not the only factor considered by the company.

"Starbucks actually is selling their whole package, including the symbol of good taste and prestige, the Westernized atmosphere they created in each retail store, and high-quality coffee and food."

Thomas C. Webster, a professor of public administration and public economics, said, "Usually prices are set based on the conditions of the specific market. In the case of China, the market is probably not saturated with competitors, so if people want designer coffee - which many regard as a status symbol - they are willing to pay the higher price.

"If Starbucks starts making large profits," Webster said, "then you will see other competitors enter the market and that will drive the price down."

'Not just coffee'

"The Starbucks brand continues to resonate with the Chinese consumer," John Culver, president of Starbucks China and Asia Pacific, said in an article on Starbucks' website. The Chinese market has become so important that he rates it as "our second home market outside of the United States".

Zou Deqiang, a professor studying consumer behavior at Fudan University, believes Chinese consumers are willing to pay "unreasonable" prices for a nontraditional beverage because they are buying more than just coffee.

"In China, Starbucks is not just coffee anymore," he said. "It represents a Western lifestyle. Some people in China want to live like people live in the developed countries so, to some extent, drinking a cup of coffee that people in the US drink helps them fulfill that dream."

A lot of people can't really tell good coffee from bad, Zou said, but that doesn't keep them out of Starbucks. If they hold paper cups with the Starbucks logo, it gives them the illusion that they live better than those who don't drink Starbucks.

The foreign allure

Zou's comment sheds some light on some Chinese consumers' obsession for foreign brands, most notably Apple's iPhone and iPad.

The craze was illustrated by the failed introduction of the Apple iPhone 4S in Beijing in January. Apple didn't open its flagship store and a frustrated crowd, which had waited all night, threw eggs at the store's gleaming glass walls. Many in the crowd were migrant workers hired by scalpers, who wanted to take advantage of demand that far exceeds supply. Apple shifted sales online to prevent scalping.

A student in Henan province went to the extreme. Local media reported in June that he sold his kidney for about 20,000 yuan and used the money to buy an iPad and an iPhone.

The starting price of an Apple iPhone 4S is 4,988 yuan ($790) in China and $649 in the US, where average personal income is about eight times higher. The price hasn't deterred Chinese consumers, even though they have easy access to domestic smartphones that cost about half but have similar functions and looks.

Why does 16-year-old Huang Junyi like iPhone in particular? "Because it's cool.

"Everybody wants an iPhone in our class. There is no reason for it," the Shanghai student said. "It will be big news if anybody in class gets an iPhone 4S, and you will be mocked if you use some copycat domestic smartphone."

'Badge of wealth'

Wang Haizhong, a professor studying brand strategy at Sun Yat-Sen University in Guangzhou, said the iPhone does have some advantages over other mobile phones but the advantages are not what Chinese consumers really want.

"It's mostly about vanity. Products like iPhone are seen as a badge of wealth and sophistication by young consumers in China. In fact, it's not just iPhone. Many Chinese consumers have a blind preference for brands in the US and other developed countries," he said.

Chinese consumers, he said, are highly brand-sensitive but price-insensitive, the opposite of consumers in developed countries. That explains why US consumers like cheap but high-quality Chinese products and Chinese consumers love US products.

Fudan University's Zou went deeper, saying that while consumers worldwide all tend to spend on vanity, the will is stronger in China, where "power distance" is longer.

Chinese people have a strong respect for power historically, he said, and it's hard for people to get power in society even if they are rich. So a lot of people turn to consuming to feel important and feel the dignity that is hard to obtain in daily life.

"For some consumers, no matter how their lives really are, they feel they are having a good time the moment they hold up a Starbucks coffee or show the latest version of iPhone to their friends," Zou said.

"In other words, they hope to go up a step in the social spectrum by consuming."

Free-market choice

Some scholars, including Qiu Baochang, head of the lawyers' group of the China Consumers' Association, feel that Chinese consumers should be educated to spend more rationally so no more students will want to sell their organs to buy anything. Campaigns, they believe, are urgently needed on campuses to help students understand the real value of money and what they really need.

But Zou disagreed. "There is no right or wrong about how people spend their money, as long as it's legal. In a free market, people have the right to buy what they like, no matter how irrational the choice is."

Good Brew: Happy Employees, Local Flair

2012-02-10T11:10:00.000-08:00

Source: Wall Street Journal By Emily Veach

Starbucks Corp. posted faster revenue growth in Asia than anywhere else in the latest quarter. Even though the region only made up about 5% of global sales in the period ended Jan. 1, the Seattle, Wash.-based coffee company just announced a partnership in India, a difficult market for foreign businesses.

"We think in the long term it's going to be another core engine for the enterprise, given India's potential and growth. It's like China," said Jinlong Wang, president Asia Pacific, who is involved with the company's India expansion and oversees 10 other markets: Australia, New Zealand, South Korea, Hong Kong, Taiwan, the Philippines, Singapore, Indonesia, Malaysia and Thailand.

Mr. Wang first joined Starbucks in 1992 and worked in international business development as well as the law and corporate affairs department until 2000. He then held executive roles in two other companies before returning as Greater China president in 2005. His career also includes teaching and a stint as a government official at the Ministry of Foreign Economic Relations and Trade in Beijing, before he left to study law at Columbia University.

China, where coffee shops have become a fixture on city street corners, is one of the company's great success stories. Yet Starbucks suffered from its own success last week when Chinese consumers reacted angrily to news of rising drink prices at Starbucks.

Mr. Wang spoke with Emily Veach in Hong Kong about the challenges of winning brand loyalty in Asia's varied markets as well as how he retains quality staff, no small task in the retail business.

WSJ: How do you keep good people?

Mr. Wang: We treat our partners with respect, creating an environment for them to excel. To really give the best of themselves, give the best to each other.

WSJ: Do you have management programs in place to groom rising leaders?

Mr. Wang: We want to promote our own people, to give them opportunities. We have store managers who stay on 10 to 15 years, which is very difficult, particularly in the retail business. But they love what they do. They want to see their people grow.

I'm working with two people in the mentoring program, a manager and an operational director. Mentoring is not how to teach, it's now how to shape, it's really how to facilitate and allow people to have someone they can talk to, someone they can rely on. You have to have their best interests in mind but nothing else.

WSJ: Where do you see the most potential in this region?

Mr. Wang: Korea. Our partner has done a tremendous job building the brand.

Otherwise, growth is a lot higher in emerging markets. China is growing at about 8% to 9%, the rest of the region maybe 4% to 6%. The coffee industry is double-digits. You're talking 10%, 20%, 25%, in certain places even 30% growth in this segment. There's tremendous potential.

WSJ: What do you make of the growth trajectory of China's middle class?

Mr. Wang: Our brand really resonates with the young people there. Among our core customers in China the average age is much younger than in the U.S.—10-15 years younger. As we continue to grow there, Chinese don't want to be Westernized. They want to be modernized.

Starbucks will play a leading role in elevating the whole coffee industry, environmental responsibility and enhancing coffee farmers' lives. We set up a coffee farmer support center, imported some of the best coffee seeds and set up demo farms. We've never done it before. Asian Pacific coffee provides a very unique taste and profile. One of best selling coffees is Sumatra, from Indonesia.

WSJ: What are the biggest challenges the markets you oversee?

Mr. Wang: For Starbucks, it's never been about what we sell. It's really about what we stand for.…We also have to see how to strike a delicate balance: How to balance the profitability and the social conscience. As we grow we have to keep doing that and not lose the sight for growth and making money. That's one piece.

The other piece is the people. We are going to hire tens of thousands of people. How do we continually attract and retain the people who have the same passion to serve?

WSJ: You have many competitors spread over a huge region. How do you cope?

Mr. Wang: Starbucks welcomes all the competition. They bring a lot to customers. They keep everyone on alert and see how to continue to stand out. We've already established ourselves as a market leader.

I'm also a lawyer; I break the company into three categories: rule makers, rule followers, and rule breakers. Starbucks operates as both a rule maker and a rule breaker.

Rule breakers work for the sake of innovation, new way of serving the market, new way of engaging customers. The other thing is, more importantly, a good company will satisfy consumer needs. A great company helps to lead and create. I think that's where we stand above the competitors in the industry.

We do (pay attention to competitors). We have a lot of copiers, or rule followers. I always treat it as a compliment. We also want to learn. Each company finds its own place and brings something unique to the market.

Overall I think we can elevate the industry, creating more jobs, creating more opportunities. One of the things I can see from the local competitors, we don't have a global or even regional competitor.

In every market they have the advantage of understanding the local culture. Sometimes they're nimble and fast as well.

WSJ: What lessons have you learned from those local companies?

Mr. Wang: We look for ways they connect with customers and how we can learn.

I think our competitors certainly pay a lot more closer attention to what Starbucks is doing and try to copy it. Whatever you call that, they have their place in the market.

The biggest competition is about the people, the talent. Our biggest competitor is ourselves. In our business we don't need rocket science, you need a passionate community partner, you need the people who take pride and pleasure and happiness in serving other people and making a difference.

WSJ: You've had an interesting career path. Why did you choose to leave the civil service in China, which is seen as a very stable career?

Mr. Wang: I always want to learn. I had opportunities to work in other international organizations, then this opportunity to study (law) and learn more.

My major was economics and trade in China, it had nothing to do with law. I always want to learn. It's the thing that keeps the fire under my belt every day, to learn something new.

But going to law school was a whole different story. They waived all the examinations, but I didn't understand a word in class when I got there. When you're young, you can do anything you want.

WSJ: Do you find there is a lot of environmental education involved with farmers in Asia?

Mr. Wang: Huge. Our goal is sustainable growth, through our cafe practice, farmer equity and environmental awareness, economic accountability and better bean count. We help them increase the yield by almost 20%. We also reduce chemical use.

WSJ: People in Asia are more aware of what's going into their food and water. How does that affect the way you educate these farmers?

Mr. Wang: It varies, but people are more and more conscious about that and becoming more environmentally friendly. Particularly for Asia, more than half the population is here while the resources are limited. We all have the same goal—how to be sustainable and promote growth.

We want to lead awareness and work with communities for the long term. That's where you can build a sustainable business. That's where you can really make a big difference. That's where Starbucks says, "how do we balance the profitability and social conscience?"

Pizza Hut seeks bigger piece of pie

2012-02-10T11:03:00.000-08:00

Source: By Li Woke (China Daily)

SANYA - Pizza Hut, a restaurant chain owned by Yum! Brands Inc, announced it will open at least 150 restaurants in China this year as its parent company moves forward with plans to expand overseas.

"Pizza Hut will accelerate its development speed in China," said Perter Kao, brand general manager of Pizza Hut and Pizza Hut Delivery of Yum! China. "We plan to invest more than 700 million yuan ($111.2 million) and open at least 150 restaurants in third- or fourth-tier cities this year."

Yum! Brands Inc, based in Louisville, Kentucky, has more than 36,000 restaurants in more than 117 countries and regions, according to its official website.

In 1987, Yum! entered China by opening its first KFC store. The catering giant now has more than 4,400 restaurants in the country - KFCs, Pizza Huts, Taco Bells, East Dawnings and Little Sheep.

On Tuesday, Yum! Brands Inc reported that its fourth-quarter profit had increased by 30 percent from the same period a year ago, a result it attributed to its global expansion and the sales increase it has seen at its China stores.

The company's net income increased to $356 million, or 75 cents a share, from $274 million, or 56 cents, a year earlier, Yum! said in the statement.

Yum!, which has about 18,800 restaurants outside the United States, said its fourth-quarter sales at stores that have been open at least 12 months increased by 21 percent in China. The company said it opened 656 stores in the country last year, a record number.

It gets more than 40 percent of its revenue from China.

By contrast, same-store sales during the quarter increased by 1 percent in the US, driven by growth at the Pizza Hut chain, Yum! said.

In addition to the store opening, Yum! announced that its plan for privatizing Little Sheep Group Ltd took effect on Feb 1, making the hotpot chain a subsidiary of Yum!. That change has given the company a much bigger presence in the Chinese market. The acquisition is expected to cost Yum! about HK$4.557 billion ($586.5 million).

"China's catering industry is on a fast development track and has achieved year-on-year growth of about 20 percent during the past 30 years," said Jing Linbo, vice-president of the Chinese Academy of Social Sciences' national academy of economic strategy.

"In 2011, the sales revenue from the Chinese catering industry was estimated to reach 2.05 trillion yuan, up 16.9 percent compared with the year before.

"By the end of 2015, the industry's sales revenue is expected to reach 3.7 trillion yuan. That will provide a huge market for foreign restaurant companies, including Yum!."

Yum Profit Up As China Keeps Growing

2012-02-10T10:58:00.000-08:00

Source: Yum

LOUISVILLE, Ky.--Feb. 6, 2012-- Yum! Brands Inc. today reported results for the fourth quarter ended December 31, 2011 including EPS of $0.75. Reported EPS for the full year was $2.74. Full year and fourth quarter results for Yum! Restaurants International (YRI) and the U.S. reflect the benefit of an additional week. This 53rd week did not impact China Division results.

FULL YEAR HIGHLIGHTS

Worldwide system sales grew 7%, prior to foreign currency translation, including 29% in China
Same-store sales grew 19% in China, 3%
Record international development with 1,561 new restaurants, including 656 in China
Worldwide operating profit grew 8%, including a positive impact from foreign currency translation of $77 million. Prior to foreign currency translation, operating profit grew 4%, including 15% in China

FOURTH QUARTER HIGHLIGHTS

Worldwide system sales grew 11%, prior to foreign currency translation, including 33% in China
Same-store sales grew 21% in China
Operating profit grew 15% in China

David C. Novak, Chairman and CEO said, “I’m pleased to report full-year EPS growth of 14%, making 2011 the tenth consecutive year we exceeded our annual target of at least 10%.

The highlight of 2011 was again the exceptional performance of our China business, which grew system sales by 29% and operating profit by 15%, prior to foreign currency translation. We opened a record 656 new restaurants and delivered extraordinary same-store sales growth of 19%. Clearly, our KFC and Pizza Hut brands in China continued to strengthen their category-leading positions. Emerging markets contributed nearly 50% of operating profit at Yum! Restaurants International. The Yum! growth story is clearly about China and a whole lot more.

CHINA DIVISION

China Division system sales increased 29% for the year and 33% in the fourth quarter, prior to foreign currency translation, driven by same-store sales growth and new-unit development.

KFC same-store sales grew 19% for the year and 22% in the fourth quarter.
Pizza Hut Casual Dining same-store sales grew 17% for the year and 15% in the fourth quarter.
Pizza Hut Home Service same-store sales grew 19% for the year and 25% in the fourth quarter.
China division same-store sales growth was driven by a 21% increase in same-store transactions for the year, including 20% in the fourth quarter.

China opened a record 656 new units during the year, including 327 in the fourth quarter.
Total revenues for the year surpassed the $5 billion mark, at $5.6 billion.
Restaurant margin decreased 2.4 percentage points to 19.7% for the year, driven by commodity inflation of 8% and wage rate inflation of 20%. Consistent with expectations, restaurant margin decreased 2.4 percentage points to 15.8% in the fourth quarter. This decline was driven by 11% commodity inflation and 18% wage rate inflation.
Foreign currency translation positively impacted operating profit by $43 million for the year and $11 million in the fourth quarter.

Our China Division reports on a calendar year basis and was not impacted by the 53rd week.

See Full Report

Wal-Mart names new CEO and president for Chinese operations

2012-02-10T10:33:00.000-08:00

Source: By Qiu Quanlin (China Daily)

GUANGZHOU - The international retail giant Wal-Mart Stores Inc announced that Greg Foran has been named president and CEO of Wal-Mart China.

The appointment comes in the wake of allegations that a number of the company's stores had sold mislabeled food in the Chinese mainland last year.

Foran is currently senior vice-president of Wal-Mart International and will start his new role in March, the company said in a statement on Tuesday.

Prior to joining Wal-Mart in October, Foran built his career in New Zealand and Australia, beginning as a part-time shelf stocker and moving on to become the head of the food and liquor business at the Sydney-based Woolworths Ltd, Australia's largest retailer.

"With his distinguished career in retail, Greg is uniquely qualified to lead our growing business in China," said Scott Price, president and CEO of Wal-Mart Asia and interim CEO of Wal-Mart China.

Price became Wal-Mart's interim China head in October, following the departure of former Chief Executive Ed Chan and Clara Wong, senior China vice-president of human resources.

Wal-Mart sources said that the two had resigned for personal reasons and that the resignations "had no correlation" with an investigation in Chongqing concerning allegations that more than a dozen of its stores in the city mislabeled regular pork as organic pork last year.

Wal-Mart also suffered a series of high-level personnel losses last year, after both its China chief financial officer and chief operating officer left in May, creating a leadership vacuum.

"I'm very pleased he (Foran) is bringing his talents to help us continue the company's expansion in China and to enhance our efforts to help Chinese customers save money," Price said in a company press release.

"China is a very important market for Wal-Mart and I am looking forward to working with our 100,000 associates."

In response to the Chongqing allegations, Wal-Mart announced last year that it will establish a compliance division, which will be in charge of issues related to food safety and protection of customers' rights.

The company will also work closely with third parties to build an internal food safety system, according to sources in the retailer's China public relations division.

At present, Wal-Mart, based in Bentonville, Arkansas, had more than 370 stores in 140 Chinese cities, after entering the Chinese mainland market and opening its first Supercenter and Sam's Club outlets in the southern city of Shenzhen in 1996.

In 2007, Wal-Mart acquired a 35 percent stake in Trust-Mart, a Taiwanese-owned chain of retail supercenters.

Sources with Wal-Mart China's public relations department said all the Trust-Mart outlets it acquired will be redecorated in the Wal-Mart style to reinforce its image in the country.

Dairy Queen opens 500th restaurant in China

2012-02-10T10:31:00.000-08:00

Source: Nation's Restaurant News By Mark Brandau

International Dairy Queen Inc. has opened its 500th Dairy Queen restaurant in China, and plans to maintain its accelerated growth in that country in 2012 by adding more than 100 new locations this year.

Since the first Dairy Queen opened in Beijing in 1991, China has been the frozen-treat chain’s largest international market. The 500th location, which opened in the Hu Dong financial district in Shanghai, is one of more than 350 Dairy Queen units operated by franchisee Shanghai Shida Catering Management Company.

“With the world’s fastest-growing major economy, China continues to be a tremendous expansion market for the Dairy Queen system, and we attribute that in large part to strong alliances with our development partners here, including Shanghai Shida Catering,” John Gainor, International Dairy Queen’s president and chief executive, said in a statement at the opening in Shanghai. “Today, more than ever, people everywhere are looking for value, but they still want to treat themselves … and we look forward to continued expansion.”

China was Dairy Queen’s largest growth market in 2011, the company said. One-hundred thirty-one of the 271 total Dairy Queen units added during the year were in China.

The country also has been a major expansion driver and international proving ground for the world’s largest quick-service companies. Louisville, Ky.-based Yum! Brands Inc., for instance, derives its largest share of its annual operating profit from its China division, whose same-store sales grew 19 percent for fiscal 2011.

Yum has more than 3,700 KFC locations in China, as well as more than 750 Pizza Hut units there, in addition to smaller systems for its Chinese quick-service concept East Dawning and the recently acquired Little Sheep casual-dining chain. The company plans to open more than 600 units in China in 2012.

Likewise, Oak Brook, Ill.-based McDonald’s Corp. opened 200 restaurants in China in 2011, and plans to build about 250 restaurants there this year. China also is expected to get a large portion of the 450 remodels planned for the company’s Asia/Pacific, Middle East and Africa division.

Dairy Queen also has made entries into other foreign markets this year. In June 2011, the chain opened three locations in Riyadh, Saudi Arabia, including its largest and only two-story DQ Grill & Chill location. Other strong international markets for Dairy Queen include Mexico, the Philippines and Thailand.

Minneapolis-based International Dairy Queen operates or franchises more than 5,900 locations in the United States, Canada and 18 other foreign markets. The company is a holding of Berkshire Hathaway, the Omaha, Neb.-based investment company run by investor Warren Buffett.

Leo Burnett Taiwan picks up Coca-Cola digital creative and media business

2012-02-10T10:28:00.000-08:00

Source: Campaign China By Benjamin Li

TAIPEI - Leo Burnett (LB) Taiwan took over digital creative and media planning and buying for Coca-Cola and Coke Zero in January, without a pitch.

LB replaced Index as Coca-Cola's digital agency in Taiwan for CRM and digital activities, while McCann Worldgroup and Starcom remain as the Taiwan creative and media agencies, respectively.

Margaret Huang, managing director of LB Taiwan, said that the arrangement represents a trend for digital accounts: Clients want a single agency to handle digital accounts from creative through media planning, instead of separating the activities.

Huang added that LB Taiwan's main task will be to help with Coca-Cola's aim to enhance interaction and engagement with its target consumers, mainly teenagers, who are spending more time on social media.

Huang boasted that Leo Burnett’s creative reputation in Taiwan helped the agency win the digital and media account after several rounds of conversation with the client. LB Taiwan's portfolio includes McDonald’s, Diageo’s Johnnie Walker, Taiwan Mobile, Chunghwa Motor Group, and Shin Kong Mitsukoshi Department Store, she said.

Previously, LB worked on Coca-Cola’s Nestea creative account in Taiwan for two years in early 2000, when the beverage giant had a business partnership with well-known Taiwanese tea company Ten Ren Group.

Over in China, last December, Leo Burnett Shanghai has revisited its hugely successful First Coke of the Year campaign for Chinese New Year 2012, with the new promotion featuring glimpses from athlete Liu Xiang’s childhood. Luxury Box, a Shanghai-based branding and interactive agency under McCann Worldgroup, has been named digital agency for Coca-Cola's bottled water brand in China, Ice Dew.

Meanwhile in Hong Kong, McCann Worldgroup Hong Kong the winner of both the 2011 Grand Kam Fan and Media Kam Fan awards was Coca-Cola's "Chok! Chok! Chok!" campaign.

According to a news article in the March 2011 Economic Times, Coca-Cola India overlooked its long-term advertising agency McCann Erickson to make Leo Burnett the creative agency for its music property Coke Studio India, in line with an increasing trend among big brands to work with multiple agencies.

Morton's Bringing The Big Beef East

2012-02-10T10:25:00.000-08:00

Source: By Yang Yijun (China Daily)

SHANGHAI - Starting from chopping onions and making salads in the kitchen 16 years ago, Christopher Artinian knows Morton's like the back of his own hand.

Now, Artinian, 41, who is the president and chief executive officer of Morton's Restaurant Group Inc, is leading the company in an attempt to escape the economic downturn and go for further expansion in Asia.

Morton's, the world's largest owner and operator of a company-owned fine dining restaurant, opened its first steakhouse in 1978 in downtown Chicago, where Morton's corporate office is still located. Since then, the company has grown to 77 steakhouses and one Trevi restaurant. Morton's has 71 domestic steakhouses and six in international locations: Toronto, Hong Kong, Shanghai, Macao, Mexico City and Singapore.

The restaurant industry, especially fine dining, largely relies on general economic conditions. Morton's, where the average per-person check is more than $99, is one of the high-end restaurants that have been affected by the global economic recession.

"There is no secret that the US economy has been difficult. It was incredibly difficult in our business in 2008 and 2009. But things started to really pick up again in 2010. Morton's has reported seven quarters of positive comparable sales, which is very exciting," said Artinian.

The company suffered a loss of $77.5 million net of tax from continuing operations in 2009 and $61.8 million in 2008. The restaurant revenues decreased when compared with the previous year by 19.5 percent for 2009 and 4.9 percent for 2008 .

In fiscal year 2010, the company reported net income from continuing operations, net of tax of $4.6 million.

"What was really great for Morton's is that luxury hotel, luxury retail and business entertaining have been on the rise for the last seven or eight quarters and continue to forecast positive," he said.

Artinian has recently completed his tour of Asian cities including Seoul, Tokyo, Taipei, Beijing and Shanghai to look for possible locations for new restaurants. Sitting in Morton's The Steakhouse in Shanghai, which has just celebrated its first anniversary, Artinian said that he is leading the group in an aggressive expansion in Asia.

"Our plan is to open two locations in Asia a year for the foreseeable future. We have nothing to announce definitively, but we are incredibly close on several locations," he said.

"We are already actively looking in two other locations for Shanghai and at least two locations in Beijing. I would not be surprised if we have at least one, if not two, open in 2012," he said, adding that the company is also looking for a second location in Hong Kong.

While the United States is Morton's No 1 for business, because that is where the company originated, Artinian said he believes the company's operations in China can easily come a very close second.

"China is our No 1 area for growth," he said.

The company has moved its regional director of operations from Honolulu to Hong Kong and the vice-president of construction and development is now based in Shanghai.

"We are excited about the growth. We want to make decisions faster," Artinian said.

In November 2010 when the Morton's restaurant opened in Shanghai IFC Mall in the Lujiazui area, a commercial center of the city, Artinian said that it might be the most important one among all Morton's restaurants.

"Hong Kong and Singapore were well-traveled international cities. They have more Western influence than Shanghai does today. We were a little unsure if we would really grow on the Chinese mainland. And we knew that if we could be successful here, it would open up the doors for other cities such as Beijing, Guangzhou, so on and so forth," he said.

He added that so far they are off to a terrific start because the restaurant's performance in the first year was beyond their expectations.

"Our four restaurants in Asia are all in the top core tile of all of Morton's. They are some of our fiscal year's most profitable restaurants," he said.

The company's financial report for the third quarter in 2011 showed that the company's six restaurants overseas realized more than $3.91 million in income before tax in the first nine months, while its domestic restaurants suffered a $2.86 million loss.

A large portion of the fine dining revenues comes from business customers on expense accounts. There is concern that companies might cut such expenses to reduce costs.

"It is always a concern but we have learned over the last 33 years that when people are going to spend money to entertain, they want to get the most value for that money.

"When they are going to take that client out, they don't have to worry about the food, the quality and the service that's going to be there. We've always been that place even when the economy in the US was as tough as it was," he said.

Morton's is well known for its consistency. The restaurants are not only similar in terms of style, concept and dcor but also share almost the same menu.

The Morton's steakhouses offer premium quality steak, featuring United States Department of Agriculture prime aged beef in the US, which is the highest in quality and intramuscular fat yet of limited supply, fresh fish, lobster and chicken, complemented by a full selection of premium drinks.

Due to restrictions imposed on the import of US beef, Morton's steakhouses in Asia use comparable high-quality aged beef where US beef is not permitted. China is the only place where they use 100 percent Australian beef, which, according to Artinian, is the best available to them that money can buy.

In addition to the quality of food, Artinian said he believes that training is a crucial factor that keeps the brand strong.

The company has a training team specially developed in Asia with the help of instructors in the US to make sure that everyone understands Morton's culture.

"Here in Shanghai, they don't understand how we execute in Chicago before they start with Morton's. We train everyone step by step, whether you are a dish washer, a server or the general manager. Everyone clearly understands the history of Morton's, how to select the best products and even how to anticipate the guest's needs in the same way," he said.

But Morton's has noticed the unique preferences of Chinese customers and made some changes.

In most of Morton's restaurants, there are only two or three private dining rooms. However, they have 11 in Shanghai "because when we were doing our research, we realized that a lot of Chinese businessmen do business over a meal and like to meet in a room that is very comfortable. It honors their guest," Artinian said.

He said that over the last several months, the restaurant is seeing a growing number of local Chinese customers. Usually around 60 percent, sometimes 70 percent, of customers are Chinese.

For Artinian, Morton's culture is about running a family business.

He began his career in the pantry kitchen at Morton's New York City, and was quickly promoted to assistant manager and then general manager. In 2004, he was promoted to vice-president of East Coast Operations and was appointed as the CEO in 2010.

But he said that in the big company with more than 4,000 employees, he is just one example of so many who have been with the company for a long time.

"What Morton's has taught me is if you treat people well inside your company, they are going to treat people well that are coming to choose Morton's. I believe very deeply in the brand because we've always kept the integrity of the brand together," he said.

He said that if there was a terrible economy, they would never say: "Maybe our beef is too expensive. Let's try something else" or: "We don't need that many staff to serve people. Let's do with fewer."

He added: "I always appreciate that commitment to excellence. It really helps to drive me to continue to be successful as the company has grown.

"Our biggest fear that drives us is that we don't ever want to become second best."

China issues infant formula regulation

2012-02-10T10:21:00.000-08:00

Source: Xinhua via China Daily

BEIJING -- China's Ministry of Health (MOH) on Friday issued a regulation to standardize infant formula for children with congenital diseases.

The regulation covers lactose-free formula, premature infant formula and breast milk dietary supplements.

According to statistics provided by the MOH, infants who are born with congenital diseases require infant formula that is tailored to their needs, as they cannot feed on breast milk or conventional infant formula.

The regulation states that special infant formula must be based on medical science and nutriology, as well as meet the needs of infants from the day of birth to six months of age.

Six kinds of infant formula for children with congenital diseases are specified in one of the regulation's appendices. Newly developed formulae that are excluded from the appendix should be produced in accordance with national food safety standards, the regulation said.

China's dairy industry suffered a heavy blow after a scandal in 2008 in which infant formula was found to be tainted with melamine, an industrial compound used to create plastic and resin. The tainted formula led to the deaths of six infants and sickened 300,000 children across the country.

Singapore lifts restriction on Taiwan beverages, foodstuffs

2012-02-10T10:17:00.000-08:00

Source: Focus Taiwan

Taipei, Feb. 10 (CNA) Exporters of certain beverages and food items in Taiwan will no longer be required by Singapore from March 1 to provide official certification that their products are plasticizer-free, the Cabinet-level Department of Health (DOH) said Friday.

Following China's decision on Jan. 5, Singapore will exempt Taiwan firms from providing certification for five categories of exports: sports drinks, juices, tea drinks, fruit jams or syrups, and tablets or powders, the DOH's Food and Drug Administration said.

Singapore and China were among a few countries in the region, including Hong Kong and South Korea, that required Taiwan last year to provide plasticizer-free certifications in the five categories, after it was reported in May that some locally produced items -- mainly soft drinks -- were tainted by industrial plasticizers.

The scandal, which involved unscrupulous manufacturers adding toxic plasticizers into clouding agents -- common additives used in food and beverage production to cut down costs -- triggered public panic over food safety.

In response, the relevant authorities in Taiwan took immediate action to crack down on the illegal practice of adding plasticizers to clouding agents nationwide.

South Korea and Hong Kong lifted their restrictions on Taiwan last year, the DOH said.

(By Chen Ching-fan and Elizabeth Hsu)

China New Borun Expands Senior Management Team

2012-02-10T10:03:00.000-08:00

Source: MarketWatch

BEIJING, Feb. 6, 2012 -- China New Borun Corporation, a leading producer and distributor of corn-based edible alcohol in China, today announces that the Company has promoted Ms. Bing Yu (Ann) to Chief Strategy Officer from her current position as Chief Financial Officer and Mr. Yuanqin Chen (Terence) to Chief Financial Officer from his current position as Vice President for Finance, effective immediately.

Mr. Jinmiao Wang, Chairman and Chief Executive Officer of Borun, commented, "I'm very pleased that Borun is off to a good start in 2012 with our previously-announced strong pre-sales contract wins, and these well-deserved promotions will enable Borun to continue not only our solid execution track record but also further expand our market position. We are glad to welcome Terence to our senior management team as CFO, as this will allow Ann to spend more time working with me on strategic initiatives. Since joining Borun, Terence has quickly proven to me and the organization his accounting and finance expertise, as well as strong leadership ability and work ethic. Working closely with Ann Yu over the last several quarters, he demonstrated solid knowledge of our industry, business practices, and corporate culture. I expect Terence will have a smooth transition into his new role and look forward to his contributions to our growth and overall success, as we continue to steadily march towards our goal of becoming China's largest corn-based edible alcohol producer."

Mr. Terence Chen has served as Borun's Vice-President for Finance and Financial Reporting Manager since August 2010. Prior to that, Mr. Chen worked at KPMG Huazhen in Shanghai, from July 2006 to August 2010, where he performed statutory and Sarbanes-Oxley-Act-related internal control audit, annual audit and reporting, and audit for initial public offerings for various companies listed on the New York Stock Exchange, Hong Kong Stock Exchange, and Shanghai Stock Exchange. Mr. Chen earned a Bachelor's degree in Business Administration from Shanghai International Studies University and a Bachelor's degree in Economics from Fudan University in China.

About China New Borun Corporation

China New Borun Corporation is a leading producer and distributor of corn-based edible alcohol in China. Borun's edible alcohol products are primarily sold as an ingredient to producers of baijiu, a popular grain-based alcoholic beverage that is sold throughout China in retail stores, restaurants and bars. The Company also produces DDGS Feed, liquid carbon dioxide and crude corn oil as by-products of edible alcohol production. China New Borun is based in Shouguang, Shandong Province.

2012-02-03T12:08:00.000-08:00

What's Happening...

Why Starbucks Succeeds In China

2012-02-03T12:02:00.000-08:00

Source: CNBC By Shaun Rein | Photo: Xinhua

About 14 years ago, I met an entrepreneur who wanted to open up coffee shops around China. I never thought the coffee business would work in the country. The Chinese would not easily give up their tea drinking culture for a bitter, overpriced drink, I told him.

Starbucks has proven me wrong. Howard Schultz, the CEO of Starbucks, announced that China will soon become its largest market outside the United States. It has opened over 500 outlets in the country, which are more profitable per outlet than in the US according to the chain`s Chief Financial Officer Troy Alstead.

What did Starbucks do to succeed in a market where so many other western food and beverage brands like Dunkin Donuts, Krispy Kreme and Burger King have failed to live up to expectations? What Starbucks did right in China is a great case study how food brands can succeed despite rising labor and real estate costs and increased competition on the mainland.

Instead of trying to force onto the market the same products that worked in the US like regular coffee, Starbucks developed flavors, such as green tea flavored coffee drinks, that appeal to local tastes. Rather than pushing take-out orders, which account for the majority of American sales, Starbucks adapted to local consumer wants and promoted dine-in service.

By offering comfortable environments in a market where few restaurants had air conditioning in the late 1990s, Starbucks become a defacto meeting place for executives as well as gatherings of friends. In other words, Starbucks adapted its business model specifically for the Chinese, rather than obstinately trying to transplant everything that worked in America into China, as so many brands like Best Buy and Home Depot have done.

The challenge with pushing dine-in service in large comfortable outlets rather than take out is that revenue per square meter is less than in the US The average revenue per outlet in China is one-third to two-thirds that in the US, according to the CFO Alstead.

To counteract this, Starbucks positioned itself as an aspiration buy. The average coffee sold in China is more expensive than in the US Carrying a cup is now seen as a status symbol, a way to demonstrate sophistication, a little personal luxury for middle class Chinese.

Starbuck`s high pricing strategy of specialty drinks allows it to have its Chinese outlets to be more profitable per store in China despite the lower volume. Overall in Asia, its operating margins were 34.6% in 2011 versus 21.8% in the US Too many brands push for market share by cutting prices but in reality they should be aiming for margins.

Not only does Starbuck`s premium pricing strategy fit market demands but it also allows it to regularly roll out higher margin specialty products like gift sets that offset rising commodity costs. As China`s urbanization rate nears 52%, companies need to put into place strategies to handle rising commodity costs.

Starbucks has also done an amazing job at recruiting, retaining, and training employees. 30% annual turnover is common in China according to data compiled by my firm. Yet, Starbucks has far lower turnover than the industry average by good compensation packages, work environments, and career paths. One barista who has been working at Starbucks for five years told me, "I feel taken care of by management. I enjoy my job and I enjoy working here so I expect to stay longer." That is a rare comment in a country where job hopping is the norm among younger workers.

Starbucks` service is on par if not higher than many 5-star hotels. In consumer interviews with several hundred consumers in Shanghai, the majority told my firm they actually preferred the taste of products from competitors but continued to go to Starbucks because of the service.

Far too many multinational companies treat their Chinese employees as second-class citizens with little career development. Their senior management ranks are full of foreigners, Taiwanese or Hong Kongers without any mainland Chinese representation.

Starbucks understood that the value proposition it was offering Chinese was different than in the US They were able to adapt their business model to fit China while keeping their core values.

Truly great global brands adapt to different markets as Starbucks has done.

Price hikes brewing for Starbucks drinkers

2012-02-03T11:58:00.000-08:00

Source: By Li Woke (China Daily)

BEIJING - Starbucks Corp raised the prices of some of its products in China effective Tuesday to offset higher costs, the coffee chain's first price hike in five years.

The increases, ranging from 1 yuan (16 US cents) to 3 yuan, will mainly affect drinks such as espresso-based beverages, fresh-brewed coffee and hot chocolate, the company said on its official micro blog at sina.com.

Seattle-based Starbucks said the decision reflected higher operating costs.

"The last Starbucks price adjustment in China was in 2007," said Li Jing, public relations manager of Starbucks China.

In early January, Starbucks started charging more for certain beverages in the Northeast and Sunbelt regions of the US, citing increased competition and higher ingredient costs.

Commodity prices, especially for agricultural commodities, surged to multi-year highs in 2010. Raw sugar futures were at a 30-year high, while the price of arabica beans touched a 14-year high in New York in May as heavy rain caused by the La Nina weather system cut output in Colombia, the world's second-largest producer of the variety, according to Bloomberg.

"The price increase is acceptable as prices of everything here are surging," said a customer at a Starbucks store in Beijing. "But I hope drinking coffee will not become a luxury lifestyle in China."

UK-based Costa Coffee, a subsidiary of Whitbread PLC and a major rival of Starbucks, has more than 160 cafes in China and has vowed to expand quickly in the country.

"The company has no plans to raise prices in the near future," said Su Bo, marking manager of Costa Coffee in Beijing.

Chinese coffee rivals such as UBC Coffee, which has about 500 stores nationwide, said their prices wouldn't change in the near future.

Another competitor, Sculpting In Time Cafe, which has 18 cafes in the country, said it would soon introduce a new menu and adjust some prices.

Last month, McDonald's Corp increased the prices of some of its menu items in China by 0.50 to 2 yuan, which the US fast-food giant attributed to rising costs of property and materials.

Starbucks operates more than 500 cafes in nearly 50 Chinese cities. It aims to triple its mainland outlets to 1,500 by 2015.

China's Coffee Market

China's coffee market, including fresh and instant, is booming. Sales climbed to 6.25 billion yuan in 2011, up 20% from a year earlier and 92% from 2006, according to market research firm Euromonitor International.

To be sure, coffee consumption in China is still tiny compared to other countries. On average, the Chinese consumer drinks three cups of coffee per year, according to data from Swiss food giant Nestlé SA.

But the thirst is there and coffee companies have been expanding rapidly to meet the new demand. Starbucks, which now has 550 stores in China, plans to have 1,500 by 2015. Nestlé is rolling out more upscale Nespresso stores and in select markets it has recently launched an ad campaign, featuring popular blogger Han Han, to tout its instant-coffee products sold in grocery stores. (Source: WSJ)

Local firms vie for Yum's slice of the China market

2012-02-03T11:36:00.000-08:00

Source: Reuters By Terril Yue Jones

(Reuters) - Four floors up overlooking the bustle of the cavernous Joy City Mall in Beijing, diners take a break from shopping to slurp noodles and nibble on dumplings at an Ajisen restaurant.

It's an increasingly common sight: Chinese consumers turning to local fast-food alternatives to the long-dominant pair in China -- Yum Brands Inc's (YUM.N) KFC and McDonalds Corp (MCD.N).

Twenty-five years after Yum introduced China to American-style fast food with its first fried chicken store, the two U.S. giants are facing a plethora of Chinese and Asian eatery chains that are steadily munching away at their market share.

As Yum prepares to announce fourth-quarter earnings on Monday, some investors are eyeing its China operations warily. Last week saw a flurry of put options on Yum after McDonalds reported earnings and said foreign exchange fluctuations and other factors could eat into profits in 2012.

But Yum's China business seems robust. The company said on December 5 that it expects a benefit of $40 million this year from yuan-dollar exchange rates, while operating profit in China is expected to grow 15 percent. It plans to open 600 more locations in China in 2012 at a pace of more than one every day.

China accounted for 36 percent of Yum's global revenue in 2010 and is estimated to be 44 percent in 2011 and 50 percent in 2012, according to Credit Suisse.

Yum's biggest challenge comes from a rising torrent of competition as Chinese consumers increasingly have more money to spend and more places to spend it, which could mean slowing growth rates for Yum in the future.

At the Ajisen outlet, stacked above a Starbucks coffee shop and a Burger King restaurant, shoppers headed in and out all afternoon.

"We were just browsing, and stopped here by chance to eat," said Sun Haihao, 30, an engineer from Sichuan province who was visiting Beijing.

He's been to Ajisen, a Japanese-style restaurant run by Ajisen (China) holdings Ltd (0538.HK) and KFC in Mianyang city where he lives. "KFC can be too oily," Sun said. "Ajisen is Asian, so we're used to it."

GROWTH OUTPACES CHINA'S GDP

A recent Reuters poll showed that economists expect China's GDP to grow 8.4 percent this year, down from 9.2 percent in 2011. Meanwhile the quick-service restaurant industry is expected to grow around 15 percent, meaning further revenue growth for Yum and McDonalds, even as their market share declines, according to market research firm Mintel.

"KFC and McDonalds are growing outlet numbers, but so are domestic and foreign chains plus independents," says Paul French, Mintel's chief China analyst. "The pie is bigger, but the number of players wanting and getting a slice of it are bigger too. A rising tide does not necessarily raise all boats."

Ajisen is among the legion of upstarts, which include fellow Japanese entrant Yoshinoya (9861.T); Taiwan-owned Dico's restaurants and 85 Degrees Bakery; Burger King BKCBK.UL, Dairy Queen and Papa John's Pizza (PZZA.O) from the United States; South Korean-owned Paris Baguette and Tous Les Jours bakeries; and a host of Chinese chains such as Golden Jaguar, Yonghe King and Country Style Cooking (CCSC.N).

Many are growing fast, albeit from a smaller base. Ajisen (China) reported a boost in first-half restaurant income last August of 40.8 percent to HK$1.6 billion ($206 million).

Country Style Cooking, a family-style chain offering casual cuisine and focused on western China, increased its locations by 63 percent in 2011, according to China Market Research. Meanwhile, the number of all of Yum brand restaurants in China last year grew 13 percent.

SUCCESS STORY

Louisville, Kentucky-based Yum, whose restaurants in China also include Pizza Hut, East Dawning and a stake in Little Sheep, plus Taco Bell and others in the United States, has had remarkable success in China.

It was the first foreign fast-food restaurant chain to set up business here, opening a fried chicken outlet in Beijing in 1987. Today it is by far the largest with nearly 3,500 KFC locations across China, and more than 4,200 restaurants in all, well ahead of McDonalds' 1,400 locations.

"KFC restaurants are more profitable than any of its competitors and generate about four times as much revenue per restaurant as its U.S. locations," says James Roy, senior analyst at China Market Research, a Shanghai-based consultancy. "No other competitor can come close to adding the number of restaurants per year it can," Roy said.

Yum itself said at the end of the third quarter, "We consider China to be the greatest restaurant opportunity of the 21st century."

Yum executives were not available to comment further because of the regulatory quiet period before the earnings announcement.

Yum's 2011 China revenue to be announced on Monday is expected to rise 23.3 percent, a slower pace from 32.6 percent a year before, according to Credit Suisse.

But China is Yum's growth engine. The company's chief executive, David Novak, said in December that he expects China to lead global profit gains, projected to be up 13 percent for 2011 "despite our disappointing U.S. results" and up 10 percent for 2012, excepting special items.

Rising affluence of the Chinese consumer is behind China's flourishing casual dining market, according to Yuval Atsmon, a Shanghai-based consultant with McKinsey & Co.

"Look at the population of the upper middle class with an income of more than 100,000 RMB ($15,800) a year. It's now 15-20 million households, but it will be over 75 million households in five years," Atsmon says.

How Do You Say Yum in Chinese?

2012-02-03T11:28:00.000-08:00

Source: Barron's By Lawrence C. Strauss

When the boss starts tossing rubber chickens at you, is it time to start worrying? Not if the boss happens to be David Novak. Chicken-throwing helped Novak turn Yum! Brands into a true, globe-girdling giant of the restaurant industry.

Think about it: If a guy builds three world-class brands—KFC, Pizza Hut and Taco Bell—and then amasses more fast-food outlets than any one else on earth—about 36,000—wouldn't you want a personally autographed rubber chicken from him? That's just one of the ways Novak has rewarded his best troops during a remarkable 12-year reign.

It is with real chickens, of course, that he has made his true mark—and, increasingly, with chicken dinner for China. Operating from Louisville, Ky., headquarters that resemble a rambling, southern colonial-style mansion, Novak has managed to turn millions upon millions of Chinese into ardent, practically ferocious fans of Kentucky-style finger-lickin' good chicken.

In fact, KFC is now by far the largest fast-food chain in China—a ringing testament to the power of aspirational marketing.

"Not everybody in China can come to the United States; it's a very expensive thing to do," Novak says. "But you can experience what is a part of the U.S. The power of the brand is immense."

Pizza Hut has also been a big hit in the Middle Kingdom. The chain, which serves not just pizza but also appetizers, wings and pasta, is China's No. 1 casual-dining operation. In all, Yum! (ticker: YUM) garnered an estimated 45% of its $12.5 billion in revenue from China last year and 42% of its operating profit.

Novak was early to China, then pushed hard. The company is now the largest U.S. retail developer in that country, with more than 3,500 KFC stores, including 600 added last year, and another 560 Pizza Huts. It's essentially one big bet on demographics—and as Novak sees it, the odds are only getting better.

"When I first went to China in 1997, you would see the parents in line, and they would buy food for their kids. But they couldn't afford to necessarily buy anything for themselves," he recalls. That's no longer the case: "The consuming class is growing so rapidly. People say it's about 300 million people now, and in eight years, it will be 600 million."

Novak, 59 years old, is more than a strategist. He's also, as you may have guessed, a rather good humorist. Once the chicken gag wore thin, as it inevitably would, he switched to chattering teeth on legs; the idea was to recognize promising managers who walked the talk of leadership.

Behind the laughter are some very serious principles. "People leave when they don't feel appreciated," Novak says. "That's why we've made recognition a really high value. Our business is people-capability first; then you satisfy customers; then you make money."

As a result of that view, the walls and ceiling of his office are festooned with hundreds of photographs of Novak with cooks, restaurant managers and other employees around the world who have done meritorious work. Anyone applying for a management job at Yum! would do well to study those walls.

"If you can't go and put your arm around a cook and make that person feel good, don't come to work here," Novak will say.

NOVAK IS a THOROUGHLY self-taught practitioner of the managerial arts. "As silly as it may seem, for years when conversation turned to the subject of where people had earned their MBAs, I'd excuse myself and go to the bathroom so I wouldn't have to answer the questions," he writes in an instructive and engaging new book, Taking People With You, published earlier this month by Portfolio/Penguin.

Novak does appear to have learned a thing or two. In fact, based on one of the endorsements on the book's cover, he could be the dean of the business schools at Harvard, Wharton and Stanford combined. "David Novak," blurbs Warren Buffett, "is the best at leadership, whether teaching it in this book or practicing it."

In other words, Novak is a thoroughly worthy successor to "Colonel" Harland Sanders, known to most folks simply as Colonel Sanders, the southern gentleman who founded the company in 1952 and whose likeness still appears on KFC signs everywhere.

The original colonel—who won his title not from battle, but from the state of Kentucky as a business honor—ran the company as Kentucky Fried Chicken. Eventually, in 1964, he sold it to a group headed by future Kentucky governor John Y. Brown. After changing hands twice more, KFC, which then had 4,720 stores in the U.S. and another 1,855 in dozens of countries overseas, was acquired by PepsiCo (PEP) in 1986.

PERHAPS THE MOST remarkable part of all is how David Novak got his foot in the door and over time rose to the top, becoming chief executive of the resulting Yum! Brands and eventually carrying the mantle of the U.S. to China.

The son of a surveyor for the U.S. Coast and Geodetic Survey, he lived in 23 states before he finished seventh grade, moving from one trailer park to the next every three to four months. "We always looked at it like an adventure," he says, his southern accent tinged with inflections from Texas and the northern plains. "On every move, we tried to get up and get going early so we could always get the best possible spot in the next trailer park," he says.

The traveler eventually packed himself off to the University of Missouri. He collected a degree in journalism, went to work in advertising and eventually jumped to one of his clients, PepsiCo—or more precisely, PepsiCo's Pizza Hut chain.

As he left advertising behind, he breathed a great sigh of relief. To be beholden to clients wasn't his slice of pie. "I wanted to be accountable," he says. "I wanted to make the decisions."

He began to do just that, duking it out with such rivals as Godfather's Pizza, then run by erstwhile presidential candidate Herman Cain, Little Caesars and even McDonald's (MCD), which made a foray into pizza in 1989. Novak, ever the jester, snapped back at McDonald's with ads warning customers they'd be making a "McStake" if they ate "McFrozen" pizzas.

In his four years at Pizza Hut, Novak helped double sales and profits, earning a nice promotion for himself: He took over sales and marketing of Pepsi's flagship brand, Pepsi-Cola.

Worried about being pigeonholed a marketing guy, Novak paid a visit to PepsicCo's then-CEO, Wayne Calloway, and asked for an operations job. "I said, 'If I don't do a good job, you can fire me, put me back in marketing, do whatever you want to do, but give me a shot at this.' " In 1992, he was named chief operating officer of Pepsi-Cola North America. "PepsiCo was a company that had a reputation for taking risks on people and putting people in big jobs early in their career," he says.

The next stop: the presidency of KFC, and he took to it like a hungry man to a bucket of chicken. In fact, he says, he liked it so much that he said "no" when PepsiCo offered to put him charge of the Frito-Lay snack unit, which was then twice as large as KFC.

"I said no because I love the restaurant business," he explains. Fortuitously, he adds, his decision to stick with KFC left him in a great spot for Pepsi's 1997 spinoff of KFC, Pizza Hut and Taco Bell into a separate company called Tricon Global Restaurants. "I didn't know at the time that they were thinking about the spinoff," he says.

Nice break—for both Novak and investors. He took over as CEO of the new company in 2000 and the stock took off. Since the spinoff, Yum! shares have delivered a total return of more than 800%. The stock of his former parent, PepsiCo, is up 122% by comparison, and the Standard & Poor's 500 index is up 75%.

Novak, it must be said, still has a long way to go to catch up with one particular rival. Although he tops McDonald's in number of outlets, the guys with the Golden Arches do twice as much dollar volume. But if Novak has anything to do with it, that gap could start narrowing. He continues to search the world for growth opportunities, and he has plenty in his sights.

It starts with China, which is growing at a nearly 30% annual clip. Novak also is looking for serious sales in India—$1 billion in 2015, up from an estimated $230 million last year. He is also ramping up in Africa, Russia and Thailand. In all, Yum! has nearly 19,000 restaurants outside the U.S., including more than 10,000 in emerging markets.

The only real problem is at home, in the brutally competitive U.S. markets for fast food and casual dining. There are scads of rivals, and the punk economy of the past few years hasn't helped one bit. Taco Bell, which accounts for some 70% of operating profits here, clocked a 2% drop in same-store sales for the third quarter. KFC and Pizza Hut were each down 3%.

Novak and his team are making some smart moves in response. Yum! is selling more and more of its U.S. stores to franchisees, earning a lump sum up front and then steady royalties.

For instance, the portion of franchised KFC stores in the U.S. is climbing to 95% from 87%. Though stable, this kind of business isn't as profitable as running your own store in a high-return market, but Novak is simultaneously raising the portion of overseas outlets that the company owns rather than franchises. The upshot: Some 70% of all Yum!'s company-owned stores are likely to be in emerging markets by 2014, up from 53% now.

In addition to the ravages of the market, Taco Bell took a public-relations hit from a 2011 lawsuit by a California resident claiming its beef didn't meet industry standards because of too many additives, but the suit was eventually withdrawn. Novak seems confident 2012 will be a recovery year for Taco Bell, thanks in part to new offerings like tacos with nacho-cheese shells.

Pizza Hut, for its part, is facing stiff competition from delivery-only operators like Papa John's and Domino's, but Novak sees room to expand in smaller towns across the country.

KFC is redoubling efforts to ensure that customers get the quality and service they expect. And Novak is unloading Yum's Long John Silver's fish chain and A&W All-American Restaurants to plow more money into emerging markets.

Investors needn't fret that Novak will be gallivanting around China while the U.S. drifts. On his visits to China he stays just long enough to say the only three things he can say in Chinese: Hello. Thank you. Build more.

Little Sheep adds choice of Yum-my flavors

2012-02-03T11:20:00.000-08:00

Source: Shanghai Daily via china.org.cn

Yum! Brands Inc yesterday said it has completed its purchase of China's hotpot chain, Little Sheep Group Co, as it expands its presence in the country to offer diners more local tastes.

Little Sheep, which owns nearly 470 restaurants in the Chinese mainland, will be delisted from the Hong Kong stock exchange today and become a unit of Yum, the US company said.

The privatization of Little Sheep signals Yum has officially taken over the management of Little Sheep in China as it named Xi Ziying, a former regional manager of KFC in China, to be the brand manager, replacing Lu Wenbing, former president of the hotpot chain.

Taking over Little Sheep will provide Yum additional access to China's catering industry and help it maintain growing momentum in the country, its biggest growth market.

Sam Su, chairman and CEO of Yum! Restaurants China and vice chairman of Yum! Brands, said the acquisition was an important expansion for Yum in China.

"We expect Yum's affiliated brands, including KFC, Pizza Hut, Pizza Express, East Dawning and Little Sheep, would continue to grow stronger and be market leaders in various catering segments."

Yum bought a 20 percent stake in Little Sheep in 2009 and increased it to 27.2 percent in 2010.

Taiwan's Uni-President opens new mainland factory

2012-02-03T11:12:00.000-08:00

Source: china.org.cn By Yan Pei

Taiwan-based food manufacture Uni-President Group opened its new factory in the city of Kunshan on the Chinese mainland Monday, Beijing Business Today reported.

Uni-President invested a total of US$105.6 million in the new base in the southeastern Chinese city. The Taiwan company has invested a factory in Kunshan in 1993, producing beverages and instant noodles.

Uni-President stepped up its capacity expansion plans in the Chinese mainland since 2010 in an effort to compete against Master Kong. Chairman Luo Zhixian said in early 2010 that his company planned to invest 1 billion yuan (US$158.4 million) in the following two and a half years to boost capacity.

In October 2010, Uni-President invested US$43 million in a beverage production base in Guangdong Province's Suixi county and another US$100 million in a branch in Shandong Province's Jinan city.

Fighting Fake Bordeaux

2012-02-03T11:08:00.000-08:00

Source: Wine Spectator By Suzanne Mustacich

Fake bottles of Lafite-Rothschild grab headlines, but according to Bordeaux's wine trade council, only a small portion of wine fraud involves counterfeit labels of real châteaus. A much bigger worry for Bordeaux is wine labeled with fictitious châteaus using Bordeaux AOCs. "The main issue is the misuse of the name 'Bordeaux,'" said Allan Sichel, a négociant and member of the Conseil Interprofessionnel du Vin de Bordeaux (CIVB), during a recent meeting at the French Consulate in Hong Kong.

But Bordeaux has little recourse against these Chinese-made Bordeauxs, because Bordeaux is not a protected geographic indication (GI) in China. The Bordelais are working to change that.

"Graves Pomerol," "Château Margot," "Chatreal Latour, Bordeaux"—all are fakes on the Chinese market that are easy to spot if you know Bordeaux, but not so easy if you're a Mandarin-speaking customs inspector with little knowledge of wine.

Normally, trade agreements tackle this issue, but the European Union does not have an agreement with China that protects appellation names, and Bordeaux is losing business to Chinese-made fakes. China bought 42 million bottles of Bordeaux last year. The CIVB believes Chinese consumers could be buying more if every time they reached for Bordeaux they were getting the real thing.

But until China recognizes Bordeaux as a protected GI, there isn't a lot of legal recourse. "The protection of geographical indications is notoriously insufficient," said Georges Haushalter, CIVB president. Champagne and Cognac already have GI protection in China. "As China is our No. 1 export market, we launched a specific action with Chinese authorities."

Last March, the CIVB took a member of the EU Trade Commission on a fact-finding mission to China, meeting with Chinese officials, and highlighted the issue for both sides. China signed a cooperation agreement with the CIVB, and sent their officials and investigators to wine school. "This way they know what to look for," said Christophe Chateau of the CIVB. "They recognize the appellations and realize that you can't make Champagne in Bordeaux."

The trained inspectors will have an app—SmartBordeaux—on their handhelds, so they can quickly determine the authenticity of a label. The plan is that they will spot the fake Bordeaux, and pass on their findings to the authorities.

"But these actions won't have a dissuasive effect if the appellation Bordeaux is not recognized as a geographical indication on Chinese soil," said Haushalter. So last spring, Bordeaux increased pressure on the Chinese to recognize Bordeaux as a GI. But the Chinese wanted something in return. "They said, we'll recognize one of your appellations if you recognize one of ours," said Chateau. "They have about 20, we have 1,000. We said, sure, sure, but this is urgent." While CIVB officials admit that they can't completely stop fraud in China, they hope to win GI protection by 2012.

In the meantime, the CIVB is asking winegrowers to protect themselves by copyrighting their brand in China. Unfortunately, it costs between $800 and $1,100—too much for the smaller producers to pay when they are just starting to ship to China. Usually, once business picks up, they get out the paperwork.

"But then it's too late," said Chateau. "If you want to change your distributor, and your distributor has copyrighted your wine brand, which they do, then he owns it in China not you. I tell them: It doesn't matter if your family has owned the château for 150 years. Whoever copyrights the brand first, owns it."

Concerns grow over safety of food imports

2012-02-03T11:05:00.000-08:00

Source: By Zhao Shengnan (China Daily)

BEIJING - Gao Pingping, a 30-year-old mother in East China's Anhui province, fed her 2-year-old son Meiji milk powder until the Japanese company announced that radioactive cesium was found in the product last December.

"I'm not sure whether the milk powder I bought was tainted, or how to deal with the milk powder I still have," she said.

The dilemma Gao faced is one shared by the growing numbers of Chinese people opting for imported food.

Imported food soared in popularity after the 2008 melamine-tainted milk scandal in China, which resulted in the deaths of six children.

In 2010, the nation imported dairy products worth $2 billion, up 91.6 percent year-on-year.

During the first seven months of 2011, China imported food and drinks worth more than $18.27 billion, up 28 percent on the previous year, according to ChinaIRR.org.

A manager surnamed Lin at Importfood.net, a Guangdong-based online business platform for imported food, said that with improving living standards and greater expectations regarding food quality, more and more Chinese prefer imported food.

Meanwhile, foreign food companies also see a big potential market in China, he said.

"We have been invited to several food trade fairs by Italian, German and Belgian food companies."

Emerging online food traders like Lin's provide Chinese people with greater access to imported food.

Wu Qian, who works for a large food trading company in Anhui province, buys imported food from online shops such as Amazon.com (China) and the US-based drugstore.com.

"I trust the big and famous online shops which provide quality food and good customer service," she said.

Besides online retailers, many Chinese profit by buying milk powder abroad and mailing it home.

Online retailer Usashopcn.com, which sells US products, promises that all the milk powder it sells is purchased from top US online stores, but it cannot guarantee that all of them are produced in the US since many well-known brands have factories all over the world, particularly in developing countries.

"If you can prove a product you bought from our website is fake - which has yet to happen, our lawyers in the US can help you to sue for compensation," said Usashopcn.com.

However, imported food is not always safe.

In January, the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) requested the Italian embassy in China to provide more information about Italian companies suspected of selling improperly labeled olive oil to Chinese customers, and urged Italy to improve its quality control and ensure the quality and safety of olive oil exports to China.

In December, Italian police discovered that 80 percent of bottles of Italian olive oil were adulterated with lower quality oil from other Mediterranean countries.

China imported 6,502 tons of olive oil from Italy in 2010, double the figure in 2009 and accounting for 35.7 percent of China's total olive oil imports, the Chinese Consulate-General in Milan quoted Italian media as saying.

In 2011, China's entry-exit quarantine inspection authorities uncovered 1,857 batches of substandard imported food, according to AQSIQ.

Li Yuanping, a spokesman for AQSIQ, said that imported products' failure to meet China's standards regarding microorganism and additive levels was a major problem.

These products, which included drinks, biscuits and dairy products, were either returned or destroyed by the local entry-exit quarantine inspection authorities and did not enter the Chinese market, Li said.

The food industry in developed countries has developed a mature system of technology and regulations to guarantee food safety, said Wang Shiping, a professor from the College of Food Science & Nutrition Engineering of China Agricultural University (CAU).

"However, although it cannot be ruled out that imported food quality may be affected during storage and transportation, the West, facing China's huge market, also began adulterating exported food with counterfeits," he said.

Consumers' ability to safeguard their rights when they encounter problems with imported products is not easy, said Shan Zhengguo, a lawyer from Shandong Yuanding Law Firm.

Chinese laws and regulations have not stipulated how to calculate customers' losses, so they can only turn to the consumers' association, which is a civil organization without administrative power, he said.

Besides, China's relatively mild penalties for substandard imported food may lead foreign food producers to lower their quality when entering China's lucrative market, Shan added.

"If the penalties food producers from developed countries faced in China were a tough as those in their own countries, I'm sure the quality of imported food would greatly improve, " he said.

But Wang from CAU believed that public supervision motivated by the Internet serves as an effective food quality watchdog.

"The disclosure of food safety scandals by the media will definitely affect public confidence and the producers' reputation," he said.

Wang also suggested that when people buy imported food, they should have enough information about the products, rather than make "blind purchases".

New Huadu Acquires Two E-Mart Stores For CNY9 Million In China

2012-02-03T11:02:00.000-08:00

Source: China Retail News

New Huadu has signed an agreement to buy two stores in China from South Korean retailer E-Mart.

One of the stores is in Shanghai, and its purchase price is reportedly CNY5.4 million; and one is in Kunshan and reportedly sold for CNY3.6 million.

E-Mart previously sold eight supermarkets to New Huadu and Yonghui Superstores.

According to New Huadu, the two stores involved in the acquisition are the Mudu store in Kunshan with registered capital of USD15 million and Sanlin store in Shanghai with registered capital of USD170 million. The Mudu store was a foreign-invested store and the Sanlin store was a jointly-invested store.

With the CNY9 million acquisition, New Huadu will fully take over the claims, relevant fixed assets, equipment, and contractual relationships related to the operation of the two stores. By December 16, 2011, the net asset value of the two stores was CNY44.67 million and CNY29.63 million, respectively.

Though E-Mart holds over 30% market share in its domestic South Korean marker and even forced Carrefour and Wal-Mart to withdraw from South Korea, its development in China has not been satisfactory. According to the financial statistics provided by E-Mart's parent company Shinsegae, since 2007 E-Mart has been losing money for four consecutive years. During the 2010 fiscal year, E-Mart lost KRW91 billion in China, which was about USD84 million.

Carrefour Names New CEO

2012-02-03T10:59:00.000-08:00

Source: china.org.cn By Yan Pei

French retail giant Carrefour announced Monday its appointment of Georges Plassat as the new chief executive officer, replacing Lars Olofsson, following the company’s recent low profit warnings sending its share price tumbling.

According to Carrefour's statement, Plassat will join the company ranks on April 2 and will become board chairman and CEO after the June 18 board meeting.

Carrefour has lowered its profit forecast five times since it announced the 1.5-billion-euro (US$2 billion) plan to restructure some of its largest European stores in September 2010. The retailer's market value has shrunk by 7 billion euros since Olofsson started as CEO in January 2008. The first thing on Plassat's plate will be to restore investor confidence.

Plassat ran Carrefour's Spanish business between 1997 and 1999. He later served 11 years in French clothing retailer Vivarte as CEO.

Carrefour has maintained a rate of 20 to 25 new stores opening every year in China. However, the retail giant has decided to step up its expansion by opening 30 stores this year.

2012-01-27T13:40:00.000-08:00

What's Happening...

Starbucks' CEO Discusses Q1 2012 Results – China Highlights

2012-01-27T13:30:00.000-08:00

Source: Seeking Alpha

In China and Asia-Pacific or CAP, the strong momentum that built throughout 2011 continued in the first quarter of fiscal 2012. Net revenues increased by 38%, driven largely by rapid new store growth, along the same-store sales growth of 20%. The strong comps were comprised of a 15% increase in transactions and a 5% increase in average ticket. All 4 of our company-owned markets in CAP posted double-digit comps, with China leading the way at 28%.

We have now recorded greater than 20% comps for 6 consecutive quarters in China. Consistent with results across our global store base, the holiday platform produced very solid results as well. Additionally, we're gaining traction on our loyalty program, with nearly 250,000 My Starbucks Rewards members already signed up in China. Strong holiday merchandise sales contributed to the higher average ticket.

Operating income in CAP was also strong, increasing 26% to $58 million in the first quarter. Operating margin contracted 350 basis points to a still outstanding 34.6%, resulting from higher performance-based compensation, higher costs necessary to fuel our expansion in this region, as well as 200 basis points related to higher commodity costs. While store operating expenses and costs increased, we saw solid leverage on occupancy and depreciation from the additional sales.

Given the consistency of strong results in China/Asia-Pacific, we're going to continue to accelerate growth in the region. We opened 121 net new stores in Q1, the highest of our 3 retail regions. The growth came from 48 net new stores in mainland China, where we continue to see extremely strong returns that are surpassing our initial projections. Sales to investment ratio in mainland China is more than 2.5:1, and first-year, cash-on-cash returns are the highest in our system. Better store growth contributors in CAP in Q1 included South Korea, where we opened 24 net new stores and Japan with 15 net new stores.

Question-and-Answer Session

Michael Kelter - Goldman Sachs Group Inc., Research Division

I wanted to ask about China. First off, China ticket was up 5%. Does that represent a price increase to offset inflationary pressures? Or is there some sort of a change in the way consumers are interacting with the brand in China? And then also in China, the acceleration in unit growth which you're now actually starting to see, curious if you're bumping into any internal or external bottlenecks, and what you're finding you have to tweak as you accelerate the trajectory there?

Howard D. Schultz

This is Howard and we've got John Culver here, the President of that region. So John?

John Culver

Yes, I would say that -- I mean, what we're seeing in China is on the ticket side, there's no impact from pricing. So we have not taken pricing in China. So what you're seeing is real. The comp growth is mainly being driven by transaction. We continue to accelerate the new store growth across all the markets. We now sit in 41 cities across the country. We opened our 500th store this quarter, and this past quarter, we opened 5 new cities, all right. So what we see is continued acceptance of the Starbucks brand and the Starbucks Experience. And in terms of any kind of bottlenecks or barriers, clearly, we are ramping up the investment around the infrastructure, and back-in-the-house systems. So IT systems, as well as supply chain systems and distribution capabilities, and then also, continuing to accelerate the advancement around hiring ahead of the curve, particularly around store operations, as well as with the store development teams. To help drive the growth, we're also accelerating the ability to design stores in market. So we've made significant investment from a store development standpoint of shifting the resources back here in Seattle, and pushing that out into China, into markets of the world much closer and much quicker in the market. And then we've also added additional investment in China around research and development to really capture the consumer trends in China, and to drive innovation that really is going to be impactful for the Chinese consumer.

US to continue anti-dumping duties on furfuryl alcohol from China

2012-01-27T13:06:00.000-08:00

Source: Xinhua via China Daily

WASHINGTON - The US government said on Friday that it will continue to maintain the existing anti-dumping duties on furfuryl alcohol from China, despite Beijing's repeated calls for Washington to drop protectionism.

The US International Trade Commission (ITC) said in a statement that revoking the existing anti-dumping duty order on furfuryl alcohol from China would be likely to lead to continuation or recurrence of material injury within a reasonably foreseeable time.

As a result, the existing order on imports of this product from China, which was widely used in organic chemistry, will remain in place. The duty ranges from 43.54 percent to 50.43 percent.

Under the Uruguay Round Agreements Act, the US Department of Commerce has to revoke an anti-dumping or countervailing duty order, or terminate a suspension agreement, after five years unless the department and the ITC determine that revoking the order or terminating the suspension agreement would be likely to lead to continuation or recurrence of dumping or subsidies and of material injury within a reasonably foreseeable time.

Trade tensions with China are a particularly sensitive issue at a time when the US and other Western economies want to boost exports to revive economic growth and cut unemployment.

The Chinese Commerce Ministry has repeatedly urged the United States to abide by its commitment against protectionism and work together with China and other members of the international community to maintain a free, open and just international trade environment.

Pollution sparks panic water buying in China

2012-01-27T13:02:00.000-08:00

Source: AFP

SHANGHAI — Pollution in China's southern region of Guangxi sparked panic buying of bottled water this week after a mining firm dumped toxic cadmium into a river, according to state media.

Residents in Liuzhou city filled shopping carts with boxes of bottled water, as the government sought to reassure people that the drinking water supply was safe, Shanghai's Oriental Morning Post reported.

Authorities found waste discharged into the Longjiang river by the Jinhe Mining Co caused excessive levels of cadmium some three times the government's accepted limit, the official Xinhua news agency said.

The pollution was originally detected on January 15 after it killed a "small number" of fish, but measurements on Wednesday showed elevated levels of cadmium further downstream, it said.

The Liuzhou government could not be reached for comment Thursday, a public holiday for the Chinese Lunar New Year.

Authorities had dispatched officials to ensure ample supply of bottled water at shops and prevent price gouging, Xinhua said. State media showed pictures of shelves at one supermarket almost stripped bare of bottled water.

However, Liuzhou officials said water quality in the area was "safe". Over the past week, firefighters had dumped chemicals aimed at neutralising the cadmium into the river.

According to the World Health Organization cadmium is a carcinogen which can seriously damage the kidneys, bones and respiratory system. It has several industrial applications, ranging from steel to batteries.

Three decades of rapid economic growth and lax enforcement of environmental protection laws have caused most waterways in China to be heavily contaminated with toxic waste from factories and farms.

A toxic algae bloom -- likely caused by pollution such as chemical fertiliser -- on Taihu Lake in eastern China contaminated water supplies for more than 2.3 million people in 2007.

Pollution by individual factories has also sparked protests in China as residents, who fear for their health, show a rising awareness about the environment.

In a recent case, hundreds of people living near a plant making solar panels in eastern China protested in September last year, forcing authorities to temporarily shut the Jinko Solar factory.

Mixing High and Low in Beijing

2012-01-27T12:59:00.000-08:00

Source: Wall Street Journal- Scene Asia By Josh Chin

Single-malt, 18-year-old Scotch mixed with bottled green tea, anyone?

The concoction — the subject of many a nightlife horror story by visitors to China — isn’t as popular as it used to be, but it remains an apt metaphor for Beijing’s nightlife, which prefers its high with a splash of low.

That distinguishes the city from the more Westernized Shanghai. “In Shanghai, it’s about how much money you can spend,” says Leon Lee, a San Franciscan who owns bars in both Shanghai and Beijing.

“Beijing is edgier, a little rough around the edges,” he adds. “It’s more fun to go out in Beijing.”

As money and mixologists have streamed into the city, its upscale options have grown. Start by checking out Sanlitun, Beijing’s preeminent drinking district. Once a sweaty Babylon where shadowy figures tried to beckon male visitors to “lady bars,” Sanlitun is now home to Nali Patio, a six-story, Mediterranean-themed courtyard complex that houses several bars and restaurants.

Here, the main attraction is Apothecary, a sleek, third-floor speakeasy. Run by Mr. Lee, its extensive drinks menu doubles as a cocktail-history textbook and includes an expertly executed Old Fashioned (with optional bacon-infused bourbon) and an Earl Grey martini made with handcrafted bitters and topped with whipped egg whites. Prices are reminiscent of Manhattan, but so is the quality.

Other Nali Patio options include Enoterra, a welcoming wine bar on the fourth floor, and Migas, a Spanish restaurant and bar with an industrial-chic dining room and an expansive rooftop patio.

For a quieter night out, go east of the Third Ring Road to an entertainment district known as Lucky Street. There you’ll find Mokihi, an unassuming Japanese whiskey bar located on an upper floor along the southern end of the street. Bypass the main room for the back area, where bartenders ply their trade in a room lined with bottles of single-malt whiskey and infused liquors. If you’re hungry, order a plate of Wagyu sashimi from K’s Kitchen next door, and pair it with a wasabi martini.

To go deeper into Beijing’s soul, head inside the Second Ring Road to Dongcheng. An older part of the city, Dongcheng is one of the last repositories of the city’s beloved hutong — maze-like alleyways where history, politics and culture brush up against each other to fascinating effect.

Few nightlife spots epitomize that better than Yugong Yishan, a music venue inside a complex that once housed the government of warlord Duan Qirui. It hosts everything from punk rock shows to film screenings to underground rebel bingo and keeps its patrons well lubricated with cheap Tsingtao.

A few kilometers away is Gulou Dongdajie, a street teeming with pubs, guitar shops and vintage clothing stores that serves as Beijing’s answer to San Francisco’s Haight Ashbury neighborhood. In a courtyard house tucked away in an alley, you’ll find Amilal, one of the favorite haunts of the city’s expatriate literati. Run by a Mongolian photographer who uses the space to host exhibitions of his friends’ work, it’s an excellent place to decompress after taking in a live show.

Another hutong option is Mao Mao Chong, a five-table bar that does a steady trade in China-themed mixed drinks such as the Maojito, a gingery take on the Mojito, and the Jing Fling, a cocktail based on China’s not-for-the-faint-of-heart baijiu liquor.

If you’re still going strong at midnight, two after-hours destinations, Lantern and Haze, beckon. Lantern, run by Beijing electronic-music label Acupuncture Records, ministers to heaving weekend crowds. Haze caters to hipsters and offers the added late-night challenge of being located at the bottom of one of the city’s most perilous staircases.

Apothecary, Third floor, Nali Patio, 81 Sanlitun Beilu, Tel.: 86-10-5208-6040
Enoterra, Fourth floor, Nali Patio, 81 Sanlitun Beilu, Tel.: 86-10-5208-6076
Migas, Sixth floor, Nali Patio, 81 Sanlitun Beilu, Tel.: 86-10-5208-6061
Mokihi, Third floor, C12, Lucky Street, Tel.: 86-10-5867-0244
Yugong Yishan, 3-2 Zhangzizhong Lu, Tel.: 86-10-6404-2711
Amilal, 48 Shoubi Hutong, south 66 Gulou Dongdajie, Tel.: 86-10-8404-1416
Mao Mao Chong, 12 Ban Chang Hutong, Tel.: 86-10-6405-5718
Lantern, 100 meters north of Workers Stadium West Gate, Tel.: 86-135 0134 8785
Haze, A101, Guanghua Lu SOHO, 22 Guanghua Lu (basement of On the Corner Cafe), Tel.:86-10-5900-6128

Best dive bars in Shanghai

2012-01-27T12:39:00.001-08:00

You could hit the Bund every night and order bottle service or sip on RMB 80 cocktails. But the glitterati lose their sheen quickly and at some point, the only bottle you want in your hand has the word "REEB" or "Tsingtao" on it.

Although some locales live up to the cigarette butts and harsh fluorescent lighting image conjured up by the words “dive bar”, the best ones are places that simply keep the concept of a cheap drink, sans frills, close to the heart.

Here are eight of the best Shanghai dive bars in no particular order.

C's

Who you'll see there: Chinese bouncing to “Empire State of Mind”
What you'll drink there: A pint of Carlsberg for RMB 15, or Tiger for RMB 20
Best deal you'll find there: RMB 40 Jagerbombs

The grandfather of places that smell like your grandfather, C’s is a maze of crowded, sweaty rooms in the basement of an office building that are completely covered in graffiti.

Imagine that the wall art is an enormous tramp stamp and this place makes perfect sense.

We can’t go back because somebody in our party decided to start breaking light bulbs, which didn’t seem all that out of place at the time.

This is one of those places where there’s always somebody to talk to or hook up with.

Don't leave without: Writing something stupid on the wall.

C's, 685 Dingxi Lu, near Yanan Xi Lu 定西路685号, 近延安西路, +86 21 6294 0547, Sunday-Thursday: 7:30 p.m.-3 a.m.; Friday-Saturday: 7:30 p.m.-5 a.m.

Harley's Bar

Who you'll see there: Older Americans, Chinese working stiffs lookin’ to kick off the Sunday shoes
What you'll drink there: Beam. Neat.
Best deal you'll find there: RMB 25 pints of Tiger, RMB 45 Heinekens, and RMB 50 Murphy's

In a basement next to an Internet cafe in Xujiahui, Harley’s takes its name and decor from the bar mat of Americana.

There aren’t any specials, the bartender is darped in a leather vest, and the pool table’s felt is torn and frayed. You got a problem with that?

Don't leave without: This might ruin the “Roadhouse” described above, but they have a really nice cat. Pet the cat.

Harley’s Bar, 265 Nandan Dong Lu, near Caoxi Bei Lu 南丹东路265号, 近漕溪北路, +86 21 5424 7317, 6 p.m.-2 a.m.

Windows Too

Who you'll see there: Sassy Filipino waitresses who reprimand you for speaking to them in Chinese. Don’t try Spanish either -- trust us.
What you'll drink there: Coors. They used to be RMB 10, but are now RMB 15
Best deal you'll find there: Other than the Coors? RMB 25 coronary in a Philly Cheese Steak costume.

Windows Scoreboard has better ambiance and view; Windows Underground provides a better assortment of degenerates selling chemical and flesh; but the Jing’an Windows branch is remarkable because it’s so damn unremarkable.

By not intruding with any hip music or decor (except that marvelous “Madagascar” mural), Windows Too allows drinkers to concentrate on the all-important union of beer and liver.

Don't leave without: Asking the manager to put on the new Gift Skateboards video.

Windows Too, 2/F, City Plaza, 1618 Nanjing Xi Lu, near Huashan Lu 南京西路1618号久光百货2楼, 近华山路 +86 21 6288 9007, 10 a.m.-4 a.m.

Helen's Cafe

Who you'll see there: Someone saying, “That’s what I love about these study-abroad girls. I keep getting older, and they stay the same age.”
What you'll drink there: They haven’t yet figured out how to water down the booze, so enjoy the RMB 15 shots
Best deal you'll find there: A free bottle of Tsingtao for the first five customers every Wednesday
If, in penance for some sin committed in another lifetime, you find yourself wandering the streets of Yangpu, grab a beer at this place.

Stupid backpacker accoutrements here aside, the place is brimming with students (from Tonji, Fudan, and Shanghai University of Finance and Economics) who are, in turn, brimming with cheap beer.

Don't leave without: Trying the cheeseburger (RMB 26, or RMB 16 before 6 p.m.)

Helen's Cafe, 49 Wuchuan Lu, near Wan'an Lu 武川路49号, 近万安路, +86 21 6536 8669, 5 p.m.-2 a.m.

Dada

Who you'll see there: Girls with sidebangs and outfits lifted from the set of "Global Guts." Check thecobrasnake.com if you don't know what we mean.
What you'll drink there: Almost all drinks hover around RMB 30, so take your pick
Best deal you'll find there: Chinglish Cocktail for RMB 25.

Dada barely made this cut. A dive cannot abandon earnestness, that's all it has. And Dada, at its root, is a hipster bar, one built on irony.

It's a little too smooth, the playlists too perfect to be a dive, but for some reason, it still is, and we love it.

Don't leave without: Checking out the Sub-Cinema Movie Night on Tuesdays (movie starts at 9:30 p.m.). Free popcorn, woohoo!

Dada, 115 Xingfu Lu, near Fahuazhen Lu 幸福路115号, 近法华镇路, +86 150 0018 2212, 8 p.m.–2 a.m. (weekend till later)

Not Me

Who you'll see there: Swedes, chicks with sidebangs and dudes outside asking for change
What you'll drink there: Standard drinks and brands you can spot in most Shanghai bars
Best deal you'll find there: RMB 80 all-you-can-drink deal and RMB 15 beers on Thursday

In the gutted carapace of a former talking-girl bar, Not Me shows that booze barns in Shanghai have second acts.

You won’t be drinking top-shelf booze, but it’s not like you deserve it.

A revolving schedule of theme nights and dance parties (electroclash and the like) keeps the place interesting. It’s hip, but not self aware enough to become a hipster bar.

Don't leave without: Talking to the San Franciscan owner, Sam Liem.

Not Me, 21 Dongping Lu, near Hengshan Lu 东平路21号, 近衡山路, +86 21 6433 0760, 8 p.m.-2 p.m., www.not-me.com

I Love Shanghai

Who’s going: People with tourist visas
What you'll drink there: Surprisingly overpriced beer (RMB 35 for a Tiger)
Best deal you'll find there: Strong Island (RMB 50)

If dive is defined by lack of posturing, then this Jing'an institution doesn't fit the bill. But, if a dive is thought of by how little it changes over the years -- I Love Shanghai has it made.

With the perpetual adolescence of a frat house, "I <3 Shanghai" (as it is also known) embraces the seedy, mediocre side of Shanghai's nightlife that is quickly evaporating like so much spilled Carlsberg. The beers are too expensive, and the lights too bright, but this place is still bizarrely popular and is still considered a dive. Don't leave without: Adding a tallymark to the absinthe shot bar. I Love Shanghai, 2/F, 1788 Xinzha Lu, near Jiaozhou Lu 新闸路1788号, 近胶州路, +86

Mokko's

Who you'll see there: Hip Japanese, people who love ska but hate Bob Marley, and anyone else who happens to wander down the random alley it's on
What you'll drink there: Shochu
Best deal you'll find there: RMB 35 for wheat shochu and grapefruit juice

The first time we went to Mokko's, the bartender walked up to the table and said, “I’ll be your menu.”

He wasn’t kidding, they have no menu, so have faith in your waiter or you're S.O.L.

The tight-knit waitstaff know their stuff though, so you’re in good hands, allowing you to relax as you sip, listen to old Trojan records and be content.

“We love ska with shochu, they’re both so smooth,” says Kanoko, our waiter, part of the tight-knit waitstaff, whose service is so unpretentious you can only experience it at a dive.

Although it’s odd to think of a Japanese bar like this making a dive bar list -- this tiny, clean and tidy bar still does even though it hides it dive-y aspects well.

Take the bathroom for instance. Look past the graffiti to the Japanese toilet. Look at all those kinky functions. Pure dive, only the best way.

Don't leave without: Asking La Mu (拉姆), the Tibetan woman behind the bar, to sing you a song.
Mokkos, 1245 Wuding Xi Lu, near Wanhangdu Lu 武定西路1245号, 近万航渡路, +86 21 6212 1114, 7 p.m.-2 a.m., (closed on Tuesday)

Source: CNN Go

Wine on the wane: Fake vintages undermine market in China

2012-01-27T12:39:00.000-08:00

Source: Want China Times

The price of Chateau Lafite Rothschild plunged sharply in China from the second half of last year due to a glut of fake imitations, which caused many investors and collectors to suffer losses.

A report from the Beijing Daily said the price of the wine had skyrocketed 30% yearly in the past few years as growing incomes stimulated demand, making it a hot investment target for Chinese collectors.

Yet Chateau Lafite counterfeits have become rampant in the world's second-largest economy. The biggest vendor of Chateau Lafite Rothschild in Beijing told the local Beijing News that he imported poor-quality wine from France, rebottled it as Chateau Lafite en route and sold these counterfeits for thousands of yuan a bottle.

Chinese wine expert Zhu Linong told the Beijing News that buying Chateau Lafite Rothschild in China is always a riddle. The vineyard produces 200,000 bottles a year, of which only 40,000 bottles are exported to China. Yet far more than this amount is consumed in China, meaning much of it is fake.

According to data from Liv-ex in London, a global marketplace for wines, a major drop in the price of Chateau Lafite Rothschild has been seen since the second half of 2011, especially the 2008 vintage, which saw a 45% reduction in price compared with the highest price in March.

It was the first time in eight years that the price of Chateau Lafite Rothschild slumped in China and many investors faced heavy losses.

At a Sotheby's auction in early Oct. 2011 in Hong Kong, the sale of 59 lots of 821 bottles of wines was cancelled, the first time this had happened since 2009.

Some investors told the newspaper that the incident showed the passion for wine collecting in China is on the wane.

McDonald's in China undergoes European makeover

2012-01-27T12:36:00.000-08:00

Source: Want China Times

Global fast-food chain McDonald's has been actively transforming its restaurants in China into European-style outlets in order to attract young people in urban areas. In 2011, 100 McDonald's outlets underwent such transformation and 80% of the outlets in China will undergo the renovation by 2013.

The new European style is intended to reflect simplicity, in contrast to the American restaurant's traditional style that reflects a high-tempo lifestyle.

"We want to attract young people and make them loyal supporters of the simple and happy lifestyle," remarks Zeng Qishan, CEO of McDonald's China.

Last year, several outlets in Beijing and Shanghai installed independent coffee corners. The ongoing renovations involves more fundamental change, including the arrangement of seats, artwork and lighting.

Since its entry into the Chinese market, McDonald's has embraced the company's classical yellow and red colors in the decor of its outlets, winning over many children, their parents and other people who like bright colors. Now McDonald's wants to tap the potential for business meetings and gathering of friends. Its new target customers are young people aged 18-28.

In order to poach customers from coffee chain Starbucks, McDonald's will offer free Wi-Fi internet access service at its outlets in Beijing, Shanghai, Guangzhou and Shenzhen starting in April.

McDonald's has launched a new slogan: "Reserve some space for happiness," stressing the slow pace of drinking coffee, in sharp contrast with their old mantra, "I'm lovin' it!"

To support the transformation, McDonald's increased capital outlay by 35% in 2011 and will boost the outlay by 40% more in 2012. So far, the company has invested 7 billion yuan (US$1.1 billion) in China. A majority of the expenditures have been in opening new outlets and upgrading corporate image.

McDonald's has more than 1,000 outlets in China, compared with more than 3,000 KFC restaurants. However, its profit margin is five times that of Yum! Brands, which operates KFC and Pizza Hut in China.

McDonald's plans to further step up its investments in China in order to tap the market potential resulting from the further urbanization of the Chinese population. China's urban population is set to top 700 million in five years. To capitalize on the trend, McDonald's plans to establish 1,000 additional outlets in China by 2013.

Online supermarket Yihaodian develops new e-commerce model

2012-01-27T12:34:00.000-08:00

Source: Want China Times

The young Chinese online supermarket Yihaodian, which got its start in 2008, has exploded onto the e-commerce stage after tweaking and experimenting with new business strategies.

Annual sales leapt from 4.17 million yuan (US$660,000) during the supermarket's first year, to 805 million yuan (US$127 million) in 2010 and to 2.72 billion yuan in 2011 (US$431 million). Yihaodian has won capital investment from global retailing giant Walmart and has become the subject of a case study course at the American retailer's MBA program.

Yihaodian — meaning "No. 1 Store" — was co-founded by current chairman Yu Gang, who formerly served as a senior supply chain executive at Dell and Amazon, and his former Dell colleague Liu Junling, who is now the online retailer's CEO.

Instead of adopting a fancy or flamboyant business format, Yihaodian has chosen to "bring people a better lifestyle." It sets as the core of its business model "providing one-stop home shopping solutions for customers who need not step outside." Yihaodian currently offers 150,000 products, about six times that offered by Walmart or Carrefour brick-and-mortar stores. Average prices are 3-5% lower than in traditional supermarkets, according to the Chinese-language Economic Observer.

The company has five large warehouses — in Shanghai, Beijing, Guangzhou, Wuhan and Chengdu — with more than 130 of its own distribution centers in 34 major cities. It aims to expand its distribution network to 100 cities by the end of 2012. What's more, it is set to increase the number of products offered to 500,000 by the end of December. Yihaodian also provides services such as flight booking and bill payment. Medical services and pharmaceutical supplies are also available at its website.

After leaving Dell in 2007, Yu and Liu rented a small room in Shanghai's Pudong area, using it as an office in which they mapped out their business plan. They launched the Yihaodian website in July 2008.

The pair pays careful attention to customer service. The company is constantly conducting market surveys to solicit customer feedback, and assigns specific teams to carry out improvements based on suggestions from clients. Employee performance is evaluated mainly on service to customers.

After establishing an efficient logistics network, Yihaodian is able to offer overnight delivery to most cities in the Yangtze and Pearl River delta regions in coastal China. Deliveries to top-tier cities like Shanghai and Beijing can be completed in just half a day. Logistics is one area in which the supermarket has reacted to suggestions, now offering "three deliveries in one day" service and delivery at designated times and locations, both requested by customers.

Yihaodian, dissatisfied with software products available on the market, has also invested in building its own team to develop software that can efficiently process the wide range of information that goes through its system.

The company allocates 30-40% of its investment capital for expanding warehouse and delivery networks, 30% on IT development, and less than 10% on advertising and marketing, much lower than average for the e-commerce industry. Chairman Yu explained that Yihaodian sticks to the principle of cost-effective spending with a focus placed on more essential operations.

Officials punished in Chinese milk scandal given new jobs

2012-01-27T12:32:00.000-08:00

Source: Want China Times

The Hong Kong-based Sing Tao Daily reports that all officials who were punished in a toxic milk formula scandal in 2008 which poisoned 300,000 children in China have since resumed government posts.

Zhao Lianhai, a representative of the victims of the melamine incident, has expressed his disgust at this latest development.

The scandal emerged in July 2008, when 16 infants in China's northwestern province of Gansu were diagnosed with kidney stones. All of them had been fed milk powder produced by the Sanlu Group of Shijiazhuang city in northern China's Hebei province.

Government inspections found that the milk formula had been adulterated with melamine, an industrial chemical which had been added to boost the apparent protein content of the milk. In addition to Sanlu, products made by 21 other brands including Mengniu, Yili and Yashili were also found to be tainted.

Seven officials in Shijiazhuang, including then mayor Ji Chuntang, were fired or forced to resign due to the scandal. However, according to the Sing Tao Daily, Ji has taken up the post of deputy director of the Hebei industry and information technology department.

Zhang Fawang and Zhao Xinchao, two deputy mayors of Shijiazhuang who were also dismissed after the scandal, also made recent returns to government posts. To avoid public criticism, related government websites deliberately deleted these officials' backgrounds and information.

Ji confirmed his reinstatement to the newspaper and asked that his new assignment not be reported.

According to the Chinese health ministry, by November 2008 an estimated 300,000 children had suffered poisoning due to melamine-tained milk, of whom six died from kidney damage and 860 were hospitalized.

The issue revealed the problems of food safety and political corruption in China and damaged the reputation of the country's food exports. At least 27 nations including Taiwan stopped all imports of Chinese dairy products and the domestic industry has yet to recover, with many in China still insisting on imported foreign brands of milk formula despite its higher price.

A survey by state broadcaster CCTV in 2011 found that at least 70% of China's public still did not dare to buy domestic milk some three years after the scandal.

2012-01-20T13:38:00.000-08:00

What's Happening...

Brands Like Nescafe Are Tapping Rebellious Figures in China

2012-01-20T13:26:00.000-08:00

Source: Ad Age By: Jerry Clode

Brands in China are looking for more rebellious figures to create aspirational messages for their affluent young white-collar targets. The recent collaboration between Nescafe and popular writer, blogger and social critic Han Han is an interesting example of this dynamic.

Nescafe coffee competes with Kraft Foods' Maxwell House and a plethora of ready-to-drink products. Until recently, both leading brands focused on championing heroic office workers and their dreams of advancement in a ruthlessly competitive job market. Maxwell House led the charge with Wang Luodan, the lead actress of the hit TV series "The Diaries of Du Lala," which celebrates the triumph of a poor village girl who becomes the head of an international company.

Nescafe countered with literary bad-boy superstar Han Han, an idol to a well-educated generation whose lives have been defined more by opportunity than restriction. The move appears to be a calculated risk for both the brand and the celebrity.

Despite their jobs in an international, professional environment, white-collar workers in China have private lives and media behaviors that are relatively devoid of participation or debate. Aggravating the situation is the Chinese government's recent effort to curb "excessive entertainment" on local television.

With an ambitious, optimistic generation feeling stifled by limits on conversation and content, brands are realizing that associating with outspoken figures is an effective way to differentiate themselves.

Nescafe's decision to work with Mr. Han is a conscious attempt to tap this sense of frustration. In the OgilvyOne Beijing ad campaign, "Live Out Your Boldness!" Mr. Han, who is also a semiprofessional race-car driver, is cast as a Steve McQueen-type hero on a motorbike who sips coffee from a red Nescafe mug. On a road trip, he encourages everyone -- from paraplegic racers to musicians -- and helps communities build schools as a veritable "rebel with a cause." The digital campaign hosted on Sina.com encourages Nescafe consumers to post examples of brave acts they have committed.

Mr. Han enjoys enormous popularity for his prolific literary talent as well as his willingness to challenge social and political norms. His blog has registered more than 300 million hits, according to a New York Times profile of Mr. Han, although content is sometimes deleted.

While not an out-and-out democratic crusader, Mr. Han is politically disruptive and on the government's watch list. His commercial success and international exposure as one of Time magazine's 100 Most Influential People in 2010 afford him more leeway than his less fortunate creative peers. (Time described him as "a willing participant in a process that channels the disaffected energy of youth into consumerism.")

Between politics and a wish to maintain his credibility, Mr. Han has until recently been reluctant to commercialize his special appeal among China's post-1980s cohort.

His first foray as a commercial ambassador was in 2010 for apparel brand Vancl, whose ads always end with the tagline "I am Vancl." Mr. Han's ad read "Love internet. Love freedom. Love racing, love waking up late. Love late-night snacking, I also love 59RMB canvas shoes. I'm not a trendsetter, I'm not anyone's representative. I'm Han Han, I only represent myself. I'm the same as you. I am Vancl."

He was also the centerpiece of Johnnie Walker's "Sentimental Journey" campaign, blogging his interpretation of dreams and encouraging consumers to break down barriers in a locally nuanced expression of the Diageo brand's global "Just Keep Walking" platform.

Mr. Han's partnership with Nescafe suggests a watershed in commercial communication in China, where a brand can leverage social criticism and controversy to create intimacy with younger consumers. And his allure makes him a safer bet than in the past.

SABMiller launches China trial for Miller Genuine Draft

2012-01-20T13:22:00.000-08:00

Source: SAB Miller

China Resources Snow Breweries Limited ("CR Snow"), its joint venture with China Resources Enterprise Limited ("CRE"), is launching a trial of SABMiller's international premium brand, Miller Genuine Draft, in the Zhejiang region of China.

The introduction of Miller Genuine Draft into the Zhejiang market gives the company the opportunity to test the potential for its international brand with a premium beer imported from the USA.

The joint venture has achieved significant growth for local brand ‘Snow', which is both the largest beer brand in China and in the world by volume. CR Snow had a 21% share of the Chinese beer market with sales of more than 92 million hectolitres (1 hectolitre = 100 litres) in 2010.

CR Snow is the exclusive importer and will utilise its existing infrastructure to service the market, with Miller Genuine Draft initially available in Hangzhou and Wenzhou following a launch event to be held in Hangzhou on 16th January.

Ari Mervis, SABMiller's Managing Director, Asia Pacific, said: "This is an exciting opportunity to introduce one of our international brands into the fast-growing premium segment in China in a way which takes advantage of CR Snow's strong market position in the region."

Zhejiang is one of the largest markets in Central China and its capital, Hangzhou, has one of the highest GDPs of the provincial large cities.

About SAB Miller
SABMiller plc is one of the world's largest brewers with brewing interests and distribution agreements across six continents. The group's wide portfolio of brands includes premium international beers such as Pilsner Urquell, Peroni Nastro Azzurro, Miller Genuine Draft and Grolsch, as well as leading local brands such as Aguila, Castle, Miller Lite, Snow and Tyskie. SABMiller is also one of the world's largest bottlers of Coca-Cola products.

In the year ended 31 March 2010, the group reported US$3,803 million adjusted pre-tax profit and group revenue of US$26,350 million. SABMiller plc is listed on the London and Johannesburg stock exchanges.

About China Resources Snow Breweries Limited
China Resources Snow Breweries Limited was established in 1993 and became a joint venture with SABMiller plc in 1994. It is engaged in the production, sales and marketing of beer in China. Its shareholders are China Resources Enterprise, Limited and SABMiller Asia Limited, a subsidiary of SABMiller plc. China Resources Enterprise, Limited has a 51% interest in China Resources Snow Breweries Limited while SABMiller Asia Limited holds the remaining 49% interest. In 2010, it operated over 70 breweries in China with a total beer sales volume of about 92 million hectolitres. It is the largest beer company in China by sales volume.

About China Resources Enterprise, Limited
China Resources Enterprise, Limited is listed on the Hong Kong Stock Exchange and is one of the constituent stocks of the Hang Seng Index in Hong Kong. The Group focuses on the consumer businesses including retail, beer, food and beverage in China.

Research in Focus - Baijiu Shows Premium Sector is Not All About Imported Cachet

2012-01-20T13:18:00.000-08:00

Source: Just-Drinks | Photo: China Daily

Given the rapidly developing consumer economy in China, it is hardly surprising that the premium spirits sector has been such a growth area. What is rather more surprising is that, in contrast to many developing markets, China's domestic spirit, baijiu, more than holds its own at the pinnacle of the spirits pyramid, in spite of the cachet of international brands.

In fact, a recently-published report from The IWSR asserts that "the widespread impression among Western companies that the Chinese consider foreign spirits as being of superior quality to their home produce is completely untrue: baijiu is by a distance the largest super/ultra-premium/prestige spirits category in China."

According to The IWSR Baijiu Report, in contrast to most other developing countries with a large domestic spirits production, baijiu is not always synonymous with low price. Moreover, the ultra-premium/prestige baijiu category has been growing faster than the standard/low-priced sector over the past five years.

Sales of ultra-premium/prestige baijiu are dependent on consumption and gifting by Chinese government officials, so much so that any government directive asking for restraint in public expenditure affects ultra-premium/prestige baijiu sales and prices. The report estimates that as much as 30% of super-premium baijiu is purchased directly by the Government for distribution among Communist Party members.

Interestingly, however, baijiu is rarely consumed in bars, nightclubs or ‘KTV’ karaoke lounges. In contrast, baijiu is drunk with meals and banquets. Indeed, the report suggests that this may be a consumption occasion which represents a considerable opportunity for Western-style spirits, as only wine and Cognac have made any inroads in this area and, even then, in only two provinces.

So, on the face of it, baijiu, which is a clear, a grain-based distilled spirit, typically at 40% to 60% abv, should be an interesting investment opportunity for international spirits companies. However, the report warns that the conventional advantage of gaining distribution clout and a route-to-market for imported products from such an acquisition does not exist in China.

Not only does the product have little or no presence in the modern on-trade outlet (MOT) sector, The IWSR points out that the distribution channels for baijiu and Western-style or imported spirits are different. "Any Western company hoping to gain distribution muscle for its Western-style spirits portfolio in the short term by acquiring (in whole or in part) a baijiu company, will be disappointed," the report states.

There are, however, "less tangible" benefits. "The advantage of buying a share in a baijiu company will be less tangible and more long-term: to better understand how the Chinese consumer’s mind works and how distribution channels work."

Such insight may alone justify the investment, but gaining full control of a baijiu brand is not possible for foreign companies. The government protects baijiu companies for heritage reasons. Only joint ventures with foreign groups are allowed, while the top baijiu companies are not permitted to accept foreign capital.

For this reason, foreign investment in baijiu companies has been very limited.

Diageo was the first international drinks group to buy into a baijiu producer and, not surprisingly, chose a brand with strong premium credentials. While Shui Jing Fang is far from being one of the largest producers by volume and ranks just inside the top 20 by value - if only the ultra-premium-plus baijiu segment is considered -Shui Jing Fang would be among the top five. The other international groups with an interest in the sector are Pernod Ricard, LVMH and ThaiBev.

In terms of scale, the baijiu sector is, by any reckoning, impressive. If all baijiu produced in 2010 was consumed, it would represent over one-third of all traceable spirits consumption on the planet. Production has almost doubled over the last five years to reach its current base of almost 1bn cases.

Baijiu is drunk at almost all occasions in China where alcoholic beverages are consumed, from daily residential consumption to family or business gatherings, while the primary gifting occasions are the Chinese New Year and Mid-Autumn Festival. Brand marketing is focused on heritage, age and provenance with packaging generally finished in red and gold, colours which have positive connotations in Chinese culture. More expensive variants come in oversized external packaging with a relatively small bottle.

However, while baijiu may have a presence in the premium spirits market not enjoyed by national spirits in some other developing markets, it faces a challenge not unfamilar to traditional spirits.

The IWSR report points to baijiu's ageing consumer base and the lack of affinity with younger consumers, with whom Western-style spirits carry much more appeal.

"Baijiu’s popularity, coupled with the scale of China’s consumerism, gives the industry colossal momentum, which could take decades to slow," the report states. "However, when you consider that most baijiu consumers are male and aged 30-plus, and the fact that the culture of baijiu is not being readily adopted by the new 18- to 25-year-old generation of drinkers, it appears that baijiu may yet face a significant decline in the years to come."

This may necessitate some radical new thinking on the part of established brands that rely more on their cultural position in the marketplace than on the type of innovation characterised by Western-style and imported spirits. As the report concludes: "In the long term, traditional brands are going to have to do something quite drastic to maintain their market dominance."

Kweichow Moutai 2011 preliminary profit up 65%

2012-01-20T13:14:00.000-08:00

Source: Xinhua via China Daily, January 18, 2012

BEIJING - Kweichow Moutai Co, China's most prestigious white liquor producer, said Tuesday that its 2011 preliminary net profit will rise more than 65 percent year-on-year.

In a brief statement filed to the Shanghai Stock Exchange, Kweichow Moutai attributed the robust profit growth to rising prices and sales volumes.

The company raised its prices by at least 20 percent in 2011. The ex-factory price of 53-degree Feitian Moutai, a high-end white liquor in the company's product range, had risen to 1,800 yuan (about $286) per bottle by the end of last year.

Kweichow Moutai ranked fourth on the 2012 list of the Top 10 World Luxury Brands released by Hurun Report Inc, following Louis Vuitton, Hermes and BMW.

The company's net profit hit 5.05 billion yuan in 2010. Earnings per share stood at 5.35 yuan, according to the statement.

The company's shares climbed 1.71 percent to close at 180.44 yuan on Tuesday.

Ban Moutai at official banquets, says deputy

2012-01-20T13:11:00.000-08:00

Source: By Xie Yu (China Daily)

SHANGHAI - A Shanghai legislator has proposed to prohibit Moutai, arguably China's most renowned liquor, from being served at government dinners in response to recent public criticism of the practice.

"The price of Moutai keeps soaring and drinking the liquor is considered a luxury," said Shen Haixiong, a deputy to the Shanghai Municipal People's Congress. "To consume the liquor is actually an abuse of public funds."

Shen, editor-in-chief of Xinhua News Agency's Shanghai branch, raised the proposal on Sunday.

His proposal came days after Moutai was listed by Hurun Research Institute as the fourth most valuable luxury brand of the world and one of the top 10 gift brands preferred by multimillionaires.

"The local discipline authorities should launch routine inspections to avoid expensive liquor from being consumed at official banquets," Shen said.

"Moutai was recently chosen as one of the world's most valuable luxury brands by Forbes business magazine. And as far as I know, the government is prohibited from luxury consumption. It is also not acceptable that a national brand that was once close to the grassroots now costs more and more," Shen said.

A bottle of 53 percent proof Flying Moutai - the brand's bestseller - costs 2,100 yuan ($330), up from 200 yuan in 2000.

Share of Shanghai-traded Kweichow Moutai, producer of the liquor, slumped nearly 6 percent to 177.48 yuan on Monday.

The reporter from China Daily was unable to contact Moutai on Monday.

Several other deputies reportedly echoed Shen, but the proposal stirred disagreements as well.

"So many other things are more expensive than Moutai, such as the French wine brand Lafite. Shall we ban them all?" said a netizen going by the moniker Mr Abalone on Sina.com, a leading Chinese news website. "What the government should do is set a quota for per capita consumption at the government banquet."

Zhu Lijia, professor at the Chinese Academy of Governance, said the problem is not what wine or what dishes should be consumed during official banquets. What matters is the trend of official banquets becoming ever more luxurious.

"The traditional discipline says receptions of Party or government organs should stay simple, and a dinner should not exceed four courses and one soup. But there is no clear legislation on specific standards of official receptions. It leaves room for luxury consumption, which has triggered a growing public outcry," Zhu said.

"Regulating the government banquets by law is necessary, but prohibiting drinking Moutai cannot solve the problem," he said.

The statistics from the Ministry of Finance showed 60 ministries and institutions spent more than 3 billion yuan on government vehicles, receptions and overseas trips in 2010.

The disclosed information reflected only the total number in official budgets, without details.

Meanwhile, about 40 percent of the ministries and departments have not released related information nor did many local governments and Party organs.

The public has been challenging government spending in recent years, especially official banquets and overseas trips, and demands that more information be disclosed so that public money will not be abused.

"The public won't be satisfied unless government spending is made transparent. And there should be punishments for violators," Zhu said.

Chinese New Year spikes Remy Cointreau nine-month sales

2012-01-20T13:06:00.000-08:00

Source: Just-Drinks By Chris Mercer

Cognac sales ahead of Chinese New Year have driven Remy Cointreau to a strong sales increase in the first nine months of its fiscal year.

Net sales for the nine months to the end of December rose by 18% on the same period of last year, to EUR821m (US$1.05bn), Remy Cointreau said today (19 January). The group was buoyed by a 30% increase in sales of Rémy Martin Cognac, to EUR475.5m, ahead of Chinese New Year.

Excluding currency changes, Rémy Martin sales jumped by almost 37%, underlining the importance of the firm's premium Cognac business in China to its overall corporate health. In the third quarter, the brand's net sales leapt by 55%. However, the group also reported "strong momentum" for premium Cognac in the US, as well as good showings in Russia and Travel Retail.

Demand for Rémy Martin is expected to drive the French distiller to a double-digit increased in full-year operating profits, excluding currency and one-off items. But, the group cautioned that its fourth quarter net sales will likely show decline, primarily due to a tough comparison with the previous year, which saw Chinese New Year fall later in the firm's financial calendar.

In its other divisions, Remy reported a 6% sales increase for its spirits and liqueurs brands, to EUR166m. Mount Gay Rum and Cointreau led the growth, while Metaxa recovered from a weak base in Greece.

There was also a strong performance from Champagne in Europe in the run-up to Christmas, as well as gains in the group's Scotch whisky distribution business. Remy continues to distribute the Piper-Heidsieck and Charles Heidsieck Champagne brands, despite having sold them in 2011 to privately-owned EPI.

In the third quarter, group net sales rose by 30% to EUR346.1m.

Starbucks Management Host Conference Call to Provide an Overview of New Reporting Segments- China Highlights

2012-01-20T13:03:00.000-08:00

Source: Seeking Alpha, January 13, 2012

Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Starbucks Conference Call to provide a brief overview of the company's new reporting segments.

JoAnn DeGrande

Previously, we informed you that we would be providing financial results for our new reporting segments, which were effective at the beginning of fiscal 2012. Yesterday, we filed an 8-K with those financial statements, and we're hosting this call today to provide some additional background information, as well as to give you an opportunity to ask questions to help you model these new segments.

Troy Alstead

Thanks, JoAnn, and good afternoon to many of you. Good morning to others. In July, we announced a new leadership structure that will enable us to accelerate our global growth strategy, highlighted by a new 3-region organizational structure for our retail business. Those 3 regions include the Americas; Europe, Middle East, Africa; and China, Asia Pacific.

Today, I'm going to spend a few minutes walking you through each region to provide additional color on historical performance of each. I'll also take you to a change to our G&A reporting, which includes shifting certain indirect costs from their inclusion in business segment results to unallocated corporate expenses.

China and Asia Pacific, or CAP, is our third retail reporting segment and comprises 5% of Starbucks consolidated revenue. It is our fastest-growing segment, with revenues increasing 36% in fiscal 2011. Operating margin is very strong at 35%, contributing 8% of Starbucks operating income, excluding the operating loss from other. Fueled by the recent strength in China, Japan, Korea and others, CAP is a key focus area for our future growth. We have already disclosed that we plan to open up approximately 300 net new stores in this region in fiscal 2012, representing a unit growth rate of more than 10%. Demand for Starbucks has never been higher in this part of the world, and we're just scratching the surface.

Now it is very important to understand the role that ownership mix plays with respect to the strong margins in this region. As our company operated presence expands as a portion of our business, we'll naturally see some margin compression due solely to business mix as we shift moderately away from that license and JV income over time, particularly given our company operated growth strategy in China. We target margin improvement on a market-by-market basis. But as a whole, due to a higher mix of company-operated stores, CAP margins will moderate to an extremely healthy 30% or so in 2012.

We're excited that John Culver, who led our former International business the past 2 years, will now be solely focused on this fast-growing and important region. He will also lead the integration of the India market into the portfolio later this year.

Nestle, Coca-Cola to end joint venture in China

2012-01-20T13:00:00.000-08:00

Source: Want China Times

Nestle, the world's largest food and drink company, has announced that it will end its 10-year cooperation with Coca-Cola in the beverage market in China.

The two companies each invested a 50% stake in a joint venture — Beverage Partners Worldwide — in 2001, mainly selling their Lemon Tea and Original Leaf Tea brands in China. Nestle will take back the Lemon Tea brand in the second half of this year, while Original Leaf Tea will be retrieved by Coca-Cola after the partnership is dissolved.

Roland Decorvet, CEO of Nestle China, said that in the future the joint venture will focus its business on the United States and Canada. For the beverage business in China, both companies will handle operations separately, Decorvet said, adding that the Switzerland-based company will seek a Chinese partner to produce the company's tea products in China as the company has not invested in any production lines in the country.

Meanwhile, Nestle has announced that the company has cooperated with the city of Shuangcheng in the northeastern province of Heilongjiang to invest 250 million yuan (US$396 million) to transform its livestock breeding model for large-scale and standardized farming.

Celebrating the Year of the Dragon

2012-01-20T12:58:00.000-08:00

Source: By Doug Sloan, Special to Courier-Islander

According to the Chinese Zodiac 2012 is the Year of the Dragon, beginning on Jan. 23rd. The Dragon is the fifth sign in the Chinese Zodiac, which consists of 12 animal signs. In ancient China, the Dragon represented earthly power and glory. Today, it is an auspicious symbol signifying success and happiness.

People born in the Year of the Dragon - 1928, 1940, 1952, 1964, 1976, 1988, 2000 - are likely to be innovative, enterprising, self-assured, brave, passionate, conceited, and quick-tempered, free and uninhibited, extroverted and irrepressible.

Everything Dragons do is oversized - big ideas and ambitions!

It is only in the last 30 years that the Chinese government has allowed and encouraged European winemakers to bring their skills to China, with French partnerships like Changyu Pioneer Wine, China Great Wall Wine Co., and Dynasty Wine leading the growing pack.

Named after the mythical creature, Beijing Dragon Seal wines were first produced in 1988. With vineyards located in Huailai, 120 km northwest of Beijing, Chinese agronomists and French winemakers have been perfecting their wines using locally grown wine grapes and traditional French methods.

Dragon Seal Chardonnay (+12054) $12.99 has a soft honeyed melon aroma and a lean, light citric set of lemon and candied grapefruit flavours. More "dry" than "fruity", it could easily be mistaken for an inexpensive French Chenin Blanc - perhaps a "dry" Anjou from the Loire?

Currently tricky to track down Great Wall Cabernet Sauvignon (+791491) $11.99 has an earthy plum and peppery blackcurrant profile. Not surprisingly, like the Chardonnay, this Cabernet Sauvignon has the "dry" weight and style typical of French winemaking practices.

True Chinese aperitif rice wine has a history that is more than 2,500 years old. Technically this strongly flavoured elixir is fermented from water, rice and some added wheat - but it has a unique personality all its own with no similarity to beer - and is quite different from sake.

According to aficionados of Chinese beverage alcohol, traditional Yellow Rice Wine must be tried. Shao Xing Yellow Wine is one of China's eight famous wines and has enjoyed a history of over 2,400 years. Modern-day Shao Xing is located on the southeastern coast of China and borders on the East China Sea.

It is made from top quality polished glutinous rice, top quality wheat, and water from Shao Xing's Jian Lake (Jian Hu). It has a centuries old tradition of being a nutritious, healing tonic overflowing with vitamins, beneficial fats, and essential amino acids - and is credited as acting as a "free radical" scavenger and immune system builder!

Pagoda Brand Shao Xing Rice Wine (+58717) $14.99 made by Zhejiang Cereals, Oils & Foodstuffs has dark reddish amber colours, aromas of earth and dried mushrooms, rootsy tree-bark notes, with slightly salty, lightly sherried flavours tinged with soy and a tangy "dry" caramel quality with notes of toasted sesame and soy.

Packaged in a red and gold "gift" box tied off with a red ribbon Huang Zhong Huang Rice Wine (+100990) $18.99 for 500 ml comes in a ceramic jade bottle based on the area's special traditional jars. Like the Pagoda Brand, this "Yellow Wine" has an earthy flavour profile showing some sesame and soy notes but somehow more reminiscent of whisky than sherry.

People born in the Year of the Dragon are reputedly imaginative, able to see new paths and take a radical approach. They have a curious spirit and try to succeed at one stroke. They work hard, but would rather give orders than receive them.

Accordingly, people born in the Year of the Dragon should be adventurous enough to consider pairing Crabbie's Original Ginger Beer (+188821) $3.98 for a 500 ml bottle with Chinese feasts. Made from a fermented ginger base and not quite as sweet as commonly available nonalcoholic ginger beers, this Scottish specialty beverage has a sweetly spicy character with no "hoppy" bitterness. It should be served over ice - maybe even with a twist of lemon?

With burgeoning domestic demand, before too long the Chinese Dragon's growing grape wine industry will be reaching out to export markets more aggressively. Good soils and microclimates await discovery and planting with classic grape varieties since most of this vast country is in the global wine-growing zone between 30 to 50 degrees from the equator.

Out of the Gate, Wine Auctions Disappoint

2012-01-20T12:54:00.000-08:00

Source: The Wall Street Journal- Scene Asia By Jason Chow

After a hot 2011, is Asia’s wine market cooling off in 2012?

Two recent Hong Kong auctions indicate flagging interest: Sotheby’s and Acker, Merrall & Condit sold 85% and 91%, respectively, of their lots last weekend, compared with sold-out events the same time last year.

Sales from the two auctions, in addition to a Zachys auction earlier in January, generated 145.5 million Hong Kong dollars (US$18.7 million), a 45% decline from the same three sales in 2011.

Those in the auction business are keeping a brave face. “It’s normal in this stage of evolution,” said Robert Sleigh, head of wine for Sotheby’s in Hong Kong. “We had three years of extraordinary growth, and there were a lot of people who bought a lot of wine in a short period of time. The market will take a breather now.”

According to the Liv-ex Fine Wine 100 Index, which tracks the prices of the world’s most collected wines and is almost entirely composed of top bottles from Bordeaux, prices have fallen 22% since their peak in June of last year.

Meanwhile, some say there hasn’t been a better time to pick up bargains.

Jason Ginsberg, who runs Wine Merchants Asia in Hong Kong, said he bought a case of 1988 Mouton Rothschild at a December auction run by Acker, at a price that he estimates was 30% lower than at the peak of the market last summer.

“We’ve bought some great stuff at great deals,” he said. “The auction room used to be dominated by people who were spending without thinking. Now they’re holding back, and people aren’t speculating anymore. Those who buy now are buying to hold and drink.”

Having the bottle to invest in red wine

2012-01-20T12:51:00.000-08:00

Source: By Tang Zhihao (China Daily)

SHANGHAI - China's booming interest in the wine industry is set to get another boost thanks to the sprinkling of a little stardust.

The first batch of wine known as Yao Ming 2009 Napa Valley Cabernet Sauvignon from the former basketball player's own Napa Valley wine company is ready at 3,800 yuan a magnum - but none of the 1,200 bottles of wine will be sold on the open market.

Yao, who retired from the professional court in July 2011, announced the debut of Yao Ming Wine on Nov 23, 2011, along with his Napa Valley wine company, Yao Family Wines.

He is not the only celebrity in China targeting the booming red wine market. Ding Lei, the founder and chief executive officer of Netease, invested in H&L Wine in Zhejiang province in June 2011. The wine trading company aims to trade imported wine from France at prices ranging from 100 yuan ($16) to thousands of yuan. The company has set up offices in several large cities including Shanghai and Guangzhou. Netease said for Ding the investment is a personal hobby and not part of the company's business.

Zhao Wei, a Chinese movie star sometimes known by her English name Vicki Zhao, is reportedly buying a winery in France worth some 4 million euros. It is said she might sell the wine in China.

Experts said celebrities investing in wine businesses are hoping to generate profits from the exuberant Chinese market. Media reports say wine consumption per capita in China was 500 mililiters in 2009 and 950 mililiters in 2010, much lower than the world average. They predict tremendous potential for increasing wine sales across the country.

Figures from A.T. Kearney (ATK), a consulting firm in the United States, suggest that revenue generated from wine sales in China reached about 53 billion yuan in 2009, benefiting from increasing wine awareness and rising health consciousness. ATK said growth in both volume and value has been 15 percent or better on an annual basis over the past few years.

Howard Abe, who specializes in consumer goods and retail practice at ATK, said the red wine business in China has a bright outlook with a compound annual growth rate of 12.2 percent from 2010 to 2015.

"Limited investment channels and a bearish stock market encourage the Chinese to seek different investments such as in gold or silver. Investing in wine involves long storage periods and represents a certain type of lifestyle so it has become a popular investment among the wealthy classes," said Shu Guohua, a marketing expert in China.

Shu said it is also a way for celebrities such as Yao to maintain public awareness and commercial value after retirement.

Some experts said Yao's wine might not be available in traditional open markets and will only be distributed among higher-end consumers. Compared with other well-known imported wines, it will be easy for Yao to establish brand awareness.

However, experts warn that celebrities need to pay attention to the quality of wine to maintain custom and establish a good reputation.

"For Yao Ming, it was a good marketing strategy to create his own-brand wine. However, it will take a long time for customers to recognize the intrinsic value of the wine and believe it is worthwhile buying," said Shu.

"As a Chinese person, I think it will be better for Yao to invest in white liquor. The market demand for white liquor in China is much larger than for red wine.

Pricey counterfeit labels proliferate as China wine market booms

2012-01-20T12:49:00.000-08:00

Source: By David Pierson, Los Angeles Times

Reporting from Beijing — The lamb chops were cooked to perfection. Fine wines flowed. Then came the piece de resistance: a 1997 Chateau Petrus Pomerol that can fetch about $2,000 a bottle.

Wine consultant Frankie Zhao was dining with a group of well-to-do Chinese businessmen at an exclusive private club in the capital. Their host was eager to share — and show off — the prized French Merlot.

But after the first sip, veteran taster Zhao knew the collector had been duped.

"I could tell immediately it was a fake," said Zhao, who kept silent rather than embarrass his unwitting friend. "It was too fresh and soft and didn't have any complexity."

Seizing on exploding demand, China's ever-resourceful knock-off artists have uncorked a lucrative new business: phony high-end wines.

Bootleggers are dousing the market with fakes, refilling empty bottles from famous chateaux with inferior vintages.

The problem is so widespread that auction house Christie's concludes its tasting events in Hong Kong and China by smashing empties with a hammer, lest the glass containers end up on the black market.

"We have to protect provenance," said Simon Tam, head of wine in China for Christie's. "Even if you scrape off the label, there are still channels for the bottles to be misused. It's really about being responsible."

As recently as a decade ago, such precautions weren't necessary; Chinese largely stuck to fiery grain alcohol. But upwardly mobile Chinese, eager to display their wealth and sophistication, have since developed a taste for imported wine along with other foreign luxuries.

Wine consumption here has more than doubled since 2005 to about 100 million cases a year, making China the seventh-largest market in the world, according to Vinexpo, a French wine industry organization.

Though cheaper domestically produced wine commands three-quarters of the market, Chinese brands such as Great Wall and Dragon Seal lack the quality and prestige to satisfy local connoisseurs.

That has created an opening for foreign producers who are increasingly counting on China for growth. Hong Kong was the third-largest foreign market for California wine in 2010 with $116 million in shipments, according to the San Francisco-based Wine Institute. Mainland China ranked fifth at $45.2 million.

Former NBA hoops star Yao Ming recently announced that he was jumping into the wine business by importing a Napa Valley Cabernet Sauvignon that retails in China for $289 a bottle, including taxes and duties.

But the real clamor in China is for high-end French reds, which enjoy unparalleled cachet. A Chinese buyer spent an astonishing $540,000 in September on a single lot of 300 bottles of Chateau Lafite Rothschild at a Christie's auction in Hong Kong.

Accolade spreads its wings in China

2012-01-20T12:47:00.000-08:00

Source: Adelaide Now By Nigel Austin

SOUTH Australian-based Accolade Wines has bought a majority stake in the Shanghai distribution business Shanghai CWC Wine Trading Co Ltd.

Accolade chief executive Troy Christensen said the purchase would provide a springboard for Accolade's expansion into the fast-growing Chinese market.

Mr Christensen said it had an established relationship with the business which has been distributing Accolade's wines in China and Mongolia for many years.

"We will now be in a position to extend our presence in the market," Mr Christensen said.

Accolade's commercial general manager, Asia, Freddie Choong said its offices in Shanghai and Beijing would provide a solid platform from which to rapidly build its market position.

"Accolade Wines has an unparallelled range of brands and wines with labels showcasing Australian, South African, Californian and New Zealand brands," Mr Choong said.

"As Chinese wine consumers are now rapidly exploring the world of wine, this acquisition ensures we are well placed to provide an exciting suite of wines from icons through to premium and commercial wines."

Shanghai CWC shareholders including manager Bong Ha will retain a minority stake in the company and he will continue to manage the business.

Mr Ha said Accolade's diverse wine portfolio from multiple geographies and outstanding wine-making expertise meant the company had the capacity to not only offer its existing wines to Chinese consumers but to develop wines specifically for the Chinese market.

Accolade Wines is a global wine company with some of the world's best known brands including the historic Hardys brand, which are sold in more than 80 countries.

Carrefour to Speed up China Store Openings in 2012

2012-01-20T12:43:00.000-08:00

Source: 21 Century Business Herald

January 17, Carrefour SA, the world's second-largest retailer, will accelerate its pace of new store openings in China this year, the China Business News reported on Tuesday, citing a person from the retailer’s local operations.

Carrefour will open 30 new stores in China this year, up from 20-25 new openings per year in recent years, the report said.

The person said China is the fastest-growing market and holds the most potential for Carrefour, which cut operations globally in 2010 as profitability declined.

The French retailer sold off or shut supermarkets in Malaysia, Thailand, Singapore, South Korea, Russia and China's western Xi'an city in 2010.

As of Dec. 31, Carrefour has 203 supermarkets in mainland China, according to data compiled by linkshop.com, a domestic retail portal.

Wal-Mart Stores Inc., the world's largest retailer by revenue, has grown more quickly than Carrefour -- it had more than 300 China-based stores at the end of last year.

UK retail group Tesco Plc., the world's third-largest, said it planned to invest £2 billion in its China expansion between 2011-2015, China News Services reported in May 2011, citing the vice CEO of Tesco China.

Tesco had 93 supermarkets and 12 convenience stores in China as of the end of last January, according to the company’s website.

McDonald's Opened 200 Restaurants In China In 2011

2012-01-20T12:41:00.000-08:00

Source: China Retail News

According to McDonald's China, the international fast food chain opened 200 new restaurants in China in 2011, marking a new expansion record in the country.

With the fast expansion, China has reportedly become the third largest market worldwide for McDonald's.

To accelerate its development in China, McDonald's will continue to increase its investment in the marketplace, and its total investments in 2012 is expected to increase by 50% compared with last year. The investments will be mainly used for opening new restaurants, upgrading existing restaurants, and expanding services. The company plans to open 225 to 250 new outlets in China in 2012.

Kenneth Chan, chief executive officer for McDonald's China, told local media that by restaurant expansion, the Chinese market is the fastest growing market in the global system of McDonald's. To achieve its development strategy, McDonald's introduced the franchise model into China in 2011. So far, the company has successfully launched and developed this new model in Zhuhai and Yunnan. Meanwhile, it has developed seven franchisees and two franchised developers, operating a total of 36 restaurants.

In addition, McDonald's has over 150 drive-through restaurants in China, with an annual growth of 25%. It also has 480 McDelivery sites, 1,000 dessert stations, 280 McCafe stores, and over 1,000 24-hour restaurants in the country.

In 2012, McDonald's will launch Internet booking services in five Chinese major cities, including Shanghai, Beijing, Guangzhou, Shenzhen, and Tianjin.

Drink makers look to cut waste, emissions

2012-01-20T12:39:00.000-08:00

Source: By Tang Zhihao (China Daily)

SHANGHAI - Drink makers are investing heavily to make better use of resources and lower carbon emissions in China to achieve sustainable development.

There should be a systematic government plan to support the companies executing environmental protection plans, experts said.

The Belgian-based international beverage manufacturing giant Anheuser-Busch InBev (AB InBev) has signed a strategic partnership agreement with United States-based General Electronic Co (GE) to undertake a series of activities to improve the efficiency of energy usage and reduce carbon emissions from its Chinese factories.

The company said the first phrase of the plan will be complete in 2013. It will help to reduce emissions of carbon dioxin by about 100,000 tons a year. Water consumption will also be reduced significantly for every unit of beer produced in China.

"If this project succeeds and is promoted throughout the entire drinks industry, it will greatly help businesses lower energy consumption and can help the country to develop into a low carbon economy," said Wang Yancai, director of the China Alcoholic Drinks Industry Association.

ABInBev said it has done everything possible to reduce the production of waste and improve the efficient use of resources over past years in China. The company said it needs to strengthen cooperation with technology service companies to make better use of resources.

"We did everything we could. Now we have reached a point at which if we want to achieve our dream to live in a better world, we need GE to help us," said Ricardo Dias, vice-president of procurement for ABInBev.

Industry experts said cooperation between the two companies can create a foundation for the beverage industry in China that can help companies to achieve sustainable development in the future.

"The food beverage industry is a fundamental industry for the whole world. Every player in this industry is facing similar problems - which are increasing costs pressure, constraints on natural resources and increasing demand for more pricing competitiveness," said Wen Yuezhong, vice-president of GE and president of GE Energy China. "So there is only one way for us to solve all the problems, and that is innovation."

AB InBev did not reveal details about how much economic benefit can be generated from the environmentally friendly plan. However, it emphasized the company is paying more attention to ecological benefits.

The drink company is not the only business in China paying close attention to improving the efficient use of energy and lowering the emission of pollutants.

Inner Mongolia Yili Industrial Group Co, a milk manufacturing enterprise, said it aims to lower the production of greenhouse gases by some 15 percent by 2020 and it will buy credits from carbon trading centers by way of compensation if it cannot achieve the goal.

"When a company grows big, it might not worry so much about how to survive in the business world. We need to undertake more social responsibility and take care of the environment. That is the foundation for us from which we can seek further development," said Pan Gang, chairman of the board at Yili.

The Chinese government is paying close attention to developing an environmentally friendly economy. Lowering carbon emissions is part of the 12th Five-Year Plan (2011-2015).

"There should be a systematic planning mechanism in place so central decisions can be carried out fully in local areas," said Xiang Jianjun, an analyst with CIC Industry Research Center.

Orange juice safe, makers say

2012-01-20T12:37:00.000-08:00

Source: By Zhou Wenting (China Daily)

BEIJING - Beverage giants PepsiCo Inc and Coca-Cola Co have said the orange juice they sold in China is safe, after discovering an unapproved fungicide in products sold in the United States.

"Our imported juice is in compliance with all the national standards, and our products are 100 percent safe," Fan Zhimin, associate public relations director of PepsiCo Greater China, told China Daily on Monday.

Wang Lei, a public relations executive for Coca-Cola in Beijing, also said that company's orange juice in China is safe and the materials used to produce the juice meet the national standards.

Atlanta-based Coca-Cola notified US federal regulators in December of low levels of carbendazim, an unapproved fungicide, in its and its competitors' orange juice products. The juice was imported from Brazil. The news prompted US authorities to begin screening juice on supermarket shelves.

PepsiCo announced later that Tropicana, its orange juice product, was found to contain traces of the fungicide. That juice was also from Brazil.

The US Food and Drug Administration and the Environmental Protection Agency have said orange juice with low levels of the fungicide is not a safety risk, US media reported.

"Orange juice containing extremely small amount of the fungicide will not cause health hazards," Coca-Cola China said in a statement on its website on Jan 12.

Minute Maid, the orange juice made by the company, tops the sales of juice beverages in China, according to industry statistics.

Carbendazim is a farm chemical widely used in some countries and applied to agricultural products, including cereals, vegetables and fruits. The reason the incident came under the spotlight is that the fungicide, which is accepted in some countries, including Brazil, is banned in the US, according to agricultural experts.

"The fungicide has a low level of toxicity, and we don't have a conclusion on whether it is harmful to people's health. Juice with a micro-scale of its residue is safe to drink," said Zhou Changyong, director of the Citrus Research Institute under the Chinese Academy of Agricultural Sciences.

Jiao Bining, an official of the Ministry of Agriculture, said the amount detected in the juice lies well within China's standards.

China allows a maximum of 0.5 milligram of carbendazim residue per kg of citrus fruit, equals 500 ppb (parts per billion). The limit in the US is 80 ppb.

But food manufacturers must carry out strict checks of materials from suppliers to avoid chemical perils, said Dong Jinshi, executive vice-president of the International Food Packaging Association.

2012-01-13T14:05:00.000-08:00

What's Happening...

Nestlé to Help Fund Dairy-Farming Institute in China

2012-01-13T13:58:00.001-08:00

Source: Wall Street Journal By Laurie Burkitt

BEIJING—Nestlé SA is renewing an effort to expand in China's fast-growing dairy market, even as the government cracks down on the sector.

The Swiss food maker plans to spend millions of dollars to teach farmers like Wang Shanshan and her family how to care for their cows.

Nestlé said this week that the company and the northeastern city of Shuangcheng are investing a total of 2.5 billion yuan, or about $400 million, to open a dairy-farming institute. The goal is to train Ms. Wang and some of the other 11,000 farmers with whom Nestlé works about how to feed and care for 500 cows instead of just a handful.

Nestlé will guarantee bank loans for farmers to buy more cattle. The company also plans to set up "cow bases," at which small-scale farmers will pay to have their cattle professionally managed.

Still, expansion appears daunting to Ms. Wang, whose family owns just eight cows. "My parents are growing older and I may just want to get out of the business altogether," she said.

Nestlé, which hopes to increase its market share in China's dairy industry, says it hopes that larger farms will help it boost production and efficiency while projecting a reputation for safety.

Nestlé also works with other farmers globally to increase yields and earnings. In 2010, it began a push to boost the quality and quantity of its coffee, giving thousands of farmers world-wide new coffee trees and teaching the farmers how to get the most from their crops.

In China, domestic dairies and foreign hopefuls are taking steps to bolster safety as Beijing tries to remake the industry after a series of health scandals. Fonterra Co-Operative Group Ltd., which is based in New Zealand, has strengthened plans to build larger farms in China. In 2008 a Chinese dairy in which Fonterra owned a 43% stake was implicated in a contaminated-milk scandal that resulted in the death of six infants and illnesses in 300,000 others.

"If we were to get hit by a safety flaw, it would be devastating," says Roland Decorvet, the chief executive of Nestlé China. The country's overall dairy sales reached $28 billion last year, up 8.5% from a year earlier, according to research firm Euromonitor International.

But most of China's agrarian landscape is made of small-scale farms, using different feed and different varieties of cattle. That adds steps to the distribution channel, maximizing the chances of contamination and decreasing accountability.

One upshot has been health crises, such as the 2008 tainted-milk scandal. Food-safety regulators last year shut down more than 400 dairy producers for not meeting sanitation and certification standards. Last month, government inspectors said they found higher-than-acceptable levels of a carcinogen in milk from China Mengniu Dairy Co., the country's leading dairy by sales. Mengniu, which didn't return calls for this article, said the implicated batch hadn't yet reached the dairy's own testing stage.

On Thursday state-run Xinhua News Agency reported that authorities are investigating the death of a four-month-old infant and the illness of his twin sister after they drank milk-powder formula made by Synutra International Inc. "We firmly believe this is an isolated incident unrelated to Synutra's products," the Qingdao-based company said. Synutra said it is cooperating with authorities but didn't order a recall, saying it is confident that its products are safe.

China's solution is to consolidate the industry. As a part of a five-year economic plan announced last year, leaders aim to accelerate "agricultural modernization," which includes moving toward decreasing the number of farms. Beijing also offers subsidies to help dairies buy more cattle to create bigger farms. Leaders have said they plan to double milk production to 64 million tons by 2020.

Domestic milk producers are consolidating. China Modern Agriculture Inc., based in China's northeastern city of Harbin, in December finalized an agreement to acquire smaller dairy operation Shangzhi Yulong Cattle Co. Terms weren't disclosed.

Nestlé was dealt a blow in China in 2005, when authorities said varieties of Neslac infant formula contained iodine in excess of national standards. Nestlé has struggled to win back market share in infant formula, which stood at 2.3% in 2010, down from 14.3% in 2003, according to the most recent data from Euromonitor.

Still, Nestlé's results show the market's promise. Its sales from China of all products jumped to 2.8 billion Swiss francs ($2.93 billion) in 2010, up 11% from a year earlier, according to the company's most recently disclosed data. Nestlé last year acquired confectionery company Hsu Fu Chi International and a 60% stake of drink maker Yinlu Food Groups Co.

Mr. Decorvet says the largest herds Nestlé will work with will contain no more than 3,000 cows. He cautions against excessive consolidation, saying that bigger farms can also lead to problems. "Extremes by any means are wrong," he says.

At the Nestlé training institute, foreign and Chinese experts will teach farm management and practical skills, such as machine sanitation. Nestlé says it hopes that the school will inspire entrepreneurial farmers who otherwise might be reluctant to take on debt to borrow milk money for expansion. Some farmers will be trained to run the cow bases to care for the cattle of other farmers, such as Ms. Wang.

Coffee Giants Target China's Yunnan Plantations

2012-01-13T13:57:00.000-08:00

Source: 21 Century Business Herald, Jan 13, 2012

January 13, Global companies including Nestle SA and Starbucks Corp. are eyeing Southwest China’s Yunnan province -- home to almost 99% of China’s coffee production volume -- as they want to gain access to prime plantations and capture market share in a country with a growing taste for coffee.

With the same latitude as some of the world’s top coffee-producing regions, Yunnan has become a key battlefield for international coffee makers, who are vying with local producers to control supply of coffee beans in the province.

Analysts said the coffee market in China has more potential than is currently being realized, and would attract fiercer competition between global giants in the future.

Under its 12th Five-Year Plan (2011-2015), which lists coffee as a key strategic industry, Yunnan’s coffee bean output will increase more than 5-fold from current levels to 200,000 tons per year by 2015.

Starbucks, Nestle

Starbucks, which has the largest number of coffee chain stores across the globe, launched Yunnan-originated coffee products in early 2009 under the name “South of the Clouds Blend.”

In November 2010, Starbucks signed an agreement with the Yunnan provincial government to establish its first-ever coffee bean farm in the province to ensure stable supply, showcasing the company’s strong commitment to building China into its second-largest market outside the U.S.

In the latter half of 2011, Starbucks acquired a 51% stake in a local coffee bean producer.

The Seattle-based coffee chain last June announced that it had signed an agreement to acquire full ownership of Starbucks stores in southern, central and western Chinese provinces from long-time joint venture partner Maxim’s Caterers Ltd.

“Full ownership of stores in southern, central and western China is part of our broader strategy to build China as our second home market outside of the U.S. and will allow us to accelerate growth as we look to achieve our goal of having 1,500 stores across the country by 2015,” said John Culver, president of Starbucks Coffee International, said at the time.

Starbuck’s president in April hailed the emergence of a “morning coffee ritual” in China.

Other companies including Nestle and Kraft Foods Inc. are all seeking such opportunities in Yunnan, according to a Jan. 12 economic news report on Central China Television.

Nestle, the Swiss food and beverages giant, dipped its toes in Yunnan as early as 1994, when it set up a coffee development program based in Pu’Er to focus on the training of farmers and providing technical assistance.

Coffee over Tea

Yunnan is home to some of the world’s most celebrated tea blends including Pu’Er, which is named after the city it comes from. The city itself is gradually acquiring a reputation as a major coffee production base thanks to heavy investment from foreign companies.

In the past 3 years, the average price of coffee beans in Pu’Er has almost doubled to RMB 34.5 ($5.46) per kilogram, while the production area has been expanded to 426,000 mu from 218,000 mu in 2009, CCTV reported, citing data from Pu’Er’s coffee industry association.

“We’ve seen a lot of locals making a bundle by planting coffee, and more are following suit,” a local farmer told the program.

Pu’Er Mayor Li Xiaoping said the city has spent no less than RMB 20 million in supporting coffee plantation each year.

“If we include every small county, the whole of Yunnan probably spends close to RMB 100 billion per year on planting coffee,” Li told the program.

Tsingtao brewing up overseas ambitions

2012-01-13T13:52:00.000-08:00

Source: By Ding Qingfen (China Daily)

Company mulls opening plants in Southeast Asia as part of expansion

BEIJING - Tsingtao Brewery Co Ltd is considering opening breweries in China's neighboring countries in Southeast Asia, a region with great opportunities for the country's second-largest beer brewer by volume.

"We aren't excluding the possibility of having more plants in the ASEAN (Association of Southeast Asian Nations) region, on top of the plant in Bangkok," said Ma Ning, deputy general manager of Tsingtao Brewery's international headquarters.

"We are especially aiming at markets that are large and open enough - those that have comparatively cheap labor and where the Tsingtao brand is already well recognized."

In October, Tsingtao Brewery announced plans to invest about $100 million to build a plant in Bangkok, capital of Thailand. The operation will be the company's first overseas and the first for the Chinese brewery industry.

The plant is expected to start production in early 2013 with an annual capacity of 200,000 liters.

In the US market, Tsingtao now has the greatest sales among brands of Asian beer.

As the United States, European Union and other developed markets are dominated by some well-established brands and the outlook remains grim for the global economy, "we will place a priority on the domestic Chinese market and on some emerging markets such as Latin America, the Middle East and ASEAN," Ma said.

Of the company's sales, 1.5 percent come from overseas and "we expect the figure to increase to 50 percent in the next three years".

Reports from an institute run by the Japanese brewer Kirin Holdings Co Ltd showed that customers bought more beer in Asia, South America, Africa and other emerging markets in 2010, even as the demand for the drinks decreased in the US and EU because of the global financial crisis.

In China in 2010, general beer sales increased by 5.9 percent year-on-year, and the country consumed the most beer in the world for the eighth year in a row.

In 2010, Tsingtao Brewery's sales in Eastern Europe increased by 202 percent from a year earlier. In the Middle East, the company's sales increased by 76 percent.

ASEAN, with the largest population in the world and a free trade agreement with China in place, is an important market for Tsingtao, experts said.

"We are fairly well recognized in the ASEAN markets, and the region will be Tsingtao's strategic market," Ma said.

The company has sent a team to look closer at ASEAN and is expected to draft a plan on how its products can be best developed and promoted in the 10 countries of the organization, Ma said.

The China-ASEAN free trade agreement came into effect in 2010 and an increasing amount of investment is flowing from China into ASEAN.

China and ASEAN signed their free-trade agreement in 2002; it is the largest in the world measured by the populations it affects, and the third- largest measured by the gross domestic products it pertains to. Under the agreement, China and ASEAN are to see a free flow of investment.

From January to November last year, China's direct investment into ASEAN increased by 12.4 percent year-on-year. That was much higher than growth in China's outbound direct investment in the same period, which went up by 5.2 percent, according to the Ministry of Commerce.

Wine Sellers Aim High Ahead of Chinese New Year

2012-01-13T13:49:00.000-08:00

Source: Wall Street Journal Scene Asia By Jake Lee

Last year was a wild ride for Asia’s growing legions of wine lovers — and 2012 could prove to be similar, with a double magnum of 1870 Château Lafite, rare bottles from Burgundy producer Henri Jayer and 90-year old Champagne among upcoming sales in Hong Kong.

Zachys kicked off the auction season on Saturday, and it will soon be followed by Acker Merrall & Condit and Sotheby’s, which hold sales this weekend, all squeezed in ahead of the region’s most important holiday, Chinese New Year.

Last year ended with mounting demand for Burgundy that has pushed a few top names up to new records, while mainstay Bordeaux struggled as Lafite and other traditional favorites seemed to fall out of favor.

“The truly rare and sought-after is getting good demand, but the other stuff you can get everywhere, like young Bordeaux, hasn’t done so well,” said Charles Curtis, Christie’s head of wine for Asia. “What is taking off is the old bottles, or the very rare like [Bordeaux’s] Château Le Pin, and Burgundy, because production there is so little.”

Christie’s Hong Kong sales rose 92% last year, and the auctioneer starts 2012 in early February with a $2.4 million sale of rare lots from Burgundy’s Henri Jayer. While Domaine de la Romanée-Conti is Burgundy’s most sought-after producer, with bottles regularly going for $10,000 and up a bottle, Jayer prices are not far behind.

Not everyone agrees about 2012’s prospects, however, given the global economy’s struggles, years of sharply increasing prices for fine wines, and the sheer glut of it coming onto the market.

“There’ll probably be fewer auctions, and the numbers a little less,” said Jamie Ritchie, auctioneer and president of Sotheby’s Wine, Americas and Asia. Even though the economy is slowing in China, home of many of the recent big buyers, Mr. Ritchie is seeing more activity by bidders in Hong Kong, Indonesia, Taiwan and Thailand.

Highlights of Sotheby’s Jan. 14 sale include Champagne magnums from Veuve Clicquot from 1921 to 1947, and a collection of bottles from Bordeaux Winebank that typically command high premiums given they are guaranteed to have been kept in optimum storage conditions throughout their lifetime. With volumes of fine wine sales surging, “provenance is more and more critical and in people’s minds,” says Mr. Ritchie.

The top lots at the two-day sale by Acker Merrall, the world’s biggest seller of fine wine, are dominated by Domaine de la Romanée-Conti, alongside a double magnum of 1870 Lafite that it says is so rare it can’t put an estimate on it.

“DRC has become the strongest brand in the market and certainly taken over Lafite,” Acker CEO John Kapon said during a tasting event in New York. “Some of the Bordeaux energy is also diversifying into California and Italy.”

Diversification by Asia’s top wine drinks away from red Bordeaux is a point everyone agrees on as 2012 begins. “People are even starting to drink white wine in China,” said Mr. Curtis.

China's wine appreciation reaches new heights

2012-01-13T13:46:00.000-08:00

Source: Herald Sun

CHINA'S taste for top Australian wines is climbing as living standards rise and demand lifts, according to the latest wine sales data.

Last year, the rapidly growing market become the third largest destination for Australian wine with sales shooting up to $201.5 million in 2011, behind only the major markets of the United States and the United Kingdom.

Wine sales to China and Hong Kong helped prevent a larger decline in Australian wine exports which fell to $1.89 billion last year as exports to the US and UK went into reverse.

Leading Australian wine makers have moved quickly, increasing their marketing spend and opening cellar doors to tap into the increased spending power that has come from a growing middle class.

Late last year, Treasury Wine Estates chose Shanghai as the city in which to launch its Penfolds Bin 620 red wine, at $1000 a bottle.

The latest data from Wine Australia shows the biggest jump in wine exports to China was in top priced bottles. Red wine was the drink of choice with exports rising 42 per cent, while whites fell 4 per cent.

In contrast, bulk wine shipments to China fell as cheaper bulk wine from countries such as Spain took preference.

Overall China has overtaken Japan as the major market for Australian agricultural produce for the first time. Rural exports to China reached $4.4 billion in 2010-11 compared to shipments worth $4.2 billion to Japan.

The rising demand from China came as total Australian beef exports reached near record levels last year with 949,195 tonnes shipped overseas.

The surge in meat sales to China included beef worth $52 million.

High spirits: Maotai and Wuliangye on Hurun's luxury list

2012-01-13T13:44:00.000-08:00

Source: Want China Times, Jan 12, 2012

Kweichow Moutai, Wuliangye, Louis Vuitton, Hermes and BMW are on the 2012 list of the 10 Most Valuable Luxury Brands of the World in a report released by Chinese research institute Hurun, according to the Chinese-language Beijing News.

Hurun has now released the report for eight consecutive years. For the first time, brand producers of the Chinese liquor products have been ranked alongside international brands such as Louise Vuitton, Hermes and BMW. Among them, Kweichow Moutai, with a US$12 billion brand value, ranks fourth on the list of the world'smost valuable luxury brand, higher than Mercedes-Benz and Chanel. In the category of same the product, the liquor producer has surpassed Hennessy, Moet & Chandon and Remy Martin. Wuliangye, valued at US$7 billion value, ranks seventh.

In addition, Hurun also released the Ten Brands Favored by Billionaires as Gifts, on which Kweichow Moutai ranked fifth.

Talk of Kweichow Moutai establishing itself as a luxury brand was widespread last year. In December, staff from the group had revealed that within three years, the retail price of its Feitian Maotai liquor will be over 5,000 yuan (US$791) per bottle, and the company will apply to international organizations to be recognized as a luxury brand within two years.　

Regardless of whether the liquor has an acknowledged status as a luxury brand, the prices of high-end spirits in China have soared, with a bottle of Feitian Maotai, with alcohol content of 53%, having risen to 2,000 yuan (US$316).

Hurun's list of the Ten Most Valuable Luxury Brands is compiled according to the market value of the company divided by the contributions of non-brand factors and multiplied by the proportion of the brand's premium to determine the brand's value.

China New Borun Books Contracts For 90% Of 2012 Capacity

2012-01-13T13:41:00.000-08:00

Source: Wall Street Journal, Jan 10, 2012

Alcohol producer China New Borun Corp. (BORN) said Tuesday it has signed presales contracts worth about 90% of its total output capacity this year.

Shares in the company were up 13% at $3.79 after hours. Through the close, the stock has dropped 72% in the last year, much worse than the market at large.

China New Borun makes and sells corn-based edible alcohol primarily to producers of baijiu, a Chinese distilled alcoholic beverage.

Its revenue and profit have risen in recent quarter results, although bottom-line growth was kept in check in the previous period as the cost of corn rose sharply.

On Tuesday, Chairman and Chief Executive Jinmiao Wang said the company was pleased to win "such a strong volume of preorders this early in the new year." he said the orders were driven by strong market demand for its edible alcohol and the acquisition of new customers. He said demand is strong for the company's by-products as well.

In particular, he noted that the company has made significant progress in expanding its customer base into other provinces outside its core of Shandong and Heilongjiang. The former province juts into the Yellow Sea across from the Koreas, roughly midway between the cities of Shanghai and Beijing, while the latter is China's northeastern-most province on the border of Russia.

China May Idle Most Aluminum Capacity Since 2009 on Low Price

2012-01-13T13:39:00.000-08:00

Source: Bloomberg News Jan 12, 2012

Chinese aluminum smelters may idle their annual capacity by one-third, the most in three years, as energy costs soar and prices slump.

China may produce almost 20 million metric tons of the lightweight metal and its capacity may be as much as 30 million tons by the end of this year, said Luo Rongjin, a Beijing-based analyst with Bocom International Holdings Co. Monthly output from China, the world’s biggest producer, fell 8.3 percent in November from a record 1.6 million tons in August.

Alcoa Inc. (AA), Rio Tinto Group and their global rivals are cutting production after prices dropped 19 percent last year, curbing profits. Alcoa, the largest U.S. producer that reported its first loss in two years this week, said China may use 70 percent of its capacity in 2012.

“China’s aluminum industry is becoming less and less competitive because power is going up and many producers are making losses,” Peter Hickson, managing director of Global Commodity Research and Basic Materials Strategy at UBS AG, said in an interview in Shanghai. Chinese smelters may idle 1 million or 2 million tons of capacity this year, adding to 6 million tons of surplus capacity in 2011, he said.

Aluminum Corp. of China Ltd., or Chalco, the nation’s biggest producer of the metal used in aircraft, beverage cans and car parts, is “actively studying the market” and may adjust production when needed, spokeswoman Shen Hui said. China will curtail 1.1 million tons of aluminum output capacity this year, Alcoa Chief Executive Officer Klaus Kleinfeld said Jan. 9.

Further Cuts

“We should watch out for further production cuts in and outside China as many aluminum smelters are operating at a loss given the low prices,” said Daniel Briesemann, an analyst at Commerzbank AG in Frankfurt. “Aluminum will be strongly influenced by macroeconomic data and political actions, especially regarding the sovereign debt crisis in the euro zone.”

Falling prices may force 3 million tons of global capacity to be closed or mothballed, Oleg Deripaska, CEO of United Co. Rusal, the world’s largest producer, said last month. Rusal itself isn’t planning to cut output yet, and is monitoring the market closely, the Moscow-based company’s press service said yesterday in an e-mail.

Alcoa this month said it would halt 12 percent of its global capacity and Rio, the world’s third-biggest producer, said in November it would shut its Lynemouth smelter in England. Norsk Hydro ASA, Europe’s third-largest producer, said Jan. 10 it may take some capacity offline at its smelter near Newcastle in Australia.

Low Prices

Aluminum prices will stay low until Chalco and other smelters cut production, UBS’s Hickson said. Prices may average $2,275 a ton, down from last year’s $2,397, according to the median of 18 analyst estimates compiled by Bloomberg.

“Ten to 20 percent of production cuts in 2012 is normal,” Lu Changqing, executive director and vice president of China Zhongwang Holdings Ltd., said in a Jan. 9 interview. The company is Asia’s largest industrial aluminum-extrusion products maker with annual capacity of 700,000 tons, according to a regulatory filing. “Prices have fallen to some of the smelters’ cost of production. They are unlikely to sustain losses for long.”

China raised retail power prices by an average 0.03 yuan (0.5 cents) a kilowatt-hour from Dec. 1, squeezing profits at smelters that don’t have access to cheaper fuel. That would raise costs by as much as 500 yuan for producing a ton of aluminum, or equivalent to an increase of as much as 5 percent of total costs, Chalco’s Shen said.

‘Heavy Blow’

“More than half of Chinese smelters are already making losses,” said Lang Dazhan, deputy head of China Nonferrous Metals Industry Association’s aluminum unit. “The latest power- rate hikes give another heavy blow and may force them to curtail production in the first quarter. Chalco is certainly a victim.”

Smelters in China’s Henan, Guangxi and Hunan provinces are the worst affected because they are paying the highest power rates, Lang said. Chalco may cut production at its high-cost units in Henan and Shanxi provinces in the first quarter, said Bocom’s Luo.

China’s primary aluminum production gained 9.9 percent to 16 million tons in the first 11 months last year from a year ago, according to the National Bureau of Statistics.

China’s economy grew 9.1 percent in the third quarter from a year earlier, the slowest pace since 2009, on weaker export demand and monetary tightening. Aluminum inventories monitored by the Shanghai Futures Exchange gained for a fifth week last week to 221,624 tons, the highest since July.

Production Restraint

Aluminum prices in London have slumped 23 percent from a record in May to $2,170 a ton at 2:34 p.m. Shanghai time today after global growth decelerated amid a sovereign-debt crisis in Europe and China’s government action to control inflation.

“Smelters will need to show production restraint in the coming years to restore a degree of normality on the aluminum market,” Bank of America Corp. said in a weekly metals report Jan. 9. The bank estimated prices may reach $2,275 a ton this year and $2,375 in 2013.

Still, China will add 3 million tons to 5 million tons of new capacity this year to the existing 24 million to 25 million tons, even as most of the producers won’t make a profit, according to Bocom’s Luo.

Many of these projects are located in provinces such as Gansu, Ningxia and Inner Mongolia that may have access to cheaper electricity or are closer to energy sources, intensifying competition to plants in eastern regions owned by larger players such as Chalco, Luo said.

“Steel and aluminum projects generate huge output value, and are always a big driver for local GDP and the government’s tax revenue,” he said. “Local governments encourage these projects to be built, sometimes even without appropriate approval.”

Aluminum smelting capacity in China may reach 35 million tons a year by the end of 2015 from 25 million tons last year, with most of the projects located in western regions including Xinjiang province, Macquarie Group Ltd. analysts, led by Bonnie Liu, said in a report dated yesterday.

Yonghui Superstores Announces Chinese Retail Store Data

2012-01-13T13:34:00.000-08:00

Source: China Retail News

With the opening of additional six stores, Chinese supermarket operator Yonghui Superstores' retail outlets had reached 204 by the end of 2011.

During 2011, Yonghui Superstores opened 49 new retail outlets and closed one community store, due to the opening of a new anchor store near to that community store. By the end of 2011, the number of its stores reached 204, a year-on-year increase of 31%. In addition, the retail company has signed agreements for another 104 stores.

A representative from Yonghui Superstores said that with the increase of stores, the company expanded rapidly in the market. Compared with 2010, when it only had presence in Fujian, Chongqing, Beijing, Anhui and Guizhou, the company extended into Tianjin, Hebei, Jiangsu, Henan, Heilongjiang, Jilin, and Liaoning in 2011. It has already signed stores in Guangdong, Sichuan, Zhejiang, and Shaanxi.

Apart from the increase of stores, Yonghui Superstores experienced changes in business structure. From the second half of 2010 to the end of 2011, the company opened 70 new outlets, including 22 hypermarkets, 38 marts, seven community supermarkets, and three boutique supermarkets. So far, the retailer has opened 144 hypermarkets and marts, accounting for 71% of its total stores.

With the adjustments to business model, Yonghui Superstores' revenue structure also changed accordingly. In the first half of 2011, its revenue from food had reportedly exceeded that of the sales of fresh goods, and the sales of food contributed the most to the company among all categories.

Shareholders in Chinese hot pot chain approve Yum! takeover proposal

2012-01-13T13:32:00.000-08:00

Source: Xinhua | Photo: Want China Times

GUANGZHOU, Jan. 7 (Xinhua) -- Shareholders of China's leading domestic hot pot chain, Little Sheep Group Ltd. (Little Sheep), have approved a takeover proposal by Yum! Brands Inc. (Yum!), Yum! said in a press release on Friday.

Under the proposal, Yum! will offer Little Sheep independent shareholders 6.50 HK dollars (0.837 U.S. dollar) per share, and will offer holders of options to subscribe to Little Sheep 4.39 HK dollars per option to cancel these options.

Yum! will proceed with its takeover process by seeking the sanction of the Grand Court of the Cayman Islands at a petition hearing on Jan. 20.

The arrangement is expected to go into effect on Feb. 1, when Little Sheep will be privatized and become a Yum! subsidiary, the press release said.

China's Ministry of Commerce in November 2011 approved Yum!'s proposed takeover of Little Sheep, which is listed in Hong Kong.

Louisville, Kentucky-based Yum!, which owns KFC and Pizza Hut, bought a 20-percent stake in Little Sheep in 2009 and raised its shareholding to 27.2 percent last year.

"We are pleased to see that the independent Little Sheep shareholders value the offer provided by Yum!," Jing-Shyh Sam Su, chairman and CEO of Yum! Restaurants China and vice president of Yum!, said in the press release.

Hot pot is a traditional Chinese meal that people enjoy by sitting around a fondue-like pot of simmering water, dipping raw foods, such as thinly-sliced meats, fish, vegetables, and noodles, into the water to cook. Hot pot is a signature New Year's dish for many Chinese families both in and outside of China.

"We have a strong commitment to the China market and to the Little Sheep brand. We are confident we can further strengthen Little Sheep's brand, business model and market position," he said.

The China Cuisine Association rated Yum! and Little Sheep as the top two market players in 2010.

Little Sheep, which focuses on hot pot, operates 3,000 restaurants throughout China and reports an annual revenue of 2 billion yuan (about 315 million U.S. dollars).

Meanwhile, Yum! has nearly 3,500 KFC restaurants and about 560 Pizza Hut restaurants in China. Last year, the company's China division reported 33.6 billion yuan in revenue.

Brewing up the cup that cheers naturally

2012-01-13T13:28:00.000-08:00

Source: By Lin Jing, Hu Meidong and Tan Zongyang (China Daily)

China's tea growers going organic in an attempt to increase exports

BEIJING - Steeped in rich history, the misty and verdant mountains of Wuyi are set to sport an organic hue that not only promises to bring in the tourists, but also keep the cash registers ringing for tea growers.

Tea has been one of the most important Chinese exports for several years now, with the Wuyi blends being the cup of choice among connoisseurs of Chinese tea.

Black tea is one of the major components of the global trade and accounted for 66 percent of the 4.06 million tons of tea produced in 2010, according to the latest figures from the China Tea Marketing Association. Exports of black tea stood at 1.3 million tons in 2010 and accounted for nearly 75 percent of global tea exports. Nearly 44 percent, or 40,000 tons, of the black tea produced in China comes from Fujian, especially from Wuyi Mountain.

In spite of these impressive figures, black tea exports from China currently account for less than 5 percent of the global total. Stiff competition from other growing nations in terms of pricing and stringent quality controls imposed by importing nations have made life difficult for many Chinese tea growers. However, things are set to look up again as consumers across the world become more health conscious and increasingly turn to products with more natural ingredients.

Wuyishan, a county-level city in Nanping, northwest of Fujian province and named after Wuyi Mountain, is the cradle of most black teas in the world.

The city has 592 companies and 958 family workshops engaged in tea production. Many of them have already turned to organic cultivation with an eye on the future.

Organic tea

Tribute Tea Co was one of the first local companies to pioneer the production of organic tea in Wuyishan.

Yu Zeqin, general manager of the company, said that Wuyi Mountain offers conditions that are particularly suitable for cultivation of organic tea.

"The temperature difference between day and night in the mountain range is huge, which makes tea trees less vulnerable to diseases and pests. Hence they need fewer pesticides and fertilizers," Yu said.

Established in 2007, the company has 35 hectares of organic tea gardens n Wuyi Mountain, with 90 percent of its employees being tea growers.

"Tea is a special commodity. Its price and profit varies based on the quality," said Yu, adding that a higher level of quality would help growers gain a greater say in product pricing. Some tea growers have seen their revenues grow fivefold after obtaining organic certification, he says.

The local government has also taken several steps to encourage organic planting and invested 22.1 million yuan ($3.5 million) to build an organic plantation of 2,800 hectares in the city.

According to the city's 12th Five-Year Plan (2011-2015), Wuyishan will build a tea technology center with investment of 600 million yuan.

Over the next five to 10 years, Wuyishan plans to become the provincial tea production base, with an annual output worth 200 million yuan by 2015.

The shift toward organic tea production in Wuyishan was prompted by low yields and declining productivity.

Spread over 2,798 square kilometers (sq km), Wuyishan has just 87.4 sq km of tea gardens and produced 9,770 tons of tea in 2010. In contrast, Sri Lanka, with 2,500 sq km of plantations, produced 399,000 tons of raw tea in the same year.

"Every year we receive large export orders, but we cannot cater to them because of limited labor and productivity," said Kang Liyun, marketing manager of Lapsang Tea Industry Co.

Established in 1998, Kang's company has 130 employees and produces 600 tons of tea every year.

The company ships about 100 tons of unprocessed tea to the European Union (EU), the United States, and some Asian countries such as Japan and South Korea. It also has two processing factories, spread over an area of 4,500 sq m. Apart from the plantations it owns in Hubei and Jiangxi provinces, it also has alliances with local tea gardens and processing factories.

To further increase productivity, the company has sought 20,000 sq m of land from the local government to build a new processing facility. The total investment in the new facility is expected to be about 60 million yuan and, if permitted, would increase production by three to four times.

"We plan to build a modern factory to help standardize our processing and shorten the production cycle."

At the same time exporters are also facing higher risks as tea-consuming countries in the West raise their testing standards.

Last year, the European Commission issued an order to impose special controls on tea imports from China.

Stricter examination

The directive called for stricter examination of Chinese tea exports to the EU, including entry into the bloc through designated ports, and also stipulated that 10 percent of the goods should undergo onsite inspection and sampling for pesticide residues and other items.

Shen Qing, chief executive of King Building, a Beijing-based company that specializes in industry planning and marketing, said that most of the directives are technical barriers.

He said that Sri Lanka exports about $1.2 billion worth of tea every year. Most of its products meet the standards required by most consuming countries.

"China should strive to have stricter quality control in its tea-garden management and production system. It may reduce productivity to some extent temporarily, but the quality may increase by a large degree, and so will the overseas sales."

The export price is another issue that concerns domestic producers. A report from the China Tea Marketing Association showed that the average price of Chinese tea in the world market is about $2 a kilogram (kg), 40 percent lower than that of tea from India and 60 percent lower than from Sri Lanka.

In the domestic market, the average price of black tea is about 150 yuan a kg. One kg of Jinjunmei, a leading variety of black tea, is priced at anything from 7,200 yuan to more than 20,000 yuan.

Wei Saiming, general manager of Fujian Tea Import and Export Co, said that stricter testing in the EU may increase export costs to some extent, but the real hindrance to the expansion of exports is the low profit in overseas markets because of inadequate pricing.

"Right now, the domestic market, with its high revenue and low market threshold, is more lucrative for tea producers. On the other hand, to satisfy the strict requirements of the EU, producers have to apply a series of quality-control measures, from the use of pesticides to the final processing method. It all pushes up the costs and management risks for tea producers."

New proposal

In October 2011, Michael Bunston, chairman of the International Tea Industry Committee, along with tea experts from Canada and the United Kingdom, introduced a Wuyi Mountain proposal at the International Tea Conference & Tea Products Trade Fair 2011.

The proposal aimed to reposition Wuyi Mountain tea in the global industry and find a way to increase its market share and build up its reputation.

It also suggested that the local government and members of the tea industry should protect Wuyi Mountain's tea culture and numerous varieties, and encourage producers to sustain their efforts through organic cultivation in such a way that Wuyi Mountain tea will sell in the EU on the basis of World Trade Organization terms and EU standards.

Yang Jiangfan, president of Wuyi University, said that for Chinese tea to be popular in the West, the first priority is to increase the prevalence of Chinese tea culture.

"Wuyi Mountain tea has its own features and own geographic characteristics and historical foundations. Local companies should combine it with their products to better promote Wuyi Mountain tea in overseas markets," said Yang, who is also managing director of the China Tea Society.

Yang said that the different consumption habits have also resulted in diverse markets at home and abroad.

He added that Western consumers treat tea as a daily drink. Thus they prefer the convenience and standardized tastes gained from using teabags.

However, Chinese people endow tea drinking with cultural significance and enjoy the often complicated process of making tea.

Tea firms set to explore high-end int'l market

2012-01-13T13:24:00.000-08:00

Source: By Lin Jing (China Daily)

BEIJING - Even as some Chinese companies are reducing prices to boost exports, other producers such as Lin Rongxi are looking to make inroads in the high-end luxury market with gourmet tea products.

"Right now everyone is talking about the rise of China. In my opinion, Chinese tea should be the symbol of that rise, much as Louis Vuitton bags and Porsche or Ferrari sports cars are," said Lin, deputy general manager of Eight Horses Tea Co Ltd.

The company, along with four other tea producers from Anxi county in Fujian province, will soon open its first marketing center for Oolong tea in Saint-Germain-des-Pres, an area in the 6th arrondissement in Paris.

"With the launch of the marketing center, we plan to enter the core area of the high-end market in Europe and build up our networks and regional influences," said Lin.

In April, Eight Horses and its partners entered into an agreement as a group with a European partner, Leblond Gre'gory. According to this agreement, the five companies will operate the center jointly with the brand name Anxi Tieguanyin, aiming to provide tea as a luxury product for the European premium market.

Tieguanyin, or Iron Goddess of Mercy, is a renowned variety of Chinese Oolong. According to legend, an iron statue of Guanyin, or the Goddess of Mercy, gave a farmer the tea and helped the poor to prosper. The grateful farmer named the tea Tieguanyin.

"The European market is the symbolic spot for Chinese tea companies to go global, especially Paris, which hosts many luxury brands," said Wang Wenli, head of the Anxi Tieguanyin Tea Association.

"Through this marketing center, we would like to promote Tieguanyin as a luxury product and look for a broader international market," Wang said.

Every year, China exports about 20,000 tons of Oolong at a price of between $2 and $3 a kilogram (kg). In Lin's opinion, the current export price is not consistent with the value of the product. "Tea is a good and fine product, not just some raw material for industrial processing of bottled drinks."

The company has more than 800 stores across China, with annual domestic sales of 1,000 tons. It exported 2,000 tons of Oolong in 2010, accounting for 15 percent of China's annual export of the tea.

The first container of Tieguanyin has already been shipped to Paris, and is likely to be priced at a range between 50 euros ($64.6) and 500 euros a kg.

The center will be ready by Chinese Spring Festival in late January and the five companies will together invest about 30 million yuan ($4.76 million) for the initial construction, management and promotion.

Lin, however, does not expect huge profits or record sales in the short term.

"Chinese tea used to be a prized possession among the upper classes in Europe some 300 years ago for its health benefits," he said. "What's more important is that we are back in the high-end market, and promoting the Anxi Tieguanyin brand."

The center will be spread over 100 square meters and divided into a sales zone and a tasting zone. It will also host various cultural activities to promote tea culture.

Lin said that the main barrier to the promotion of Tieguanyin in Europe is the lack of Chinese tea culture.

"Previously our products were mainly sold overseas in bulk. Now we want to sell packaged tea at a much higher price. Western consumers may need time to accept the fact that tea can be really expensive.

"The second issue is the tea-making process. Europeans are used to drinking the beverage with tea bags. But traditionally, Chinese tea needs to be treated with more complicated procedures. Also, tea tasting requires a certain understanding of the Chinese tea culture."

Besides tea sales, tea-making performances and training courses will be held on a regular basis for consumers.

Lin hopes that the new marketing center will provide a template for local producers to change their strategy in international markets.

"We want to raise another round of Chinese tea mania in Europe," Lin said.

He expects Tieguanyin to be popular in the European Union within five years. "It is our aim, but it all depends on our long-term efforts."

Shen Qing, CEO of King Building, a Beijing-based company that specializes in industry planning and marketing, said that Chinese companies should figure out a way to make the best tea at the lowest possible price, just as Lipton's Teas - owned by Unilever PLC - does. That is the only way for domestic producers to make a successful return to the global market, Shen said.

China’s Soft Drink Sector- UBS

2012-01-11T13:15:00.000-08:00

Source: UBS Investment Research, Jan 5, 2012

Will multinationals expand NCD spending?

Multinational brands to expand NCD portfolios after Tingyi-Pepsi alliance

We expect Coca-Cola to accelerate non-carbonated drink (NCD) portfolio expansion from 2012 as Tingyi Cayman Islands’ (Tingyi) alliance with Pepsi expands Tingyi’s juice, energy drink and high-end bottled water portfolio. In this report, we consider whether multinationals can free up funds through potential cost savings in the value chain that could be reallocated to selling and marketing NCD products. We also look at the potential impact on China soft drink companies.

Proprietary model to study global brands’ capacity to add NCD spending

Our value chain analysis indicates Coca-Cola and Pepsi have the potential to reduce costs Rmb3-4bn each by improving supply chain efficiency in China. We think Tingyi and Coca-Cola’s share of sales and marketing spending in the NCD segment could rise to about 40% if they reallocated potential cost savings to the segment. Their combined NCD volume share is currently approximately 20%.

Managing a diversified portfolio is key to competitiveness

We expect companies to launch more high value added NCD varieties such as sport and energy drinks, ready-to-drink coffee and tea, and milk drinks over the next decade. We believe juice drink competition will intensify between Coca-Cola and Tingyi and think small companies will only be able to survive the competition through product differentiation strategies.

Buy ratings on Tingyi and China Foods; Neutral on UPC and Huiyuan

We believe Tingyi and China Foods (Coca-Cola’s China bottler) will be the beneficiaries of industry consolidation. In our view, Uni-President China (UPC) needs to adjust its beverage product strategy to prevent further margin erosion. We expect China Huiyuan Juice’s (Huiyuan) weak cash-flow capability and leveraged balance sheet to result in a valuation discount against peers.

Executive summary

Multinationals to accelerate NCD portfolio expansions after Tingyi-Pepsi alliance

The declining share of carbonated drinks in total soft drink consumption poses the most significant challenge for soft drink multinationals. According to Euromonitor, the share of carbonated drinks in total soft drink consumption in China declined from 32% in 2001 to 17% in 2010. Despite Coca-Cola’s success in the juice drink segment, its share in China’s NCD category was only 6.6% by volume, compared with 14% for Tingyi and 10% for Hangzhou Wahaha Group (Wahaha) according to Euromonitor. Pepsi’s share in the NCD category is almost negligible.

Based on our proprietary model of value chain analysis, we believe multinationals have been over-spending in the carbonated drink segment. In 2011, we estimate Coca-Cola and Pepsi’s total advertising and promotion (A&P) spending in China were Rmb7.8bn and Rmb3.7bn, respectively, compared to Rmb2bn for Tingyi. We estimate Coca-Cola spent Rmb5.6bn of its total A&P spending on the carbonated drink segment, equal to 26% of its total carbonated drink revenue of Rmb23bn; we estimate Pepsi spent 28% of its Rmb11bn carbonated drink revenue on A&P. In comparison, we estimate Tingyi spent only 10% of beverage revenue on A&P. While we believe that Coca-Cola and Pepsi’s over-spending on the carbonated drink segment has been a strategic decision to drive volume growth in core markets, the spending has been heavily concentrated on a small subset of the China soft drink market.

The November 2011 PepsiCo/Tingyi strategic alliance provides Tingyi with Tropicana and Gatorade, leading global brands in the juice and energy drink segments, respectively. Tingyi is capable and we expect it to successfully grow these two brands. We believe this will pose a major threat to the leadership of Coca-Cola’s Minute Maid brand in the juice segment. Minute Maid’s number one share already faces an increasing challenge from Tingyi’s traditional juice drinks, launched in 2009.

We believe the Pepsi-Tingyi deal will push Coca-Cola to step up its investment in expanding its NCD portfolio. Coca-Cola’s launch of a pulpy milk drink and Glaceau vitamin water products in 2009-10 demonstrated its ambition to expand its NCD portfolio. We believe milk drinks, sport and energy drinks and readyto-drink (RTD) coffee are potentially key areas for Coca-Cola’s NCD portfolio expansion over the next decade. As a comparison, Coca-Cola has achieved its number one position in Japan’s soft drink market by regularly introducing NCD products since 1975, including in the RTD coffee, sport drinks and RTD tea
segments.

UBS proprietary model to evaluate cost savings potential for multinationals

In this report, we analyse the potential for Coca-Cola and Pepsi to free up funds through improving supply chain efficiency that could be re-allocated to NCD marketing and selling activities, and the implications for domestic companies, especially Tingyi and UPC.

We analysed the value chains for the China soft drink operations of Coca-Cola, Tingyi, Pepsi, UPC and Huiyuan. We also performed a cross-sector analysis by comparing the soft drink companies’ value chain with those for brewery and dairy companies.

Our analysis suggests that differences in supply chain efficiency are mainly driven by internal efficiency rather than scale effects. This contradicts what most investors believe. Supply chain efficiency is mainly reflected in A&P spending and transportation expenses, while sales personnel expenses are mainly driven by scale effects.

Coca-Cola’s A&P spending is more than twice Tingyi’s, measured per unit of products they sell. While we believe Coca-Cola’s heavy advertising expenses for brand building are a key reason for this, we believe Tingyi’s highly efficient utilisation of marketing resources due to its integrated operating system is even more
important.

Multinationals shifting to more integrated supply chain

In our view, a more integrated supply chain could become a major approach to generate cost savings for soft drink multinationals. Coca-Cola and Pepsi’s business models differ from Chinese soft drink companies due to their use of bottlers. Bottlers are responsible for the packaging, sales and distribution of Coca-Cola and Pepsi products. Both companies choose to delegate these functions to bottlers to reduce up-front capital engagements when building new production capacity. Bottlers also have know-how about local distribution
channels, which can enable multinationals quick expansion when entering new markets.

On 4 November 2011, Pepsi announced its strategic alliance with Tingyi, China’s largest NCD company by volume. Under this agreement, Tingyi acquired a 72% stake in Pepsi’s 24 bottlers; in return, Pepsi took a 5% share in Tingyi’s beverage subsidiary with the option to further increase the stake to 20% at a cash consideration of at least US$2.25bn by October 2013.

Pepsi has been continuously increasing its stakes in its China bottlers over the past few years before it entered the strategic alliance with Tingyi. We believe this transaction shows Pepsi’s determination to integrate its beverage supply chain by improving execution through bringing in Tingyi management.

Pepsi’s fragmented bottling system, comprised of 24 different local partners, resulted in lack of capital commitment by, and synergy among, bottlers in designing marketing activities. This has been detrimental to Pepsi’s market share expansion, while its direct competitor, Coca-Cola, has been aggressively expanding market share in the carbonated drink segment.

We estimate Pepsi’s carbonated drink revenue was half of Coca-Cola’s in 2010, and its presence in the NCD segment is almost negligible, while Coca-Cola has held the number one position in the juice segment since 2008, with its Minute Maid juice achieving revenue of US$1bn in 2010. Pepsi’s smaller revenue size made bottlers reluctant to expand their internal sales force, hurting Pepsi’s presence in traditional channels, which are fragmented and require an internal sales force to penetrate and manage. We estimate traditional channels account for 70% of soft drink sales in China.

Coca-Cola has also strengthened its control over its bottling system in recent years. Coca-Cola adopted a different approach than Pepsi in choosing bottlers when it entered China in the 1980s. Kerry, Swire Pacific and COFCO (under listco China Foods) were Coca-Cola’s three bottling partners before Kerry sold its bottling business to Coca-Cola in 2006. In 2008, Coca-Cola sold a 21% stake in its Dongguan subsidiary, which manufactures NCD products, to COFCO.

Implications for domestic companies— intensifying competition in the NCD segment

In 2010, the NCD segment already accounted for 81% of China’s soft drink market by value, while NCD represented only 35% of Coca-Cola’s 2010 China revenue and 14% of Pepsi’s. Coca-Cola and Pepsi’s expansion of their NCD market shares needs to be supported by greater marketing expenditure, in our view.

We estimate Coca-Cola’s NCD selling and distribution spending is currently Rmb2.4bn. We think Coca-Cola’s NCD selling and distribution spending could increase to Rmb6bn if it were to utilise the potential cost savings of Rmb4bn we estimate it could achieve by improving supply chain efficiency.

In 2011, we estimate Tingyi’s total selling and distribution expenses were Rmb4.8bn. If we assume half of the potential cost savings we estimate Pepsi could achieve by improving supply chain efficiency are shifted to the NCD category, we think Tingyi’s selling and distribution spending could increase to as much as Rmb6.8bn.

This would pose a major challenge for other NCD companies given the China Securities Bureau (CSB) estimated total NCD selling and distribution expenses at Rmb25bn in 2011. Based on our calculations, we estimate Tingyi and Coca- Cola’s share of NCD selling and marketing spending could increase to about 40% if the companies were to spend the potential savings we estimate on S&M. On the other hand, our analysis shows that Coca-Cola and Tingyi’s combined NCD market share is low, at 20% by volume.

In 2010, NCD selling and distribution expenses by all companies totalled Rmb23bn, or 8.6% of NCD revenue. As a comparison, we estimate Tingyi and UPC spent 19%/24% of beverage revenue as selling and distribution expenses. We think this implies the existence of large numbers of local companies that enjoy above industry average profitability due to their local dominance. We saw the same phenomenon in the brewery segment a couple of years ago, though it declined greatly as national breweries penetrated local markets and took market share from regional brands.

Near-term impact: juice consolidation will come soon

Among the three key categories of soft drinks, the juice segment appears the most fragmented. We attribute this to the low entry barrier in product know-how and the increasing variety of flavours compared to the previous dominance of orange juice.

We believe Coca-Cola’s leadership position in juice drinks has faced an increasing challenge from Tingyi since Tingyi launched its traditional juice series in 2009. According to Nielsen, Tingyi’s juice market share increased to 26% in 2011 while Coca-Cola’s market share remained unchanged at between 30-32%.

Tingyi’s old juice drink products, marketed under the Fresh Daily C sub-brand, face the challenge of brand upgrading given Minute Maid’s image as a premium brand. The introduction of Pepsi’s Tropicana into Tingyi’s juice portfolio could solve this issue, in our view. With the addition of Tropicana, Tingyi’s juice portfolio will become complete with Tropicana, Fresh Daily C and Chuan Shi Xin Yin targeting different sections of the juice segment.

As a result, we expect Coca-Cola to accelerate the pace of product extension for Minute Maid to combat the competition from Tingyi. The launch of pulpy milk drinks using the sub-brand Guo Li Nai You in 2009 signalled the first product extension effort for Minute Maid.

Long-term impact: small companies lacking marketingresources and a diversified product portfolio will be eliminated

Small companies might have the benefit of low transportation expenses in the short term. However, in the long run small companies have less ability to manage the value chain and new product pipeline, which makes it difficult for them to survive competition. Only small companies having strong brand equity in niche markets are likely to become potential acquisition candidates, in our view.

Evaluating potential cost savings for multinationals

Comparing soft drink companies’ value chains with breweries and dairy companies

We studied the value chain of key soft drink companies, including Tingyi, Coca- Cola, Pepsi and UPC. We also compared soft drink companies with brewery and dairy companies given the similarities in product nature and distribution channels. We selected Tsingtao Brewery and China Mengniu Dairy (Mengniu) as the representative brewery and dairy companies, respectively, given they are the leaders in their respective industries. We therefore assume they are more efficient than their peers.

Key implications of the comparison

Our analysis suggests that differences in supply chain efficiency are mainly driven by internal efficiencies rather than the scale effect. This is quite different from what most investors believe. Supply chain efficiency is mainly reflected in A&P spending and transportation expenses, while sales personnel expenses are mainly driven by the scale effect.

The scale effect on A&P spending seems to be less substantial than investors believe. On the contrary, A&P spending is more a result of the utilisation efficiency of marketing resources by different companies. Tingyi and Tsingtao Brewery are the most efficient of the sample companies. UPC’s unit A&P spending is similar to Tingyi’s, probably due to the company’s focus on marketing in big cities. Mengniu’s A&P spending efficiency seems low, especially since the dairy industry is much more consolidated than the soft drink and brewery industries. This phenomenon coincides with our belief that dairy companies’ A&P spending has significant room to improve after the two industry leaders, Mengniu and Inner Mongolia Yili Industrial Group (Yili), focus more on product diversification strategies and improving internal operating efficiency.

Transportation expenses depend primarily on the distance between plants and end markets. We calculate the transportation distance for Tingyi is comparable with Tsingtao Brewery at around 100 kilometres. Mengniu’s new plants are much closer to the end market, aiming to shorten the transportation distance and therefore lower transportation expenses.

Sales personnel efficiency is mainly a result of the scale effect given national companies need to access retail channels using internal sales personnel. This has been the common trend in the fast moving consumer goods (FMCG) area, given the key growth area is in undeveloped areas where distribution channels are fragmented and traditional channels dominate.

Why the supply chain efficiency of multinational companies appears lower than domestic peers

A&P spending and transportation expenses

A&P spending is mainly comprised of on-air advertisements, cold equipment investment and on-site promotion activities. In 2011, we estimate Coca-Cola’s A&P spending was Rmb6.7bn compared to Tingyi’s Rmb2bn. We think there are several reasons why Coca-Cola’s A&P spending is twice Tingyi’s, measured per unit of products they sell.

While we think Coca-Cola’s heavy advertisement expenses on brand building are a key reason, we believe Tingyi’s highly efficient use of its marketing resources due to its integrated operating system is even more important.

Coca-Cola uses intensive advertising to strengthen its global brand value. Coca-Cola’s global advertising spending amounted to US$2.9bn in 2010; if we assume Coca-Cola allocated advertising spending by region based on each region’s share of volume, we estimate Coca-Cola’s China advertising spending could have been as much as Rmb2bn in 2011, given China contributes approximately 10% of Coca-Cola’s global volume.

Tingyi’s integrated nationwide operating system improves marketing efficiency. On-air advertisements should be matched with on-site promotion activities to optimise the positive impact on sales revenue. As a comparison, Coca-Cola’s three different bottlers undertake most on-site promotion activities, which have difficulty creating as much synergy as Tingyi’s unified platform.

A more efficient procurement system for cold equipment and other marketing materials could result in cost savings for Tingyi. Coca-Cola adds 1m units of cold equipment at retail outlets every year. If we assume a purchase cost of Rmb2,000-3,000 per unit of cold equipment and four years’ depreciation life, this would amount to Rmb500-750m of spending for both companies if we assume Tingyi reaches the same pace.

We estimate potential cost savings of approximately Rmb4bn for both Coca- Cola and Pepsi if we assume they could reach the same supply chain (sales and distribution) efficiency as Tingyi. However, we think this is unlikely as both companies spend significant amounts on building their brand image. But even if we assume both companies maintain the same yearly advertising spending, which is about Rmb1bn higher than Tingyi, we estimate the potential cost savings from increased supply chain efficiency could be as much as Rmb3bn.

Accelerating consolidations by Tingyi and Coca-Cola

We believe NCD consumption will remain the growth driver for the soft drin sector for the next 5-10 years, given the rising health awareness of consumers. The share of carbonated drinks in total soft drink volume has been dropping steadily in China, falling to 17% in 2010, according to Euromonitor.

Domestic NCD companies are accelerating product innovation efforts. Wanglaoji Herbal Tea, Wahaha’s Nutrition Express, Tingyi’s Traditional Sour flavour juice drinks and UPC’s milk tea have all generated more than Rmb1bn in revenue pa within two to three years of launch. We expect new NCD product launches by Tingyi to accelerate after it starts to distribute Pepsi’s NCD products in 2013.

In our view, the most likely way for Coca-Cola to utilise the potential Rmb3bn cost savings we estimate it could achieve from greater supply chain efficiency would be to increase its selling and distribution spending in the NCD segment. We estimate Coca-Cola’s selling and distribution spending in the NCD segment
is currently about Rmb1.3bn. We estimate Coca-Cola’s NCD selling and distribution spending could potentially increase to Rmb4bn if it increased efficiency and devoted the savings to NCD marketing.

In 2011, we estimate Tingyi’s total selling and distribution expenses were Rmb4.8bn. If we assume half of Pepsi’s potential cost savings from potential efficiency increases were to be shifted to the NCD category, we estimate Tingyi’s selling and distribution expenses could increase to as much as Rmb6.3bn.

This would pose a major challenge for other NCD companies given the CSB estimated the total selling and distribution expenses for the NCD category at Rmb25bn in 2011. Based on our calculation Tingyi and Coca-Cola’s combined share of total NCD selling and marketing spending would increase to approximately 40% if they devoted potential savings to NCD marketing.

Evaluating the size of the soft drink market

The most commonly quoted soft drink market size figure is based on Nielsen’s estimate of approximately Rmb180bn of retail revenue in 2010. If we exclude a 10% margin for distributors and retailers and the 17% VAT, we estimate the total size of the soft drink market, based on ex-factory prices, of Rmb168bn, assuming 20% revenue growth in 2011.

However, we believe the Nielsen data underestimates the real size of China’s soft drink market.

Flavoured milk drinks have become a substantial component of soft drink consumption in China. However, flavoured milk sales are not accounted for in Nielsen’s total market size calculation.

According to Euromonitor, the total off-trade value of flavoured milk drinks was Rmb54bn in 2010, accounting for 17% of total soft drink value (including flavoured milk drinks). Wahaha, Want Want, Mengniu and Yili have become the key companies in this category: we estimate Want Want’s Hot Kid milk generated about Rmb5bn of revenue in 2011. Coca-Cola and Tingyi launched flavoured milk drink products in 2009 and 2011, respectively, showing that it has become an important segment of the soft drink sector.

Most soft drinks are distributed through traditional channels—we estimate the share of traditional channels could be above 70%. And lower-tier cities seem to have a higher consumption of soft drinks, according to our observation. However, the Nielsen data mainly focuses on modern channels in first- and second-tier cities.

According to Euromonitor, the total soft drink market was Rmb330bn in 2010, based on off-trade value. According to the CSB the sales revenue of beverage companies was Rmb332bn in 2010. The Euromonitor data would imply a total market size of Rmb282bn, if we assume a 10% revenue contribution by on-trade
consumption, and exclude the 10% margin for distributors and retailers and 17% VAT. In our view, the major reason for the difference between the CSB and Euromonitor data is that the CSB appears to overestimate the total market size of carbonated drinks. According to the CSB, the total market size of carbonated drinks, based on ex-factory prices, was Rmb62bn in 2010 compared with Euromonitor’s estimate of Rmb38bn. We estimate the combined carbonated drink revenue of Coca-Cola and Pepsi was Rmb30bn in 2010.

A fragmented NCD segment

We estimate total NCD sales revenue of Rmb293bn in 2011, assuming 20% revenue growth in 2011. We estimate the combined share of Coca-Cola and Tingyi in the NCD segment was low at 12% (by revenue) in 2011. We estimate the combined share of both companies in the NCD segment is 20% by volume, as shown in Chart 17. As a comparison, the top two companies’ shares in the NCD segment by volume were 25% in Taiwan, 30% in the US and 38% in Japan in 2010.

Juice drink consolidation will come soon

As discussed above, the juice segment appears the most fragmented of the soft drink industry’s three key segments. We believe this is due to the low entry barrier in product know-how and the increasing variety of flavours.

Coca-Cola is the market leader. In 2011, we estimate its Minute Maid brand achieved total revenue of Rmb6.7bn. Juice drinks, which have juice content below 25%, account for 80% of the total juice segment. Minute Maid’s pulpy juice is perceived as the premium brand in the juice drink segment, we estimate it has a market share of about 10%. Coca-Cola’s market share expansion has been driven by consumer upgrading, given that the key difference between Minute Maid and other juice drinks is the inclusion of pulp in Minute Maid and its first mover advantage in this category.

However, we believe Coca-Cola’s leadership position in the juice drink segment has faced challenges from Tingyi after Tingyi launched its traditional juice series in 2009. According to Nielsen, Tingyi’s juice market
share increased to 26% in 2011 while Coca-Cola’s market remained unchanged at between 30-32%. The success of Tingyi’s traditional juice drink series, namely Chuan Shi Xin Yin including sour plum and sour jujube flavours, is mainly because the flavours cater to Chinese consumers’ traditional tastes. Wanglaoji, the leading herbal tea brand, registered revenue of Rmb14bn in 2010.

Tingyi’s older juice drink products, marketed under the Fresh Daily C subbrand, face the challenge of brand upgrading given Minute Maid’s premium brand image. The introduction of Pepsi’s Tropicana brand to Tingyi’s juice drink product portfolio could solve this issue, in our view. Tropicana, the leading global juice brand, was introduced in China in 2007. It has been positioned as a premium brand in the nectar category. According to our industry checks, the key reason for Tropicana’s poorer-than-expected performance in China was bottlers’ low incentives to distribute new products rather than any issues with the product’s branding. With the addition of Tropicana, Tingyi’s juice drink portfolio will become complete with Tropicana, Fresh Daily C and Chuan Shi Xin Yin targeting different sections of the juice drink segment.

We therefore expect Coca-Cola to accelerate the pace of product extension for Minute Maid to combat the competition from Tingyi. The launch of pulpy milk drinks under the Guo Li Nai You sub-brand in 2009 signalled the first product extension effort for Minute Maid in China. The product series achieved substantial growth, especially in southern China, according to our checks. However, we think the recent poisoning incident could lead to some uncertainty on brand development.

In late November 2011, a boy died and his mother fell into a coma in the northeastern province of Jilin after drinking a bottle of Guo Li Nai You. Tests suggested that the drink was tainted with organic phosphorous, a toxic pesticide. Local government authorities later confirmed that the incident was caused by an individual who had poisoned some drinks. Our checks showed some product recalls after the incident, but the industry expects the impact to be short lived.

Implications for key soft drink companies

In this section, we discuss the implications for key domestic soft drink companies as Coca-Cola and Pepsi step up their extension of their NCD product portfolios.

Tingyi—industry consolidator; upgrade to Buy

We think Tingyi’s strategic alliance with Pepsi strengthens its market positioning despite the potential near-term negative earnings impact (for more detail, please refer to Tingyi Cayman Islands: A favourable transaction despite potential near-term earnings dilution, published 4 November 2011). We upgrade our rating from Neutral to Buy and raise our price target from HK$22.20 to HK$30.60. We derive our price target from a DCF-based methodology and explicitly forecast long-term valuation drivers using UBS’s
VCAM tool.

We expect Tingyi to become China’s largest soft drink company by volume within the next decade. We believe upgrading and portfolio extension will be the key industry trends, and Tingyi’s alliance with Pepsi will provide benefits in both categories. Tingyi’s leadership in the NCD segment will be strengthened by a broadened portfolio with the addition of Pepsi’s Tropicana and Gatorade and its capacity to add A&P spending versus Coca-Cola will be substantially improved with the Pepsi alliance.

We expect Tingyi to turn around the Pepsi bottlers in two years. We believe the losses at Pepsi bottlers are due to the low efficiency of A&P spending and high transportation expenses resulting from the unfavourable geographical distribution of factories. Tingyi is more efficient in A&P spending than the multinationals due to its local know how, and we believe unified management by Tingyi will improve the operating efficiency of the bottlers and stop Pepsi’s market share losses.

The aligned interests of Pepsi and Tingyi will also mitigate execution risks. However, the 28% minority stakes in the bottlers are potential hurdles for Tingyi’s cost-saving measures. There could also be internal competition between Tingyi’s existing juice drinks and Tropicana, if Tingyi fails to differentiate the two brands. Pepsi’s willingness to invest in A&P spending on Tropicana and Gatorade is critical to expanding their revenue, even with Tingyi’s strong distribution capacity.

Uni-President China—rising beverage execution risks

We cut our 2012-13 EPS estimates from Rmb0.18/0.26 to Rmb0.16/0.23 as we have become more concerned with its beverage execution risks as a result of the intensifying competition from Tingyi and Coca-Cola. We therefore downgrade our rating from Buy to Neutral and lower our price target from HK$5.41 to
HK$5.10.

The juice drink segment is becoming a “destroyer of value” for UPC, in our view. We expect competition in the segment to intensify as Coca-Cola and Tingyi step up consolidation. We estimate UPC’s juice drinks were loss-making in 2011, due to competition as well as cost pressures. Despite easing cost pressures in 2012, we expect negative pricing to deter margin recovery for the juice drink segment.

In our view, a differentiation strategy is the only way for UPC to survive industry consolidation. The biggest challenge for UPC is to utilise the 86% beverage capacity addition coming on stream in 2011-12. We believe UPC can only prevent further margin erosion through product differentiation, given its much lower capacity for A&P spending than Coca-Cola and Tingyi. We think UPC needs to adjust its juice drink product strategy and accelerate milk tea and RTD coffee revenue expansion.

Huiyuan Juice—margin pressure from price promotions

Huiyuan Juice dominates the 100% juice and nectar categories. Its key strength is its first mover advantage and resulting strong brand equity in the 100% juice category. However, diluted juice drinks make up 80% of total juice consumption and 100% juice and nectar account for only 20%. Huiyuan has been exploring growth opportunities in the diluted juice segment through aggressive expansion in traditional channels. We believe Huiyuan’s relative inexperience in developing and marketing juice drinks, and its ongoing sales channel restructuring contributed to a negative juice drink sales in H111

We believe Huiyuan’s weak cash-flow capability and leveraged balance sheet will result in a valuation discount against other soft drink companies. Huiyuan has run a price promotion since June 2011 for 100% juice and nectars (excluding orange juice products), with discounts as high as 30%. While the price promotions have been effective in driving sales volumes, especially of 100% juice products, we believe the promotions will depress gross profit margin substantially in 2012 due to higher orange juice concentrate costs.

Wahaha—business diversification a potential concern

Wahaha’s product portfolio is comprised mainly of milk drinks, bottled water, instant Chinese congee and other soft drink products. Milk drinks are its biggest revenue contributor. According to management, Wahaha’s biggest strength is its cross shareholdings with distributors, which align distributors’ interests with the brand’s long-term development. Wahaha’s distribution system is comprised of about 6,000 wholesalers and approximately 20,000 distributors. Its distribution system is deeply rooted in China’s rural areas. The strong distribution system also contributes to the success of its new products, which usually require one to
two years to reach the breakeven point.

In 2011, Wahaha announced plans to enter the mining, biotechnology and agricultural industries. The frequency of consumer complaints on product quality has increased in recent years.

Farmer’s Spring—innovative, but weak execution

Farmer’s Spring entered the soft drink industry in 1997 with its signature premium mineral water product. Its launch of mixed juice in 2005 made it a pioneer in the nectar category, differentiating it from other juice drink
companies. According to management, its biggest strength is its product innovation capability. However, large companies can copy its new products and scale them up extremely rapidly. A good example is lemon juice, which Farmers’ Spring launched in early 2009—competitors including Wahaha and Huiyuan Juice soon launched their own versions.

2012-01-06T14:32:00.000-08:00

What's Happening...

Uncorking China's Wine Market

2012-01-06T14:23:00.000-08:00

Source: Knowledge@Wharton | Photo: WSJ

Although China's bustling metropolises and staid Bordeaux may seem worlds apart, the two are becoming increasingly intertwined. Indeed, China recently overtook the traditional strongholds of Germany and the United Kingdom to become Bordeaux's largest export destination. This transformation is particularly remarkable given the country's short history of mass wine consumption. Historically, beverages such as sorghum-based baijiu and beer have dominated Chinese alcohol consumption, with wine only recently gaining wide acceptance.

Bubbling to the Top

In the past few years, China, the world's second largest economy, has risen to become one of the world's most important wine markets, offering both high growth potential and generous profit margins. By volume, the country is currently the seventh-largest consumer of wine, with expected sales of 1.6 billion bottles in 2011. In contrast, the U.S. and France, the first and second largest consumers of wine, are expected to consume 4.0 billion and 3.9 billion bottles, respectively. Since 2006, the Chinese market has experienced more than 20% annualized growth, and experts predict it will further double by 2014 to become the world's sixth largest.

Collectively, three major domestic producers account for nearly half the total wine sales in China. The largest brand, Changyu Pioneer Wine, is a unit of the major state-owned conglomerate China National Cereals, Oils, and Foodstuffs Corporation (COFCO). Changyu and the other two primary producers, Great Wall Wine and Dynasty Wine, focus on domestic consumption, with 98% of their production remaining in China.

Foreign wine imports are also growing rapidly. In 2010, imports grew to more than 20% of total wine consumption, a four-fold increase since 2005. Reductions in tariffs following China's accession to the WTO have been one factor in this growth. Currently, an estimated 20 million adults drink imported wines on at least an occasional basis. Given that this figure is a fraction of the overall estimated 200 million plus people who have the purchasing power to buy imported wine, the future for foreign wine appears bright.

In China, domestic wines are sold primarily at the lower end of the pricing spectrum, while imported wines are sold at the mid-to-higher end. The average retail price at the lower end is RMB20-30 (US$3-$5) per bottle. Mid-range wines sell for RMB30-80 (US$5-$13) per bottle and are aimed at consumers with higher disposable incomes and more exposure to wine. Premium wines sell for RMB80 (US$13) and up per bottle. Imported wines typically range from RMB80-400 (US$13-$66) per bottle and are in direct competition with high-end domestic wines.

A Chinese Taste for Wine

Numerous factors have driven the growth of the overall wine market in China. In particular, the government's promotion of wine as a healthy alternative to baijiu and other spirits, declining tariffs on wine imports, and consumers' increasing purchasing power have given rise to an increased interest in wine.

Consumption still centers around entertaining and gift-giving occasions, with two major holidays -- the Chinese New Year and the Mid-autumn Festival -- accounting for about 60% of annual wine sales. As one customer in a wine store in Beijing noted, "I'm not too familiar with wine, but I know it makes a great gift." Consequently, consumers are interested primarily in purchases that convey a suitable level of prestige, status and respect, all of which are important components of Chinese culture. Pairing wine with food is still a developing concept, especially given the family-style custom of Chinese dining.

Despite rapid growth, however, the Chinese market remains fairly immature. Customer preferences are driven heavily by advertising, with top producers running extensive mass-marketing campaigns to build brand awareness. This brand-driven environment, with a lack of emphasis on taste preferences, has also affected the market for foreign wine. Regardless of brand or vintage, Bordeaux and Burgundy wines enjoy strong recognition among Chinese consumers. High-end consumer demand for first-growth French wines, such as Lafitte and Latour, has caused a tremendous jump in prices. Although consumer appreciation and knowledge of wine have improved in recent years, purchases continue to be driven primarily by brand-conveyed prestige and status.

Beyond the emphasis on brand, consumer preferences have also driven the market to supply a narrow range of products. Given the limited consumer appreciation for white wine, red wine accounts for more than 90% of the wine consumed. This preference is related to numerous cultural factors, including associations with sophistication, heritage and health.

Regardless of the product category, Chinese customers often have enduring "country-of-origin" biases, and wine follows this pattern. The association between wine and France is particularly strong, with domestic brands mimicking French imagery on packaging and vintage naming conventions. On the import side, French labels account for almost half of all wine imported into China. When pressed about their perception of brands and vintages, many consumers said their perception of France as the leading wine country is a primary factor in their purchase decisions. According to the manager of Scarlett, a prominent wine bar in Beijing, "The Chinese are big fans of Bordeaux and not very curious about other wines."

In response to changing customer perceptions of wine, domestic firms have begun to adjust their marketing strategies. While domestic wine brands have traditionally focused on lower price tiers, producers are increasingly looking to move further up-market, investing in world-class equipment and seeking out international best practices. Some Chinese-produced wines have already received international recognition for their efforts, with one producer recently winning Decanter magazine's "Middle East, Far East & Asia" category for red wines. At the same time, with the increasing spread of wealth beyond the largest coastal cities, China's wine market is now expanding into smaller markets across the country.

Both Chinese nationals and foreign investors are seeking ways to capitalize on the booming Chinese wine market. Within this market, the relative unsophistication, yet increasing purchasing power, of the Chinese consumer presents tremendous investment opportunities with multiple means of entry. Recent examples of entries into this sector include Chinese purchases of foreign vineyards, full-service distributors catering to the unique qualities of the Chinese market, and high-net-worth Chinese investing in wine as part of their wealth management strategies.

Investing in Terroir

Most attention-grabbing among these modes of market entry, however, has been Chinese investors' acquisition of foreign vineyards. Among the first was the 2008 purchase of a Bordeaux chateau by the Cheng family of Qingdao, China.

After an extensive search, the Cheng family chose Chateau Latour-Laguens, a 150-acre property in southeast Bordeaux. Although the Chengs had been historically involved in importing wine from other global wine centers, such as South Africa and Australia, their search for property focused exclusively on Bordeaux. Family member Daisy Cheng noted France's strong reputation in the Chinese market as the key factor in the selection: "The Chinese consider French wine to be the most authentic."

Since purchasing Latour-Laguens, the family has transformed the vineyard's strategy to focus exclusively on exporting to the Chinese market. To drive name recognition back in China, Cheng said that the family has done extensive newspaper advertising in target markets. In addition, the winery received a tremendous amount of attention within both the Chinese and international press for the acquisition, providing significant exposure. The family has subsequently worked to upgrade the winery. As Cheng noted, "we have invested in the most advanced equipment in order to produce the highest quality wine. We have also restored the historic premises."

Following the 2008 acquisition and with the continuing strength of the Chinese economy, other Chinese parties have made foreign purchases. Perhaps most significant was the 2011 purchase of the Bordeaux property Château Viaud by COFCO. This RMB100 million (US$15.2 million) deal, by the owner of China's high-volume Great Wall domestic wine brand, was seen as legitimizing overseas acquisitions. Property agents in Bordeaux report an increasing number of inquiries from potential Chinese investors, sparking talk of a wave of Chinese purchases in coming years.

While Bordeaux has received the greatest attention, Chinese entities are broadening their scope to other major wine-producing regions. COFCO also purchased a high-volume Chilean winery in 2010. In addition, deals have taken place in other wine production centers such as California's Napa Valley and New Zealand. In 2010, Dynasty Wine announced plans to spend up to RMB900 million (US$150 million) to acquire vineyards overseas, although it has yet to make a purchase. After the Chilean and French acquisitions, Wu Fei, COFCO's wine and spirits branch head, discussed the company's commitment to additional purchases, noting that "the next purchase might happen in Australia or the United States, and we are also eyeing other places."

While this growing trend of overseas purchases shows no sign of abating, some wonder if resistance to Chinese ownership will grow. Past peaks in foreign acquisitions elicited significant protectionist concerns. In the Chinese context, however, issues have thus far appeared relatively muted and limited to minor cultural challenges, e.g., a misunderstanding between Chinese investors and a French vineyard over which nation's property laws should apply to the acquisition. Instead, Chinese investors -- and, even more importantly, Chinese consumers -- were cited as the "saviors of Bordeaux" by The Financial Times, helping to revive a region struggling through declining demand from recession-battered developed markets as well as increasing New World competition.

Bringing Wine 'In'

Further along the value chain, distribution is another channel through which businesses and individuals can enter the Chinese wine market. However, consumer education is the key to success for this burgeoning industry.

Major distributors in mainland China include ASC Fine Wines (majority-owned by Suntory Holdings), Aussino World Wines and Summergate Fine Wines, all founded in the 1990s and currently marketing themselves as both purveyors of fine wine and educators. This informational aspect of distribution is necessary, given the relative immaturity of the Chinese wine market. For instance, ASC runs its own wine school, which the company promotes as suitable for "wine lovers from all walks of life." This program helps ASC target and guide consumers to its own imports. At the same time, ASC builds credibility as one of the first organizations in China to certify wine professionals.

Within this environment, new distributors also need to emphasize education. Altruistic Boutique Wines (ABW), based in Hong Kong and Beijing, imports boutique wines primarily from California. The company's founder and CEO, Rai Cockfield, considers wine education an integral part of his distribution strategy, particularly given the lack of awareness of New World wines. The Chinese wine market is where the U.S. wine market was 30 years ago, but "China will catch up faster," says Cockfield, who is expecting an enhancement in Chinese consumers' global wine awareness. Regarding the domestic product, Cockfield has already sampled many Chinese wines and believes the Chinese domestic wines will eventually rival some of the top wines in the world as Chinese vineyards come of age in the next few decades.

As part of its efforts to promote American wines, ABW has organized major events in Hong Kong to showcase U.S. boutique wines. The company also plans to hold similar events in Shanghai and Beijing. However, Cockfield notes that Hong Kong is a more sophisticated market, and mainland Chinese consumers will require more active guidance. When asked about ABW's different approaches to mainland China and Hong Kong, he said that tastings in China need to be "more casual and educational, focused more on making clients feel comfortable judging wines."

A Palatable Investment

Beyond the traditional business opportunities in production and distribution, China's developing wine market has also given rise to secondary investments. Because Chinese nationals face limited investment options of all types due to heavy government regulation, new opportunities like wine investment are particularly attractive.

In August 2011, the Chinese government approved the launch of the nation's first private wine investment fund. The Dinghong Fund (also known as the De Rouge Fund) will raise RMB1 billion (US$156 million) to invest solely in vintages from Bordeaux and Burgundy. For a minimum investment of RMB1 million (US$160,000) and a lock-in period of five years, fund managers are promoting a potential 15% annual return. According to Ling Zhijun, the fund's founder and manager, Dinghong expects to raise its first tranche of RMB200 million (US$320,000) easily by the end of its first month. The difficulty will be limiting the number of enthusiastic investors.

The excitement around the Dinghong Fund is easy to understand in the Chinese context. Unlike countries with more mature financial services industries, China has a scarcity of private wealth management vehicles. Until recently, many wealthy Chinese invested their capital in the booming real estate market. But, with growing fears of a housing bubble, there is a push for alternative asset classes. Fine wines and other luxury assets (e.g., art or rare gems) are perceived as being more stable investments and having a low correlation with traditional commodity markets. With an annual expected return of 15%, the Dinghong Fund offers high-net-worth Chinese a stable and desirable hedge against domestic inflation.

Also in August 2011, Changyu, the country's largest domestic producer, partnered with Bank of China to issue a new wine investment product that would give investors an opportunity to buy a stake in Changyu's new vintage, Century Cellar Ping Zhong Li Quan. For a minimum investment of RMB1.08 million (US$168,804) and a lock-in period of 18 months, investors are guaranteed a 7% annual return, double the current one-year bank deposit rate. Like the Dinghong Fund, the Changyu investment product has found eager investors -- nearly all the initial release was subscribed within three days of its issuance.

Considerable differences exist between these investment choices. However, whether purchasing a vineyard directly, expanding distribution or investing in wine funds, the outlook appears strong. China's growing demand for luxury experiences, its rapidly developing economy and the limited investment alternatives have combined to create an ideal climate for wine investments.

Today, many industry experts note the relative lack of sophistication in China's wine industry, particularly when compared to the West. Yet the market has shown rapid development in the past 10 years. Educating consumers and developing wine knowledge take time, requiring both purchasing power and customer desire. Just as appreciation of, and demand for, wine in the U.S. has grown over the past few decades, the Chinese wine market should continue to develop in the coming years. With the right blend of investment strategies and a little patience, it should be easy to uncork the tremendous potential of the Chinese market.

This article was written by Ulysses Auger, Jeanne Chen, Catherine Ho and Andrew Rowe, members of the Lauder Class of 2013.

Nestle Gains With Heinz as Chinese Turn Away From Toxic Local Food

2012-01-06T14:16:00.000-08:00

Source: Bloomberg News

Tainted milk from China’s largest dairy company, discovered amid a state crackdown on food safety, is set to be a windfall for foreign companies such as Nestle SA.

China Mengniu Dairy Co. (2319), which supplies China’s astronauts and athletes and is part-owned by the government, faces protests after regulators found toxins in its milk last month. The dairy company’s shares (2319) have dropped 25 percent in two weeks and its website has been vandalized by hackers.

The backlash may hurt Mengniu’s earnings (2319), lure consumers away from local dairy brands and drive the government to clamp down further on foodmakers. Foreign companies, from Switzerland’s Nestle to France’s Danone, may profit from renewed food-safety fears, three years after contaminated local formula killed six babies.

“This scandal is another black mark on Chinese firms’ reputation,” said Jessica Lo, managing director at China Market Research Group, based in Shanghai. “Foreign food brands will benefit. Companies like Danone and Nestle should see a bump in sales.”

Nestle is accelerating investment in its dairy business in Shuangcheng, China, and investing in a new dairy training institute, Jonathan Dong, a spokesman, said by e-mail. Nestle’s Shuangcheng factory has close to 100 people in testing and monitoring and has a “very sophisticated” test capability in its factories, he said.

Baby Food Pouches

H.J. Heinz Co. (HNZ), the Pittsburgh-based food maker, started selling baby food packed in pouches in China last year, which costs less than food in jars. Business in China will double during the next three years, Chief Executive Officer William Johnson said in November.

Mead Johnson Nutrition Co., the baby-food maker based in Glenview, Illinois, in November opened a 53,000 square-foot pediatric nutrition research institute in Guangzhou, southern China. The company made $745 million of sales (MJN) in China in 2010, more than doubling in two years and accounting for 24 percent of its total, according to data compiled by Bloomberg. Mead Johnson had a 12 percent share of China’s milk formula market in 2010, Danone (BN) had 10 percent, and Nestle 2.3 percent, according to London-based researcher Euromonitor International.

China’s government has tried rebuilding confidence in its food industry through factory inspections and regulation. Mengniu was taken over partially by a unit of state-backed food company Cofco Corp. after being identified among 22 Chinese companies that sold baby formula containing melamine in 2008. Cofco’s Chairman Ning Gaoning replaced founder Niu Gensheng as chairman in 2011.

Lower Estimates

Safety infractions have surfaced in the industry even as the government seeks to improve standards. Toxins above normal levels were found in one batch of milk from closely held Fujian Changfu Dairy Industry Group Co. and in another from Mengniu, regulators said on Dec. 24.

Deutsche Bank on Dec. 27 lowered its estimates (2319) for Mengniu’s 2012 and 2013 per-share earnings by about 9 percent on concern consumers’ confidence in its brands will be hurt. The milk producer’s stock-price forecast was cut at Deutsche Bank to HK$22.60 from HK$31.50. Mengniu has dropped HK$6.60 to HK$19.70 since Dec. 23.

Consumers “will immediately shift to foreign brands when they learn about the Mengniu incident because they have stronger trust in overseas companies,” said Tracy Sun, an analyst at CSC Securities HK Ltd., based in Hong Kong.

Lu Jianjun, a Hohhot-based Mengniu spokesman declined to comment when reached by phone.

Market Share

Mengniu has the biggest share of China’s milk market, with 24 percent, followed by Inner Mongolia Yili Industrial Group Co. (600887) at 20 percent, according to Euromonitor. Vevey, Switzerland- based Nestle has 1.5 percent. France’s Danone has a 1.5 percent share in a separate yogurt and sour-milk drinks category.

China’s market for milk products is expected to surge 66 percent to 232 billion yuan in 2015 from 2010, Euromonitor data show.

Sales of foreign food brands grew in China during the 2008 scandal involving melamine-tainted milk, which killed at least six infants and sickened 300,000 people. Mengniu reported a 2008 loss of 949 million yuan ($151 million) and Yili lost 1.7 billion yuan.

Nestle’s sales in China, Hong Kong and Taiwan rose 10 percent to 2.23 billion Swiss francs that year, or $2.1 billion using exchange rates at the time. Mead Johnson Nutrition Co. (MJN) had a “temporary increase in demand” as competing products were pulled off shelves, the company said in its 2008 annual report.

‘Wealth’s Curse’

Multinationals in China have been better at maintaining product safety, said Jason Ding, vice president at management consultancy Roland Berger AG in Beijing. Quality has become a “secondary” concern for Chinese companies pushing to increase sales in the world’s fastest-growing major economy, he said. “It’s like wealth’s curse.”

Niu founded Mengniu, which means “Mongolian Cow” in Chinese, in a six-floor building in Hohhot, capital of the Inner Mongolia autonomous region, in 1999. It now employs about 25,000 people and has annual production capacity of 6 million tons. Last year’s sales of 30.3 billion yuan ($4.8 billion) are almost triple the level five years ago.

Mengniu supplied China’s first astronaut, Yang Liwei, with milk for outer space, according to its site, which shows top state leaders, including President Hu Jintao, inspecting the company’s facilities.

Biggest Concern

China’s government has shut 5,000 companies, arrested 2,000 people, and given at least one death sentence in a crackdown on food safety in 2011. State and local governments hold stakes in the country’s largest food makers including Bright Dairy & Food Co. Ltd. (600597) and Yili.

Cofco Dairy Investment Ltd., a company affiliated with Cofco Corp., China’s largest food maker, is Mengniu’s biggest shareholder with a 19.7 percent stake, according to data (2319) compiled by Bloomberg.

Food and product safety is the biggest concern for consumers, China Market Research found in interviews with 5,000 people in 15 cities last year. “They were more worried about that than paying for medical care or education costs,” said Lo. “The food supply chain in China is a mess and smart companies will benefit by ensuring the best quality.”

“Hacked By:Drift”

Mengniu said moldy feed given to cows caused December’s tainted milk, which was destroyed. It promised to “reinforce quality control” by monitoring each production step.

That hasn’t appeased some consumers. On Dec. 28, hackers changed the title of the milk producer’s website to “Hacked By:Drift” and posted a message that said: “Mengniu once made the Chinese people strong and proud, but now it’s doing harm to its own people.”

Mengniu’s troubles come after regulators last year found an additive meant to induce lean meat in products made by China’s top pork producer, Henan Shuanghui Investment & Development Co. (000895) “Local companies, even industry leaders, can’t be protected,” said Ding.

Chinese brands will dominate the liquid milk market despite safety concerns because it’s costly for foreign brands to import milk, said Sun at CSC Securities. Mengniu’s stock recovered some of their losses, climbing 8.5 percent this week on speculation it slid too much. The share price remains 31 percent below the 2011 high of HK$28.55 hit on July 22. The benchmark Hang Seng Index has fallen 16 percent during that time.

“Long-term, Mengniu’s sales and market share will be affected by the frequent quality scandals,” said Jason Yuan, an analyst at UOB Kayhian Holdings Ltd in Shanghai.

Why Danone, Nestlé And Other Foreign Food Giants Are Struggling In China

2012-01-06T14:12:00.000-08:00

Source: Worldcrunch By Li Juan

The French and Swiss firms have a longstanding presence in China, but are still outstripped by local competitors. Add to that rising land and labor costs, and foreign food giants must recalibrate their strategies in the world's No. 2 economy.

SHANGHAI - Danone has just closed its Shanghai yogurt plant, Nestlé says it’s going to shut down its local ice cream factory and Pepsico has sold off 24 bottling plants in China. What is shaking up foreign food and beverage giants inside the world's No. 2 economy?

Danone, the French dairy giant, says it wants to concentrate on developing its Bio brand, where margins are high. But after the failure of its Chinese joint ventures, the company is operating alone, and its sales and marketing channels are far behind the competition. In the Guangzhou yogurt market, for example, Danone has a 12% share, but is forced to ship in products from faraway factories in Shanghai or Beijing. To arrive from the factory to the supermarket can take nearly one week, which is already half of processed yogurt’s typical shelf-life.

Just two days after Danone ceased production in Shanghai, Nestlé, an even larger food industry rival, confirmed that it would stop selling ice cream in eastern China, and shut down its Shanghai factory. The company didn’t give a specific reason for the closure, but industry analyst Liang Mingxuan of CI Consulting said the Swiss firm was struggling to compete with local peers.

“In the past few years both Nestlé’s ice cream business and Danone’s yogurt business have been squeezed by dairy giants Yili and Mengnui,” he said.

The Chinese spent 31 billion yuan ($4.9 billion) on ice cream in 2011, according to consultancy Euromonitor, but Nestlé’s share of the market was around 3%, less than half of Unilever’s, and far behind Yili and Mengniu, which have 17% and 15% respectively.

With Nestlé’s market share flat, the company has struggled to match its rivals’ economies of scale, a problem aggravated by the location of its factories – one up north in Tianjin and the other down south in Guangzhou.

The Shanghai problem

It’s significant that, when they chose to make cutbacks in China, Nestlé and Danone both singled out their Shanghai operations.

“There’s almost no suitable land”, said Gao Jianfeng, a management consultant with BOGO Consultants, who recently advised a foreign client looking for a location to build a factory near Shanghai.

“A lot of the land seems like wasteland, but, when you make enquires, you find that it all belongs to someone,” he added. Gao noted that the owners of the leaseholds (Note: businesses are not allowed to actually buy land in China; local governments only sell long-term leases) are often businesses from Zhejiang, Jiangsu and the Yangtze River Delta.

Gao says that the lack of land is the biggest problem for businesses in the area. Those determined to operate there must either settle for one of the tiny plots available or pay for land from another business that already owns the leasehold.

Another problem for businesses eyeing Shanghai is the operating costs, with labor, logistics and raw materials coming at a premium over the Pearl River Delta, central and western regions.

“The lack of land makes it hard for Nestle and Danone to build new plants and expand their production capacity,” said Gao.

Many coastal cities, including Shanghai, had previously drawn foreign manufacturers with tax breaks, but changes to the taxation code have put an end to these incentives. “Shanghai is focused on developing the service, high-tech and advanced manufacturing industries,” said Chen Yao, of the Chinese Academy of Social Sciences.

The government’s fiscal policies are expected to reflect these new priorities, further marginalizing the city’s food factories and prompting the owners to shift inland. “Shanghai is no longer suitable for traditional manufacturing,” concludes Gao, the management consultant.

But that point of view isn’t universally accepted, and market analyst Li Baojun, says that Shanghai factory owners have another option aside from moving inland. Li says that some firms are keeping their higher-cost operations in the east, but upgrading the products produced in those plants.

As an example, he cites Nestlé, which may have shed its ice cream business in Shanghai, but has just bought 60 percent of Xiamen-based food company Yinlu, and 60 percent of candymaker Hsu Fu Chi.

Along with their moves inland and upmarket, foreign food makers are paying much closer attention to their supply chains, in light of recent food scandals in China. “In the past, it was enough to have a lead in production and sales channels,” said one investor. “Now they’re also very concerned about whether a company has its own sourcing and production base […] and whether it has a system to trace any quality problems.”

China says finds no more excess toxins in milk

2012-01-06T14:07:00.000-08:00

Source: Reuters | Photo: Bloomberg

(Reuters) - China's quality watchdog said it has found no further problems with milk tainted by high levels of carcinogenic mildew in tests of products by major dairy producers.

Public concern was triggered this week after milk giant Mengniu Dairy Co Ltd said its Sichuan plant had destroyed products found by a government quality watchdog to contain the cancer-causing substance aflatoxin.

Aflatoxin occurs naturally in the environment and is produced by certain common types of fungi. It can cause severe liver damage, including liver cancer.

The General Administration of Quality Supervision, Inspection and Quarantine said in a statement late on Friday (December 30) that checks covering other major producers "did not discover levels of aflatoxin which exceed standards."

The companies tested included Mengniu, Beijing Sangyuan Foods Co, Yili Industrial Group Co, Nestle SA and Bright Dairy & Food Co, it said.

Fungi and the aflatoxin they produce can infect crops before harvest or during harvesting and storage. The tainted crops then enter the food chain either directly or indirectly via animal feed.

The official Xinhua news agency, citing a quality watchdog official, said the toxin had originated from cows eating mildewed feed.

The aflatoxin scare has since spread to some cooking oils and peanuts in the southern province of Guangdong.

These incidents are the latest in a string of safety scandals to hit China's food industry in recent years.

In 2008, at least six children died and nearly 300,000 became ill in China from drinking powdered milk laced with melamine, an industrial chemical added to low-quality or diluted milk to give misleadingly high protein readings.